After death, who pays for student loans?

This was originally published on Monday, July 31 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

When a loved one passes, it is a very emotional and trying time. Having to deal with your loved one’s affairs after they pass can be a long and drawn out process.

If they have a student loan that isn’t fully paid off, the loan can be passed on to someone else, depending on the type of loan.

  • Federal loan. If your loved one had a federal student loan, it won’t be passed on to anyone; the loan ceases. The survivors will have to present an official death certificate to the loan provider.
  • Parent PLUS loan. A federal Direct Parent PLUS Loan is a credit-based loan that the parent or parents of a dependent, undergraduate student may borrow to help pay for educational expenses. Since it is a federal loan, it can be discharged when either the parent or the student dies. The estate and the heirs won’t be responsible to pay the loan.  Unfortunately, there are tax consequences associated with the death discharge of a Parent PLUS loan due to the student’s death. Parents will receive a 1099-C form from the Internal Revenue Service after the debt is canceled. The remaining debt canceled is treated as taxable income. Parents in this situation could be hit with a large tax bill.
  • Private student loan. Some private student loan lenders do offer a death discharge, but not all of them. This loan is more like a traditional personal loan. Private lenders may request the estate to pay off the loan. However, if the deceased is the sole signer the heirs or other relatives aren’t generally considered liable.  If there is a co-signer, the co-signer is legally responsible for the debt. In some cases, the death can cause the loan to go into default and accelerate the debt repayment. In other words, the lender can demand the entire loan is due immediately.  The co-signer may request a co-signer release. To obtain the release, the lender will require the co-signer to make on-time payments for a specified period of time, to illustrate they are financially capable of handling payments on their own.  If the deceased is married, depending on local laws, the spouse may be liable for the loan. If the loan was obtained before the marriage, the loan may be forgiven.

Be prepared

To ensure your loved ones are not responsible for your debts, the best thing you can do is to make sure you and your family are protected by understanding your lender’s policy regarding death discharge and reviewing it in depth. A life insurance policy can help with any outstanding debts and protect your family from aggressive loan providers.

Preparing now can save your family from financial trouble in the future.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

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