Research suggests close to 50 million people in the United States have federal student loan debts. When you include the number of people with student loans from private institutions, that figure rises significantly. Because it can take years or even decades to pay off these debts, it’s crucial to understand how student loans can affect your estate plan.
The Orange County, CA, estate planning lawyers at OC Wills & Trust Attorneys can help you avoid passing your student loan debts onto your heirs. If you have questions about how student loans affect your estate plan, you’ll find the answers below.
What Happens To Student Loan Debts After Your Death?
There’s no one-size-fits-all answer for what happens to student loan debts after your death, as the answer depends on the type of loan. Here’s a breakdown of what happens to student loan debts based on who loaned you the money:
Direct Federal Loans
Usually, direct federal student loans are discharged upon your death. This means that the federal government forgives the remaining balance, and your estate does not have to pay it back.
Federal PLUS Loans (Parent Loans)
If you borrowed money for your child’s education through a federal PLUS loan, the loan is discharged upon either your or your child’s death.
Private Loans Backed by the Federal Government
Some student loans from private institutions are backed by the federal government. These loans are discharged upon your death in most cases, but you should check the terms of your loan agreement to make sure your heirs aren’t responsible for these debts.
Other Private Loans
Private student loans are generally not discharged upon your death. Instead, the lender can file a claim against your estate to collect the remaining balance. If you had a co-signer on the loan, they may become responsible for paying the remaining balance.
Special Situations for Certain Student Loan Debts
In some rare situations, student loan debts can create unexpected consequences after the borrower or a co-signer dies. For instance, if you co-signed a student loan for your child and your child dies, you may become responsible for paying the remaining balance. This is especially common with private loans, where co-signers are usually responsible for the debt after the borrower’s death. In some cases, lenders may even call the entire loan due immediately after a co-signer dies, creating a sudden financial burden for your estate or family.
It’s also important to note that Parent PLUS loans are discharged if either the parent or student dies. However, the forgiven amount is considered taxable income, so you could receive a significant tax bill following the discharge.
Because these situations can vary based on the loan and lender, it’s crucial to consult a lawyer to fully understand how your specific student loan debts could affect your estate plan and your family’s financial future.
Tips for Addressing Student Loan Debts in Your Estate Plan
Taking proactive steps as part of your estate plan can help your heirs avoid having to pay any outstanding student loan debts you might have. Here are a few steps to consider:
- Identify your loan type: Know whether you have federal or private loans, as federal loans are generally discharged after death, while private loans may need to be repaid by your estate or a co-signer.
- Review loan forgiveness policies: Some private lenders may offer loan forgiveness upon death, so check your agreement to know what will happen and how it could impact your estate.
- Maintain sufficient life insurance: If you have private student loans or have co-signed for someone else’s loans, ensure your life insurance coverage is adequate to help pay off the remaining debts.
- Create a repayment plan: Consider setting up a specific plan in your estate to allocate assets or life insurance proceeds toward paying off student loans.
OC Wills & Trust Attorneys can help you create or adjust an estate plan to help your family avoid the financial burden of unpaid student loans. Call us today or complete our contact form for a consultation.
