While it’s easy to assume any student debts you have will die if you do, that’s not always the case. Sure, it’s absolutely true that most federal student loans die with the borrower after proper “proof of death” is submitted. However, PLUS loans—a type of federal loan typically taken out by parents of students or graduate students—won’t go away quite that easily.
In the case of Parent PLUS loans, the parent who took out the loan on your behalf will likely receive a 1099-C in the mail if you pass away while in school or any time after when you’re repaying your loans, meaning they are on the hook to pay income taxes on forgiven loan amounts. The amount of taxes they are expected to pay will be significantly less than the loan amount owed, but that doesn’t mean it won’t sting—particularly after dealing with the death of you, their child.
This doesn’t seem fair, and maybe it’s not, but it’s the reality you need to deal with if you ask other people to borrow money to help you get through school.
What about private student loans?
While federal student loans come with a standard process that dictates what happens when the student borrower passes away, private student loans have policies that can vary widely. Some private student loans come with death and disability forgiveness policies built-in, but not all do. Before you take out a private student loan, you should absolutely check on your lender’s policy so you can plan accordingly.
Also, keep in mind that private loans work entirely differently than federal loans once you die. When it comes to collecting on private student loans after a death, the lender will typically try to collect from the estate first. In the event there is no estate—which would be common for a college student or recent college graduate—they’ll attempt to collect from any co-signers. If there’s no co-signer, they’ll attempt to collect from a spouse if one exists.
However, many community property states have laws that exempt spouses from having to repay education debts they didn’t co-sign for. If you live in a community property state, it’s worth checking local laws to confirm either way. If you don’t live in a community property state, on the other hand, you’re never liable to repay student loans you never co-signed for.
And this illustrates why co-signing on a private student loan is so incredibly permanent—and a serious matter. For the most part, co-signers on private student loans are always on the hook for repayment no matter what happens. If your parent co-signs on your private loans and you pass away or just stop making payments, your parents (or any other co-signer) are obligated to repay your loans regardless of the circumstances or how long it takes.
How to protect your family from your student debt
If your goal is ensuring your family isn’t stuck with your student debt upon your death, there are several steps you can take right away. This includes not asking family members to co-sign on your student loans or take out Parent PLUS loans to help you get through school. If your family members do not take part in the borrowing process for college, they cannot be held liable for your debts.
Unfortunately, this step can be difficult—particularly if you’re attending an expensive college or graduate school. If you want to protect your family, however, you should look for ways to limit their liability. This can include:
- Sticking only to federal student loans that are discharged upon death, such as Direct Subsidized Loans, Direct Unsubsidized Loans, Federal Perkins Loans, and Direct Consolidation Loans
- Switching to a less expensive school so you can limit borrowing for college
- Working your way through school and “paying as you go”
- Making the switch to attend college only part-time while working full-time
Another step you can take is asking your family to take out a life insurance policy to cover your student loan debt in the event of your death—or taking out a policy on yourself and naming your student loan co-signer or parents as the beneficiary.
Term life insurance is perfect for student loan liability since these policies last for a specific term—usually 10 to 30 years—and tend to be extremely affordable. A $50,000 life insurance policy on a healthy college student (or a recent graduate) could easily cost $15 per month or less, which seems like a small price to pay for the peace of mind you would receive.
The bottom line
Student loan debt is easily one of the worst debts anyone can have. You cannot easily discharge it in bankruptcy, meaning you’re stuck paying it off no matter what life circumstances come your way. And, as I’ve illustrated, some student loans don’t even disappear when you die—and they can even plague your family with financial worry for years to come.
When it comes to student loan debt, however, an ounce of prevention is worth a pound of cure. Considering the state of our economy and the costs of higher education, attending college may not be as rewarding as it once was. If your alternative is borrowing a ton of money for a four-year degree, you may want to consider trade school or a technical career that lets you learn on the job. Also, remember that there are a ton of high-paying careers you can start after earning an associate’s degree that can be earned after spending two years in community college.
At the very least, don’t buy into the idea that spending six figures or more for a bachelor’s degree is a good idea. And don’t let your parents or other loved ones co-sign for that kind of borrowing—at least not without taking out a life insurance policy that will ease their burden if you pass away. You may need their help, but it’s up to you to protect them.
This article was written by Robert Farrington from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to firstname.lastname@example.org.