The following article was written by Margaret Stockdale, an attorney with my law firm Marshall, Parker and Weber.
Unfortunately, as the cost of higher education rises, the number of individuals with student load debt is increasing exponentially. As these debts increase, many individuals are forced to factor them in to their estate plan. According to the Consumer Finance Protection Bureau, between 2012 and 2017, the number of individuals, over the age of 60, borrowing money for education increased by at least 20 percent. While some of these borrowers were doing so for their own benefit, almost 73% of them were taking out student loans for the education of a child or grandchild.
The first step in incorporating these student loan debts in to your estate plan is to determine what type of loans you have. Student loans are characterized as either federal or private. What happens to your student loans at your death depends on the type of loan. It is important to determine the character of your student loans so that you can reduce the chance of your estate being on the hook for the remaining balance at the time of your death.
For example, if you die with federal student loan debt it will be discharged. Therefore, federal student loan debt will not pass on to anyone else. The federal student loans in your name at the time of your death will be discharged after presenting a certified death certificate to the company.
In addition to the generic federal student loans, there is something known as Parent PLUS Loans. Parent PLUS Loans are signed and taken on by the parents of a student. Therefore, when either the parent or student dies, the loan will be discharged in the same nature as discussed above. However, if the student should pre-decease the parent, he or she may experience a negative consequence of the debt discharge. Following the death of the student, the parent will receive a 1099-C form from the IRS notifying them of the discharge, and that amount will be treated as taxable income.
Private loans, on the other hand, are not as easy to incorporate in to your basic estate plan. Certain loan companies will offer discharge of student loan debt upon the death of the borrower, but others will not. More often than not, private student loan debt will be treated as any other type of debt, and the lender can make a claim against your estate at the time of your death. A caveat to this situation is that if the loan is in the name of the decedent alone, then the family will generally not be considered liable for the amount.
In many situations, a parent or grandparent will become a cosigner on a student’s loans. Unlike a family member who is not involved, a cosigner will be liable to continue paying the student loan debt after the student is deceased, regardless of whether or not the loan is federal or private. Not only will a cosigner be liable for the debt, but upon the death of a cosigner the company can place the loan in default and the entire balance may be due immediately.
Due to the potential outcomes of signing on as a cosigner, you should carefully consider this decision before moving forward. Defaulting on a student loan can lead to many negative consequences for each individual who cosigned. Defaulting cannot only mean having to work longer or delaying retirement plans, but it can even affect your Social Security benefits. If you default on a federal loan, the government is able to take up to 15% of your social security check, each month, as long as that does not bring the amount below $750. This will occur until the debt is paid off, as there is no statute of limitations on student loan debt.
While it may seem intimidating, it is important to remember that having student loan debt does not make planning for your future impossible. Rather, it may function as motivation to sort out your estate plan a head of time to make retirement age, and your eventual passing, easier to navigate. For more information on how to deal with your particular student loans and the potential complications, please visit the Consumer Financial Protection Bureau at https://www.consumerfinance.gov/about-us/blog/four-tips-help-older-student-loan-borrowers-navigate-common-problems-their-student-loans/.