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.
This post comes from Bob Sullivan at partner site Credit.com.
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 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.
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.
More from Credit.com:
- How student loans can impact your credit
- Paying off student loans with forgiveness programs
- How to pay for college without building a mountain of debt
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
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.
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?
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.
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