73% of student loan borrowers don't know what happens to their debt if they die
If you don't know what would happen to your student loans if you die, you're not alone.
Almost three out of four student borrowers say they have no idea what effect their death would have on their loans, according to a recent survey of roughly 400 borrowers by Haven Life, a life insurance agency backed and owned by MassMutual.
Yet it's not surprising that most people are unaware of what happens when a student loan borrower or co-signer passes away, says Barbara Ginty, a certified financial planner and host of the "Future Rich" podcast.
"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," she says. "Most people don't think about it until something happens."
For some borrowers, that may be OK. If all of your loans are federal student aid and in your name, then the outstanding balance will be wiped out through what's called a "death discharge." If a friend or family member sends a death certificate or other proof of death paperwork to your loan servicer, the loans will be cleared.
But it can get more complicated with other types of loans.
If your parents are helping out
The same protections are in place for Parent PLUS loans. If your parents take out that type of loan, you bear no responsibility for paying back the loan. If your parent should pass away with a balance still due, the government treats it the same as regular student loans and it's discharged. If you're the one to die, the loan is also forgiven.
It used to be that the IRS treated these debt cancellations as taxable income, but President Trump's Tax Cuts And Jobs Act, which went into effect in 2018, changed things. Now if a student passes away, or suffers a life-altering disability, their student loan debt is forgiven without any tax consequences. It's worth noting, however, that the provision is set to discontinue in 2025.
The way private lenders handle death can vary
Federal loans make it fairly straightforward to discharge student loan debt because of a death, but the stipulations around those issued by private lenders can vary. About 1.4 million Americans have borrowed from private lenders, according to a report by LendEdu.
If you consolidate your federal student loans with a private lender, you will lose the government's death discharge protections, says Robert Farrington, founder of The College Investor and a student loan debt expert.
And when it comes to private lenders, discharges happen on a "case by case" basis, says Elaine Griffin Rubin, the senior contributor for financial aid site Edvisors. The good news is that many major lenders are offering this type of relief more and more to families who have had their children pass away, Rubin says.
However, you may have to really dig for information about their policies. While popular refinancing company SoFi doesn't list death and disability discharge as an option for borrowers, The College Investor confirmed this lender does offer to forgive loans if the borrower should pass away.
But when it comes to the death of a co-signer, such as a parent, Ginty says you need to read the fine print ahead of time because lenders may not be as forgiving.
"Often times, private lenders have a clause stating that the loan goes into automatic default if the co-signer passes away," she says, adding that this happened to a client of hers. The student borrower was current on her loan, making on-time payments, and her father passed away suddenly from a heart attack. "Her loan balance was due immediately," Ginty says. Thankfully, her client's father had life insurance that the family was able to use to pay off the loan.
Additionally, if you're married and your spouse takes out student loans, you may be on the hook even if your name isn't on the loan. That's because if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin; Alaska has an optional community property provision), all property, including debts, are pooled and considered to belong to both spouses.
What you can do to protect yourself and your family
Because you can end up leaving your student loan debt to someone you love, it's worth taking the time to plan for any contingencies, Ginty says. You don't want your family to have to deal with expensive surprises after your death.
Here are four steps you can take to make it easier to navigate any student loan debt should you or your co-signer pass away.
Understand the terms and conditions of your loan
Whether you're considering federal or private student loans or already in the process of paying them back, take a look at your loan document or contact your lender and find out how they would treat the death and serious disability of a borrower or co-signer.
Put together an information sheet
When a family member passes away, it can be chaotic, Rubin says. "This is very real and it does happen — and families often don't even know where to begin," Rubin says. Many times, she works with families who don't know what their children's debt obligations are or where they took out loans, which can make a stressful time even worse.
To make it easier for you family, talk with them about your loans if that's something you feel comfortable doing. If not, create a document or a list of all your loan obligations and relevant information.
That way, if you should pass away, people will be able to find out what they need to know, Rubin says. "Put it somewhere safe where they can access it in an emergency situation," she adds.
Remove co-signers
If you're already on your own and making regular payments on your student loans, you can opt to remove your co-signers by getting a "co-signer release" or by refinancing the debt without a co-signer on the new application.
If you simply want to remove a co-signer, the process will vary by lender, but generally requires that you make a years' worth of on-time payments, meet certain income requirements and have good credit.
If you haven't taken out any student loans yet, but plan to do so, you may not have a choice about getting a co-signer. Many lenders require a co-signer if a student doesn't have a strong credit history or if they are underage. Having a co-signer is not the end of the world, but it may be helpful to start building your credit and making payments in college so you can remove them as soon as possible.
Get life insurance
"You can purchase life insurance to protect your co-signer and ask your co-signer to have life insurance as well," Ginty says, adding term insurance would work best in this scenario.
Term life insurance is pretty much exactly what the name implies — it's insurance that covers you for a specific period of time, typically 10, 20 or 30 years. If you die while the policy is in place, you're covered. Once the term expires, you're no longer covered.
For term life insurance worth $100,000, a 22-year-old female in excellent health can pay as little as $11 a month for a 30-year policy, according to an estimate from Policygenius.
Some employers will offer life insurance as part of your benefits package, but they're not usually portable, which can be a huge drawback. Your policy ends when your job ends, so if you quit or are let go, you'll be left with zero coverage. If you have a sizable student loan debt, it may be worth having your own policy.
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