With all the talk surrounding President Joe Biden’s student loan forgiveness plan in the headlines, it’s easy to forget that borrowers and their families have other things on their minds when it comes to their student debts.
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For instance, what happens to federal student loans when a beneficiary dies? As gloomy as the subject is, there was a time not long ago when this question was being asked by more and more borrowers.
Back in 2020, Betsy Mayotte, president and founder of The Institute of Student Loan Advisors (TISLA), spoke to Money about the increasing number of debtors who were asking her what would happen to their student loans if they contracted COVID-19 and died. “It seems to be the theme of the day,” she remarked at the time.
While the coronavirus threat has waned, wondering what will happen to one’s student loan debt should the borrower die is still a relevant query. According to a 2019 survey done by Haven Life Insurance Agency, 73% of student loan borrowers didn’t know how their debt would be handled if they were to pass away.
The answer, thankfully, is that if a holder of a federal student loan dies, their debt will be discharged by the U.S. Department of Education (ED).
What Happens to Federal Student Loans When a Borrower Dies?
According to Forbes, a family or spouse can apply for a loan discharge if the deceased borrower has any of the following federal student loans: Direct subsidized loans, Direct unsubsidized loans, Direct PLUS loans and Direct consolidation loans.
The same thing applies to the now-discontinued Perkins loan and Federal Family Education Loan (FFEL) debts that some borrowers may still have outstanding, per GoodRx Health.
Parent PLUS loans will also be discharged by ED if the parent borrower or the student to whom the parent provided the loan for dies. Because only one parent can be responsible for a Parent PLUS loan, a surviving parent NOT listed on the loan, will not be responsible for repaying the loan.
In order to have a loan discharged (not forgiven; that term is used to indicate elimination of a debt due to a job loss or inability to pay), acceptable proof of death (death certificate, a certified copy of the death certificate or an accurate or complete copy) must be provided to the student loan servicer.
What About Private Student Loans?
As mentioned above, there are a number of federal student loans available to borrowers, but they all are overseen by the Department of Education and have standard policies, including discharge regulations in the event of a debtor’s death. However, private student loans are another matter entirely.
Private loan terms differ “from lender to lender,” according to Forbes, so in the event of a death of a student loan borrower or holder, the lender’s agreement and policy need to be checked thoroughly before assuming a discharge will be applied. There is absolutely no guarantee that a private lender will discharge a deceased’s debt.
“The problem with private loans is that every single loan product is different,” claims Mayotte. “Historically, for a lot of private loans, the borrower’s estate or their co-signer, if there was one, would often still be left on the hook.”
Now, in the case of a loan that was co-signed, companies will normally discharge a debt if the primary borrower dies but may require the borrower to continue repaying the loan if the co-signer dies, per Forbes.
Borrowers that have refinanced a federal loan are in a prickly situation because their loan has changed from a dischargeable federal student loan to a possibly dischargeable private student loan. Again, in the event of a borrower’s passing, the company providing the refinanced loan will need to be contacted and its policy reviewed.
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