Student loan debt has been in the news for years. And, for New Yorkers, we have some of the highest student loan debt burden in the country at nearly $40,000 per borrower, on average. When you are planning your estate, you likely wonder what will happen if you die with such massive student loan debt.
What about my federal student loans?
Federal student loans include Direct Loans, Perkins Loans, PLUS Loans, Parental PLUS Loans, etc. For these federal loans, each is discharged when you die. Neither your estate nor surviving family members will have to worry about paying them back. Though, they will need to take steps to get the loans discharged.
According to the U.S. Department of Education, your estate will need to provide a certified copy of your death certificate to each federal loan servicer that services one of your loans. Each must be contacted separately and directly. The funeral home that handled the arraignments can provide a certified copy, as can the state where you passed.
There could be tax consequences. The IRS may consider the discharged loan amount as taxable income for the surviving borrower.
What about private student loans?
Private student loans, which are not guaranteed by the federal government, do not necessarily follow the federal model. Some could provide death discharge, but they are not obligated to offer it. Check with your lender now to figure out their policy and plan accordingly.
In the worst-case scenario, your private student loan servicer may sue your estate to recover the outstanding balance on your student loans. In New York, your private student loan servicer has 7 months from the date of death to file their claim against your estate. Though, if your estate does not have enough assets to pay them and your other creditors, it will likely be declared insolvent, and your creditors may not receive anything.
What if I have a cosigner?
If you have a cosigner, if you die, they could be liable for those loans. This is a double whammy of dealing with your debt and death. Nonetheless, your lender may have the option to release your cosigner. You can either try this path or build in some bequest to pay-off your student loans for your cosigner.