Every few months in the news we hear stories about family members who are left with the student loan debt of their deceased children and partners. The story typically goes like this… they co-sign on a loan, and then a death leaves them believing the loan has been forgiven. A few months later collection calls begin.
What many co-signers and spouses don’t realize, is that only some types of student loans are forgiven with the deceased, and only after a certificate of death is provided.
What Student Loans Are Forgiven At Death (Federal)
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct Consolidation Loans
- Federal Perkins Loans
Student Loans That Are Not Forgiven
- Private loans in which the cosigner is still alive. This is true whether or not the cosigner is a parent, a relative, or anyone else.
- PLUS loans to some degree. While the actual loan is forgiven, the parent who applied for the loan could be stuck with a 1099-C. In this scenario the PLUS borrower may be stuck with taxes on the forgiven loan. The taxes paid would be based on the loan amount forgiven, as if it were taxable income.
How To Avoid Student Loan Debt Issues
- Don’t co-sign a student loan. There are plenty of alternatives to standard loans that your child may receive without your assistance. Look into some of the scholarships that go unclaimed every single year. There are literally billions of dollars in easy to obtain, yet unapplied for student loans.
- Take out life insurance on the student. $250,000 in student loans? Take out a $250,000 policy. Don’t think of it like life insurance, think of it like a policy that protects your own retirement funds. You only need this time of added protection if you co-signed for someone.
In the end it is important to remember that some student loans are forgiven upon death, while others can leave those you love financially strapped, perhaps for the rest of their life.
Student Loans: What Debt Dies With The Deceased, Which Debt Lives On?
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