Student loans can’t die doing this

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While it’s easy to assume that if you do this, your student debt will die, but it isn’t always. Sure, it is absolutely true that most federal student loans die with the borrower after a proper “death certificate” is presented. However, PLUS loans – a type of federal loan usually taken out by parents of undergraduate or graduate students – are not going to go away easily.

For Parent PLUS Loans, the parent who took out the loan on your behalf will likely receive a 1099-C in the mail if you die on the hook during school or later when you repay your loan, to collect income tax on waived loan amounts to pay. The taxes you are expected to pay will be significantly less than the loan amount owed, but that doesn’t mean it won’t hurt – especially after your child dies.

Don’t you think that can happen? A good example of this exact scenario is the story of Roswell Friend, a Temple University student who committed suicide in 2011. After his death, Sallie Mae laid off the $ 55,400 his mother, Regina, borrowed from a Parent PLUS loan. However, she received a 1099-C in the mail for the amounts awarded, which provided her with a $ 14,000 tax bill – while mourning her son’s death.

That doesn’t seem fair and maybe it isn’t, but it’s the reality that you have to deal with when you ask other people to do it Borrow money to get through school.

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What about private student loans?

While federal student loans come with a standard process that dictates what happens if the student borrower dies, private student loan policies have guidelines that can vary widely. Some private student loans come with built-in death and disability forgiveness guidelines, but not all. Before you take out a private student loan, it is important to find out about your lender’s policy so that you can plan accordingly.

(For more information on the differences in personal loans, see The The six best private student loans.)

Also, keep in mind that after your death, personal loans work very differently than federal loans. When it comes to personal student loans after a death, the lender usually tries to cash in on the estate first. In the event that there is no inheritance – which would be common for a college student or graduate – they will try to collect from all co-signers. If there isn’t a co-signer, they try to cash in on a spouse if there is one.

However, many jointly owned states have laws that exempt spouses from paying back educational debts that they have not signed up to. If you live in community property, it is worth checking local laws to confirm both. However, unless you live in a jointly owned state, you will never be required to pay back student loans that you have never co-signed.

And this illustrates why co-signing a private student loan is so incredibly permanent – and serious business. Co-signers of private student loans are in most cases always up to date with the repayment, no matter what. If your parents co-sign your personal loans and you die or simply stop making payments, your parents (or any other co-signer) have a responsibility to repay your loans regardless of the circumstances or the length of time.

How to Protect Your Family From Your Student Debt

If your goal is to make sure that your family is not stuck with your college debt after you die, there are several steps you can take right away. This also means that you don’t ask family members to co-sign your student loan or take out Parent PLUS loans to make your way to school easier. If your family members do not participate in college borrowing, they cannot be held responsible for your debts.

Unfortunately, this step can be tricky – especially if you’re attending an expensive college or graduate school. However, if you want to protect your family, you should look for ways to limit their liability. This can include:

  • Only stick to federal student loans that are paid out after death, such as
  • Move to a cheaper school so you can Limit borrowing for college
  • Work through school and “pay”
  • Only move to college part-time while you work full-time

Another step you can take is to ask your family to get life insurance to cover your student loan debt in the event of death – or to get a policy for yourself and designate your co-signer or parents as beneficiaries.

Term life insurance is perfect for student loan liability insurance as these policies have a specific term – typically 10 to 30 years – and are usually extremely affordable. $ 50,000 life insurance for a healthy college student (or graduate) could easily cost $ 15 a month or less, which seems like a small price to pay for the security you would get.

The bottom line

Student loans are certainly one of the worst debts anyone can have. You can’t just pay it off in bankruptcy which means you have to pay it off no matter what your life circumstances. And, as I’ve shown, some student loans don’t even go away when you die – and can even plague your family with financial worries for years.

However, when it comes to student loan debt, an ounce of prevention is worth a pound of cure. Given the state of our economy and the cost of higher education, college may not be as rewarding as it used to be. If your alternative is to borrow a ton of cash for four years of study, consider a business school or a technical career where you can study on the job. Also, keep in mind that there are a ton of high paying careers that you can begin after earning an associate degree, which can be earned after two years of community college.

At the very least, don’t think spending a six-digit or multi-digit amount on a bachelor’s degree is a good idea. And don’t let your parents or other relatives sign this loan – at least not without taking out life insurance that will relieve you in the event of death. You may need their help, but it’s up to you to protect them.

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