Fifty years ago, this isn’t a question that would have been on many people’s minds. Student loans were typically small and paid off shortly after graduation, leaving the students who needed them free to start their adult lives, debt-free and degree in hand.
Now, things are very different, with the majority of students exiting four years of college (or more) with debt that could literally take them the rest of their lives to erase.
But what happens to the loan if the person who signed for it does pass away before it’s paid?
If you have no idea, you’re not alone – a recent survey done by Haven Life revealed that almost 75% of borrowers aren’t sure what effect their death would have on their lines.
“The reason is because it is a scary thing to think about…losing a parent, most often the co-signer, or a parent losing a child. Most people don’t think about it until something happens,” says Barbara Ginty, a certified financial planner.
The answer is that it depends on what type of loan you have, along with a few other factors.
If you have a federal student loan in your name when you pass, the outstanding balance will be wiped out through a “death discharge.” All that needs to happen is a friend or family member remitting proof of your death (a death certificate, etc) to the servicer, and it will be cleared.
The same protections are in place for Parent PLUS loans, and recent changes to tax law through the Tax Cuts And Jobs Act (2018) mean those discharged loans are not taxed as income, which is significant.
If you have private loans, though, your situation could be a bit trickier. Discharges, even due to death, are considered on a “case-by-case basis,” says Elaine Griffin Rubin, a senior contributor for the financial aid site Edvisors.
That said, most lenders do have it in the fine print that death is a valid reason for forgiving the loan.
If your parent was a co-signer, and they pass away, though, the lender might not be as forgiving, says Ginty.
“Often times, private lenders have a clause stating that the loan goes into automatic default if the co-signer passes away.”
That means that even if you have a payment plan and are current on your payments, a company could expect you to repay the loan in full immediately if your co-signer dies.
If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, you could also be liable for your spouse’s loan balance, since those are community property states.
I mean, you’re young and healthy and you’ll probably never have to worry about any of this. That said, bad luck can strike anyone, so if you want to protect your loved ones, talk to them about your loans and your plans for paying your debts if something should ever happen.
Life insurance is a good idea for everyone, to be honest.
That’s your free tip for the day. You’re welcome.