CNBC recently reported that 73 percent of students are not aware of what would happen to their student loans if they or any of their co-signers untimely die.
According to Haven Life, a life insurance agency owned by Mass Mutual, on their recent survey conducted on 400 borrowers, three out of four student borrowers don’t have any idea what would be the effect of their death on their loans.
Future Rich podcast host Barbara Ginty explained how it was not a surprise that most student debtors were unaware of what would happen to their student loans when they, as the borrower, or their co-signer(s) passed away. Most people don’t prepare ahead of time, let alone think of what to do in case of losing a parent, who is often our first co-signer, or for a parent to lose a child.
But not preparing for these cases is not ok.
For some borrowers with federal student aid to their name, any outstanding balance would just be written off through “death discharge.” A simple death certificate or any proof of death document sent by a close friend or relative would be enough to clear the outstanding student loan. For the other types of loans, however, it could get way more complicated than that.
PARENT PLUS
If the parents are helping out their children with their college, chances are they may have availed of this type of loan. For this kind of loan, the student bears no responsibility for paying back the loan should the parent borrower pass away. In this loan agreement, the government treats the death of debtor the same as regular student loans and are discharged at their death. Also, if the student dies, the loan is written off without being included as taxable income. This credit is all to President Donald Trump for the Tax Cuts and Jobs Act provision that he made that got effective in 2018. However, do note that this provision is set to discontinue in 2025.
PRIVATE LOANS
A report by LendEDU reflects that about 1.4 million Americans borrow from private lenders. While federal loan features stipulation of student loan discharge upon death, private loans don’t. So if there are students who consider this route in obtaining their student loans, they must make sure to think long and beyond before they apply for one. As well as for the parents who consider consolidating federal student loans with a private lender, for surely, they will lose the government’s death discharge protection.
Today, however, many big and private lenders offer the same type of relief, most notably for parents who accommodate their children’s student loans. Debt discharges may happen on a case-to-case basis, though. There’s also a need to double-check the company’s lending policies first as there’s a possibility that they can be like those who don’t offer such death and disability discharge option. Instead, they can forgive loans if and only the borrower passes away.
For private lenders, however, the death of a co-signer, such as a parent, can mean ground for full demand for the loan’s outstanding balance. As frequently, with private lenders, such clause is included in their agreements. This clause also supersedes even substantial evidence of long-time timely payments. The same could be true also for married couples with a spouse still tied to a similar agreement, especially in the community property state such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. All property, including debts of couples in these areas, is considered belonging to both spouses.
THINGS THAT CAN BE DONE TO PREPARE
As it has already become quite a bad habit of some people to surprise their family with massive hidden debts upon their death, the need to educate and encourage preparation arises. This preparation is important to plan for any contingencies so that you will never burden your family members with such things.
As responsible student loan borrowers, here are four steps that can help you navigate your debt in case of an early demise or a co-signer passes away.
- Check and understand your loan agreement’s terms and conditions
It is best to check and understand any contract before you apply for a student loan, as you’re still in the phase of considering whether to take the one offered by the federal or private company. But in case your credit is already granted, you won’t go wrong in revisiting the loan agreement document or giving your lending company a call to find out about their policy in case a borrower or co-signer dies or gets a serious disability.
- Gather all documents and necessary information in one place
When a family member passes away, it is sure chaos, especially if it’s a sudden one. So it is best to get organized by filing your necessary certificates, debt agreements, and insurance policies in one place. By doing this, you are making sure that your family can avoid the undue stress of trying to find things in an already worse of times.
Another way to make things easier is to discuss your loans with your family. You may do this if you feel comfortable to do so, but if not, then a list of all your assets and obligations with their relevant information is sufficient.
This way, in case of your early demise, your loved ones will be able to know just about everything they need to know and do accordingly. Also, be sure to put it somewhere safe and easily accessible in case of emergencies.
- If you’re already able, remove your co-signers
When you’re just applying for your first loan, especially for your student loan, usually your parents become your co-signer. But when you’re already on your own and making regular payments on your loan, it would be common courtesy to remove your co-signer by having them sign a release form or through the application of a new agreement. The process in removing a co-signer may vary depending on your lender, but generally, it will require at least a years’ worth of timely payments as it would give a proper credit status and income bracket requirement.
- Get yourself a life insurance
It would be a tragedy to leave your co-signer a burden over something they didn’t even spend or use. Having your own life insurance is an evident proof that you care and love those people you left behind.
Having life insurance can protect your co-signer. Likewise, if you’re a co-signer, having life insurance of your own is also a good call. For the minimal cost, term insurance would work best in this scenario.
Getting life insurance is easy for some, especially for those employees whose employers offer it as part of their benefits package. However, it is usually a group insurance type, which ends automatically when your job ends. So when you quit your job, you’ll run out of insurance, which could be detrimental when you attach it with a sizable student loan debt. Most of the time, having your own policy is all worth it.
Based on Material taken from CNBC Make It
Photo Credits:
Pixabay
Sharon McCutcheon
Roman Coval