What happens to student loan debt when the borrower dies? The answer: It depends, based on the type of loan.
Federal student loan debt can be discharged through a relatively simple process; private loan debt, however, can shift to parents or other co-signers. As the families of many deceased borrowers know, the process can be confusing. Here, we outline how to deal with the debt after a death.
Federal Student Loan Debt
The U.S. Department of Education says federal student loans will be discharged upon death. Parent PLUS federal loans can be discharged if either the student or the parent borrower dies.
Still, there is a process that must be followed.
For a subsidized Perkins loan, a family member or representative must send a copy of the death certificate to the student's school. For other kinds of federal loans, a family member or representative must obtain a death certificate for the borrower and send it to the loan servicer for review.
One servicer, FedLoan, told us recently precisely what happens next:
- Once the servicer receives the death certificate, it begins processing the loan discharge unless a co-maker exists on the loan(s).
- It takes approximately 10 business days to review a death certificate and update the account to a “Verified Death” status.
- Every two weeks, a report is sent to the Department of Education (DOE) listing any new accounts that were placed into a “Verified Death” status.
- Approximately a week after receiving this report, the DOE approves a write-off of the account.
- Treasury Management then applies a write-off transaction to bring the loans down to a $0 balance.
- Any payments received after the date of death are refunded to the borrower, unless an estate has been set up. Then, Treasury Management will refund the estate of the deceased. If the borrower has an estate set up, the executor/executrix has the authority to cash the checks made payable to the borrower.
Private Loans
With private student loans, the answer is more complex, but generally lenders will not forgive loans after death. It's common for private student loans to require a co-signer, often the student's parent. In most cases, banks expect co-signers to assume responsibility for the loan after a death. There are exceptions: Sallie Mae's "Smart Option Student Loan," launched in 2009, forgives loans when students die. But generally, banks will attempt to collect payment from the deceased's estate, and then turn to co-signers.
Private lenders sometimes grant exceptions to surviving co-signers on a case-by-case basis, but there is no legal requirement that they even consider loan forgiveness. In fact, co-signers may be required to repay the full balance of the loan immediately, and have fewer options for consolidating or reworking loan repayment terms.
Co-signers who find themselves in this sad situation should send a certified copy of the student's death certificate to the bank, and request consideration as soon as possible.
In some states, it is possible for surviving spouses to be on the hook for student loans even if they don't co-sign a loan. Community property states require that debts be assigned to the surviving spouse. In some of these states -- Arizona, California, Louisiana, Idaho, Nevada, New Mexico, Texas, Washington, Wisconsin and Alaska -- there are exceptions for education-based borrowing. Check with an estate lawyer.
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