Our Marketing Director Heidi Cookson shares some wisdom on student loan debt and your estate plan.
As someone who graduated college not too long ago, recently refinanced my student loans, and is about to embark on the journey of graduate school, there is one big elephant in the room: student loan debt. I am one of the millions of contributors(approx. 45 million people according to The Motley Fool) to the $1.6+ trillion of debt. The joke I frequently crack with my family and with my friends who are also feeling the pressing weight of student debt is, “at least if I die, the debt disappears *poof*”. This ultimately leads to drumming up fantastical stories of how to fake my death and live off the grid or assume a new identity to escape the ever-mounting sum, which can feel quite crippling. (Of course, as a Native Vermonter, the living off the grid option seems the most feasible and appealing.) This joke about faking death is one I am sure many parents and fellow student loan holders are familiar with.
Sadly, I’ve had to burst my own bubble around these morbid daydreams, because in reality, if I die, the only student debt guaranteed to be forgiven is my federal loans (including the Parent PLUS Loan*, see note at the end), this is the same for everyone else out there. Yet, the problem I encounter, as I am sure many other millennials do too, is either the largest loans, the loans with the largest payments, or the loans I’ve refinanced are private. So, in the wake of my death, these private loans will still need to be sorted out, especially if a parent or spouse/partner has cosigned. An article from The Ascent by Motley Fool, “What Happens to Your Student Loans When You Die?”, dives into the details of what happens to private loans if you die (or fake your death).
When you die, it is up to the lender to decide what happens to your private loans, as they do not automatically get discharged. There are some lenders that will follow suit with the government and forgive your loans upon your death, but others will likely try to collect from your estate if you have assets that could repay the loan.
What happens if you have a cosigner on your private student loans? If you look at it from a contractual stand point, your cosigner is mutually responsible for repaying the loan. This means your cosigner would still be responsible for paying the debt back. Fortunately, there are some private lenders that acknowledge the difficulties in paying back student loans when you are not the original borrower. If your lender is not one of the more forgiving ones, many do have an option to release a cosigner after you make a certain amount of payments. This is something to consider if you have a cosigner or if you have cosigned on a student loan for your child or spouse. Whether you end the cosigner obligation or not depends on your family, as always it can be a good idea to discuss these kinds of decisions with a financial planner. Of course, releasing a cosigner can also be more difficult than initially thought. Make sure you talk with a representative from your private lender about all the ifs ands or buts when it comes to releasing a cosigner and what happens if you die.
If you are married, your spouse more than likely won’t be required to pay your loans, unless they cosigned to refinance with you. Again, cosigning assigns equal obligation.
If you have thought about refinancing, you will want to look for a lender whose terms include discharge of student loan debt upon your death. Additionally, you may want to consider leaving your federal loans as federal and not consolidate them with your private loans as there tend to be very favorable benefits to federal loans. Per usual, the best approach is, if you have one, to ask your financial advisor about the best course of action.
Okay, so how does this relate to estate planning aside from getting your affairs in order before watching hours of crimes shows in preparation for faking your death? It is wise to make sure you read your private loan contracts or ask a representative from the servicer that you are borrowing from what the practice is in the event of your death, as this will play a role in how you want to plan your estate. If you have a parent cosigner on your private student loans, you may consider taking out and naming them as a beneficiary on a life insurance policy (some companies provide life insurance as an employee benefit, make sure you review your benefits). If you and your spouse/partner cosigned a loan together to refinance private student loan debt, and then you pass away, they will be responsible for the loan. You and your partner/spouse may want to consider taking out life insurance policies to help make these payments and pay for other bills you share. Side note, it is also typically wise to take out life insurance policies when you are young to get better premiums (another topic to discuss with a financial planner).
In the wake of your death, a death certificate must be provided to your private lenders and to the loan servicer of your Federal Loans or to the U.S. Department of Education. If you are single or even if you have a partner, you will want to leave information in your estate plan on who to provide death certificates to lenders regarding your student loans.
So, the moral of the story? Take out private loans or refinance your private loans with a lender that will forgive your loans upon your death and take out life insurance if the lender will not forgive the loan– I won’t be faking my death anytime soon, but I have taken and will continue to take the steps to protect me and my family. Make sure you take some time to look into your private loans and find out what will happen if you die with outstanding student loan debt and take the necessary steps to protect your estate, cosigners, or partner.
To read about more interesting and lesser known estate planning and retirement topics, explore our blog. Ready to establish your estate plan and plan for life? Schedule your complimentary consultation with us today!
*In regards to the Parent PLUS Loan, according to many sources including Discover, it used to be that if the student died and the parent borrower has a Parent PLUS Loan, the IRS would treat the discharge like income, creating a tax liability for the parent. They would have likely been sent a 1099-C form, but due to the Tax Cuts and Jobs Act of 2017, this discharge would be excluded from taxable income, therefore when the student dies there will be no surprise federal obligation. This applies from December 31, 2017 to before January 1, 2026. If you have a Parent PLUS Loan, you will want to stay plugged in about any law changes, and in 2026 make sure you check on where the rules stand.
