Have you ever wondered what happens to student loans if the holder passes away without paying them in full? It’s actually a fairly common question with a somewhat tricky answer depending on a few factors.
First off, there are two main different types of student loans – federal and private loans. There are different outcomes for either loan type to cover first. Starting with these differences is step one, but there are additional implications to keep in mind depending on the loan.
How Federal and Private Student Loans Are Treated After Death
As mentioned, federal and private student loans usually see different outcomes if the original student loan holder passes away. Here are a few differences.
Federal student loans make up the majority of student debt in the United States. Luckily, the federal government will discharge outstanding student debt when the borrower dies or becomes seriously and permanently disabled. Once proof of death or disability is provided to the government, the slate is wiped clean.
Private student loans are a different story. These loans are owned by the individual banks and lenders, and they are not legally required to discharge the student debt if the borrower dies. While some lenders will write off the debt (e.g. Sallie Mae), many lenders will hold someone accountable for the remaining balance. There are several different options for private lenders to collect on their debt.
Who Is Accountable for Private Student Loans?
The first obvious choice is the cosigner. A cosigner is someone (either a family member or close friend) who signs with and backs the original borrower on a loan application, improving the borrower’s chances of approval. However, the cosigner also takes on risk when cosigning a private loan. They are legally obligated to ensure the loan is paid back by either the borrower or themselves. They would also be accountable for the entire loan balance if the borrower passes away.
It’s fairly common for young college students to rely on cosigners, but not every private student loan will have one. If there’s no cosigner, then who is liable?
In community property states, it is possible for a surviving spouse to be held responsible for the private student debt of a deceased spouse. Community property states hold spouses accountable if the debt is incurred after the marriage. Keep in mind this pertains to community property states, which includes only nine states.
What You Can Do If You’re Liable for Student Loan Debt
If you find that you’re suddenly liable for student loan debt, paying them back can be difficult, but you have a few options.
If you are a cosigner or liable spouse, you should review the terms and conditions of the loan. There should be a clause in the paperwork that address death and discharge. You’d be lucky to find a clause that exonerates you from paying back the student loan. However, this isn’t always going to happen. Either way, you should call the lender to discuss cancellation.
Assuming you are required to pay it back, it isn’t the end of the world; there are manageable repayment strategies that could help. You could try making half-payments every two weeks. This budgeting trick amounts to 13 full payments each year, adding an extra payment annually. Alternatively, you may consider refinancing your student loans. If you have great credit, then you may be able to get a lower rate and save money over repayment.
Finally, if you are experience serious problems and cannot repay, you could file for bankruptcy and seek private student loan discharge. This is a tough last-ditch effort. You must be able to prove undue hardship. You must show an inability to maintain a minimal standard of living, repayment appears undeniably doomed, and the liable debtor has earnestly tried to pay back the loan. It may sound easy, but it is notoriously hard to prove in court.
Answering this question will never be easy, especially when you consider the root cause of the issue. The death of a close family member or friend can be especially harmful on its own. Adding student debt into the mix can further complicate an already terrible scenario, but it’s important to understand your options moving forward.
By Andrew from Lendedu – a website that helps consumers learn about their finances. When he’s not working or writing, you can find Andrew hiking, hanging with his cat Colby, and reading up on history.
Are you ready to discuss your financial goals with Gilbert, Arizona's Most Successful Dave Ramsey Smartvestor Pro?
East Valley Smartvestor Pro Financial Goal Planning and Retirement Planning Advisor. Serving the East Valley Region of Greater Phoenix area. Watch the video of your city below.
Chandler, AZ: Your Dave Ramsey Smartvestor Pro
Queen Creek, AZ: Retirement Financial Goal Planning
Mesa, AZ: Saving for Education with 529 Plans
Tempe, AZ: Women, Pensions, 401k & Divorce