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.

A deceased loved one’s debt: Who pays what?

This was originally published on Monday, July 24, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My sister passed away unexpectedly. She left behind a few loans, including a mortgage, a new car loan and a student loan. Some of the loans she took out were done by her, but a few were co-signed by family members. She passed with good credit and was up to date on her loan payments. Our family would like to get a better understanding of what we are responsible for and what happens to the loans she had acquired by herself.

Answer: Condolences to you and your family. Losing a family member is certainly emotional. Once the ceremony of the funeral and burial are done, the stress of finalizing your loved one’s estate can be overwhelming.

Generally, creditors get paid first from the estate and assets left behind; the beneficiaries receive whatever remains. The person who is legally appointed to be the executor will use the assets to pay off the debt. This can be done by using money left in a bank account or even selling off property or stocks.

If there are not enough assets to pay off the debt, creditors may get part of what is left and the family members may not be responsible to pay off the debt.

Sometimes it is not that straightforward. The type of debt may also play a factor as to who is responsible for paying off the debt.

  • Mortgage. If the mortgage has a joint homeowner, he or she will inherit the house and the mortgage. Federal law prohibits lenders from forcing a joint homeowner to pay off the mortgage immediately after the death of the co-owner. If the mortgage doesn’t have a joint homeowner the executor can continue to pay the mortgage from the estate. If the estate doesn’t have enough money, the person(s) who inherit the house can take over the mortgage payments.
  • Home equity loan. If someone inherits the house, they will also inherit the loan. A lender can request the inheritor to repay the home equity loan immediately. If the inheritor doesn’t have the money, the lender may require selling the house. Lenders do have the option to work with the inheritor to take over payments.
  • Credit cards. If the credit card has a joint account holder, he or she will be responsible for the unpaid bills. Authorized users listed on the account are not responsible to pay off the remaining balance. If the estate doesn’t have enough to pay off the credit card balance, the credit card companies absorb the debt. Credit card debt, unlike a car loan or mortgage, is considered an unsecured loan because the loan is issued on the borrower’s creditworthiness.
  • Car loan. If the car loan has a co-signer, the co-signer is responsible for continuing the payments or paying off the loan. If the deceased is the sole owner of the loan, the executor can pay the loan from the estate. If the payments stop, the lender can repossess the car. If the estate can’t pay off the loan, the inheritor of the car can continue making payments.

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.