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How to deal with student loans after death

If a borrower dies with a balance on his or her student loan, it's important for survivors to know how to proceed. In many -- but not all -- cases, the loan will be forgiven.

By Credit.com Nov 12, 2013 5:00PM

This post comes from Bob Sullivan at partner site Credit.com.


Credit.com on MSN MoneyWhat 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 Graduation cap © Stephen Wisbauer/Getty Imagesprocess; 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 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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91Comments
Nov 12, 2013 10:09PM
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Cheap term life insurance in an amount that will cover the loans. I had both of my sons get coverage. It's cheap, I pay about $12 a month for $100,000 of coverage. No worries.
Nov 13, 2013 7:50AM
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We just paid off Sallie Mae: I will never deal with her again: two week ago my family and friends started getting phone calls around 9pm asking how to get hold of us: funny thing was they had our e-mail plus we had talked to them on the phone to get the pay off on the loan: so we get the pay off amt. and they are sent a check in that amt: got on line to check if  had been received and I showed it was received but we still owed 1000.00, called again to get pay off amt. and we found out they owe us 333.00: I wonder when we will get that money: stay away from Sallie Mae if you can
Nov 13, 2013 9:55AM
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...."the poor become slaves to the money lenders" -

Nov 12, 2013 9:54PM
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Talk about adding insult to injury for the cosigner parents of a private loan borrower..........not only is your kid dead, but then you get saddled with their loan debt.   Ouch.
Nov 13, 2013 7:54AM
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a friend of mine husband lost his life and she was being harassed to pay his student loan: after sending the death certificate and numerous phone calls and letters she had her attorney send a very nasty letter and she never heard from them again

 

Nov 13, 2013 12:19AM
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Our student loan system could be vastly improved by granting greater amounts to students in STEM fields rather than liberal arts.  Set caps on the available amounts based on field - for example, $30k/year for someone in biological sciences, physics, or computer science and $5k/year for someone studying historical trends in anthropological thought.  Also, set caps for the number of loans available based on job prospects/employment data.

 

But in all seriousness, such reform will never happen - the student loan system is vastly profitable to the crooks at the banks providing the loans (eg Sallie Mae).  The system is structured essentially the same as the housing market was in '05, except that there is no rating of the loans.  Speculators gobble up the packaged, derivatized product and ride it until it is no longer profitable, at which point they will unload it on the taxpayers.  Allowing the lender to collect after a students' death only makes the profits more secure.

Nov 13, 2013 10:14AM
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People should be forbidden from dying until all of their bills are paid.
Nov 13, 2013 10:02AM
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Wow.  It's so sad to read something like this.  Parents of a deceased child already have enough to deal with.
Nov 13, 2013 11:26AM
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I had a student loan - not a large one, but still a loan.  I had disability coverage on my loan.  I made payments for several years and then became disabled.  The disability insurance covered back to the date I was determined to be disabled and paid off the balance.  Then, at the end of that year, I received a 1099 on the amount the insurance paid.  Ah, excuse me, why was I getting a 1099?  My wife, who is a financial consultant, made a phone call to the bank, and it was taken care of.

It is unfortunate that even something as simple as this is confusing to the organizations who are supposed to know what they are doing.  This was a private bank, when you are dealing with anything directly connected to the federal government, its going to be a mess.  Don't get me started on the incompetence of the Social Security Adm and the IRS.  Why in the world do they have policies and regulations that their own people don't understand or can administer?



Nov 13, 2013 9:27AM
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When my husband passed away in 2008, I mailed a copy of the death certificate to the Dept of Education because he still had an outstanding federal student loan that had been on a hardship forbearance because was disabled in 2005 from a stroke. Within a month I received a letter stating the account was closed. I had more problems out of the credit card company for a credit card I didn't even know he had. I wasn't on the account in any form or fashion nor was my name sign to any of the credit card receipts so they had to write off the debt as well.
Nov 13, 2013 12:15AM
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"In many -- but not all -- cases, the loan will be forgiven." Wait so if I die, I no longer owe anything? Alright, time to fake my own death! Naw Jk I don't have any debts.
Nov 13, 2013 1:08PM
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And when a federal loan is discharged.  It becomes taxable income for the surviving spouse.  So be prepared if there is a large loan, and your spouse dies.  You may end up paying a hefty tax bill.  The only loop may be insolvency.  Check with your tax advisor.  If your spouse does die, it is a good idea to get your taxes done by a professional for the first few years as you gain control of your finances.
Nov 13, 2013 1:23PM
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The bigger problem is parents cosigning these private loans for their deadbeat offspring who refuse to pay.  Have seen more than a few people lose their homes over this. Parents who sign a school loan for their kids might try playing Russian roulette, since the odds of survival are better.
Nov 13, 2013 2:03PM
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One of the problems with student loan debt is that the federal department of education approves schools that are not even graduating any students.  If you look into some of the schools they acredit, some of them have a 8% graduation rate, and nearly non-existent job placement rate.  They are scamming veterans and students.  They take the students federal loan money, and then the student is left with nothing and a huge debt.  It makes you wonder why, doesn't it?  Lots of trade schools do this.  I know someone who attended one of these schools.  The owner of the school stole money from the school and is wanted on embezzlement charges.  None of the student loan debt was forgiven for any of the students.  Only a handful of students ever graduated from the school in twenty years.  They all ended up owing $40K or more.  The government is complicit in this.  They tell you how the school is acredited with the Board of Education.  Really?  How can they approve fake trade schools for student loan and living expense money is no one graduates?
Nov 13, 2013 1:18PM
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Beware; the Parent Plus loans my husband took out were forgiven when he died in April, but the forgiven amount was counted as INCOME for us this tax period and I ended up paying the IRS a $30,000 tax bill this year. Thank goodness for the small amount of life insurance he had, I had to use it to pay the bill. Just sayin'.
Nov 13, 2013 2:48PM
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What an oxymoran here, If I'm dead, I can not possibly owe anything! Dead is DEAD! and I sure as hell won't be making another payment.
Nov 13, 2013 7:04AM
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why do ppl want the dead to rest in peace. they are dead, they don't know peace from war  from a hole in the wall, and if they are dead and  do know they are dead why would they want to just be resting? would you?
Nov 13, 2013 5:11PM
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A loan is a loan. Whether you co-sign for your child's first car, or his student loan, if he doesn't pay YOU ARE responsible.


I remember years ago, my brother bought a new car, just as he got out of HS and joined the military. 3-4 mos. later my mother commented to him that the bank was calling looking for their money. He said "Well I a made a couple of payments". He learned, and so did my parents. They never co-signed a loan again.

Nov 13, 2013 12:23PM
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The $26,000.00 thing is wrong that is all the student can borrow. Parents have to borrow more or the student in private loans college really cost about 60,000.00 to 100,000.00n for a four year degree. I think it should be like everywhere else in countries that have free college and healthcare paid for by their taxes instead of paying long term retirement and huge salaries for congressman and presidents and sending money oversees and wars. What is the deal with giving foreigners free education and requiring them to pay it back? I know of a foreign doctor who did not have to pay back a $150,00.00 education loan, whats up with that? Our young people are at a disadvantage because of education loans where the taxpayers bailout? Where's our childrens bailout? The economy would improve if we got a stimulus on these loans. Parent Plus loans also put the parents in debt again!
Nov 13, 2013 12:04PM
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I keep seeing the writers writing a lame stories about debts after death, they obviously don't know the theory of "Over My Dead Body". Nobody gonna inherit your social security number after you die or inherit your debts for you. They need to get off the MSN pages.
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