ESTATE PLANNING NEWS & ARTICLES
Student Loans & Estate Planning: Read Before Applying
My friends and clients who have upperclassmen in high school have been mentioning their university tours and investigating how they (and/or their kids) will pay for college. Many are considering student loans and apparently, they are not the only ones — 44 million Americans have student loan debt and owe over $1.48 trillion (yes, with a “T”), according to Student Loan Hero.com.
The website also says that the average student loan debt for Class of 2017 graduates was $39,400, up six percent from the previous year. Therefore, it is not a surprise that it may take some students decades to pay off their education. Because of this fact, it is reasonable to question what may happen if the student can no longer pay because of death or serious injury.
What to Know About Federal Loans
The difference between Federal and Private loans is actually very simple. With federal loans, the debt is discharged and is not passed on to heirs. To receive this discharge, survivors present a certified death certificate to the loan servicer.
One slight difference is with Parent Plus Loans. Parent PLUS borrowers are also eligible for a death discharge, since PLUS loans are federal loans. However, the remaining debt canceled is treated as taxable income. So, parents in this situation could be hit with a large tax bill. (See #2 below.)
What to Know About Private Loans
Private loans set different terms, so their requirements may vary. Choose carefully, as some private student loans may even accelerate the debt after death, especially for co-signers. Also, co-signers are legally responsible for the debt after the main borrower passes away. Consider the terms carefully, as these may be loans that you deal with for many years to come.
There are two ways to counteract a private student loan with this kind of provision: 1. Investigate the possibility of a co-signer release, which will allow the co-signer to be dropped from the loan once certain terms have been met, say paying on time for a certain number of months or years. 2. Parent cosigners might purchase a life insurance policy for their child. At death, parents would receive a sum of money to help cover the repayment of the cosigned student loans.
What About Student Loans and Marriage?
One other important thing to know: If you live in Arizona and borrow the funds WHILE married, your spouse IS responsible for the debt after you pass away because of community property laws. However, if you took the loan out BEFORE marriage, then your spouse is only liable if he/she is a co-signer.
“The best thing you can do to make sure you and your family are protected by understanding your lender’s policy regarding death discharge and reviewing it in depth. Use the National Student Loan Data System (NSLDS) to figure out who your servicers are and contact them to find out their policies,” writes Melanie Lockert of Student Loan Hero.com. In addition to a cosigner release and/or a life insurance policy to help with any outstanding debt, students might also consider federal loan consolidation or student loan refinancing to simplify their payments and gather all their loans in one place. “Preparing now for what happens to your debt when you die can save your family from financial trouble down the line,” she writes.
Learn more about other ways to prepare your teen for college here or call us for a free consultation.