Practical Matters After a Tragedy – How Does Death Affect Student Loans?
Ten days ago, our nation was attacked by terrorists. The Boston Marathon bombings took the lives of three people and wounded more than 260 people. When any tragedy happens, the initial reaction is to tend to the wounded and investigate what happened. But in the weeks that follow, practical matters will move to the forefront. One such question is: what happens to student loans after the death of the borrower?
One of the victims that lost her life to the bombing was a full time college student who may have had student loans. It’s awful to contemplate, but financial matters are a reality that will have to be dealt with in many cases. In addition to the initial terror attack in Boston, an MIT police officer was shot by the terror suspects and an industrial facility explosion in the same week has taken 15 lives and injured hundreds. What will the ultimate financial implications be for families of those who lost their lives last week?
Federal Student Loans. If the borrower of federal student loans dies, the loans will be eligible for death discharge. In case of a Parent PLUS Loan, the death of either the parent borrower or the death of the student beneficiary will make the loan eligible for a death discharge and the loan will not be pursued for repayment.
To be granted a death discharge, a family member or representative will need to request it. For a Perkins loan, the school should be provided with a copy of the death certificate. For a Parent PLUS loan, Direct loan or FFEL loan, the death certificate copy should be provided to the loan servicer.
But here’s something else you should know – in the case of a Parent PLUS loan, the cancelled loan will cause a 1099-C to be issued to the parent and they will owe taxes on that amount. If the loans were substantial, the associated incomes taxes will be as well.
Private Student Loans. Some private student loan creditors may offer a death discharge, but generally they will not. If the deceased borrower had a co-signer, they will be asked to pay. Losing a loved one is bad enough, but facing debt while you’re grieving can be made even worse if your private student loan has a death-triggered acceleration clause. This means that the lender can ask that the co-signer pay off the loan immediately!
For parents that co-sign loans and lose a child when they are in or near retirement and on a fixed income, the burden of student loan repayment can be catastrophic. Currently the only private loans that offer death discharge are Sallie Mae SmartOption Loans.
Spouses will be burdened with student loans after losing their loved one if they live in a community property state. And in any state, the private lender will try to collect from the decedent’s estate – property, cash and other assets can be used to satisfy the debt which could leave you with little (or nothing) depending on the size of the loans.
Solutions. No one thinks they’ll die an untimely death, but as last week’s horrible events showed us so clearly, bad things happen to good people. And when those people have private student loans, the outcome can be even more devastating. The best option is to minimize student loan borrowing and tap into scholarships and grants. Another plan to avoid loans is to work while in school. And if you do have to borrow, federal student loans are preferable.
If you absolutely have to take out private student loans or ask your parents to take out a PLUS loan, you should have life insurance in an amount to pay off your loans in full. For a young person, life insurance is very affordable and can make a huge difference in the lives of those you could leave behind so they’re not burdened by both grief at your passing and debt.
If you already have student loans, try Tuition.io’s free student loan tool. The award winning solution will let you view your loans in one easy to use interface that can be accessed on any device or screen. You can also check out repayment options, track balances and payoff dates.
Also check out these related blogs on student loans and marriage, retiring with student loan debt and student debt collections.