Three-Quarters of College Students Do Not Know What Happens to Their Student Loans at Death
Student debt is a major part of most students’ lives. Most, however, do not know if their loved ones will be burdened should the unthinkable happen.
If you’re like most Americans, you’re unsure of what will happen to your student loans when you die. With 45 million borrowers carrying $1.61 trillion in outstanding student debt, it’s the second-largest class of consumer debt.
Unlike other debt, student debt has been treated differently, to the detriment of the consumer. Student debt, for example, is protected — unable, in most situations, to be discharged by bankruptcy. This level of ambiguity has left many confused about their rights. Per a survey from Haven Life, a MassMutual-owned life insurance agency, 73% of the student borrowers surveyed did not know what happens to their student loans should they die.
With 96% of those surveyed admitting that they have put off at least one major life event or financial milestone due to their student debt — such as traveling, buying a home, having children, or getting married — there is a well-founded fear that this financial instability can be inherited to new generations upon death. Depending on one’s situation, though, this may not be as big of a problem as it seems.
If your financial aid package consisted of federal student loans, then your loans will die with the proof of your death. Known as a “death discharge,” a family member or representative only needs to present your loan servicer with a certified copy of your death certificate and a complete photocopy of your death certificate for your loan accounts to be closed.
This applies to loans you personally applied for or for loans applied for on your behalf. Should you or your parents die before a PLUS loan is satisfied, the loan will be discharged upon proof. This means that — in the case of a PLUS loan — a student can get a “death discharge” while still being alive.
“Death discharges” were once considered to be taxable income. However, the tax cut package that went into effect in 2018 canceled the tax liability for federal student loan cancelation. So, if you were to die and you borrowed money from federally-backed programs, your heirs will not have to worry about your student debt.
If, however, you were to borrow from private lenders, this will be a completely different set of circumstances. Depending on the terms of the loan, your debt may truly be inheritable upon death
With 1.4 million student borrowers holding $102 billion in outstanding private student loans as of 2019, this could be a true problem. Finder has investigated private student lenders and has determined which ones offer death debt forgiveness.
As many lenders do not list death terms front and center, it is important to ask about the conditions for debt forgiveness before signing any loan agreements. Many opt not to do this because the ramifications may be frightening. “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,” Barbara Ginty, a certified financial planner and host of the “Future Rich” podcast, said to CNBC. “Most people don’t think about it until something happens.”