What happens to your student loan debt if you die?
It’s a terrible thought, but for many families dealing with the loss of a loved one, it’s an unavoidable consideration.
While federal loans are automatically canceled, other student loans are often fair game for collections — even after the borrower has died.
But in New Jersey, families of the departed now have a reprieve. A new law requires the state’s loan agency to forgive student loans when borrowers die or are permanently disabled.
Why New Jersey Changed Its Loan-Discharge Policy
The new law puts New Jersey in its place after it went bonkers running its student loan program.
The state agency “aggressively sought repayment of loans with already onerous terms, even after some of the recipients had died,” ProPublica explained in an update to a summer 2016 investigation it conducted with the New York Times.
State agencies used to serve as middlemen between federal financial aid and borrowers, until the government essentially eliminated that role in 2010. Some states retained their own programs, while others won contracts to manage federal student loan accounts for their residents.
New Jersey, which has the largest state-based student loan program in the country, prevented the cancellation of student debt for death or disability, according to ProPublica and The New York Times.
The state also charged high interest rates, did not cap borrowing amounts and did not offer flexible payment programs, like those based on income levels. And if you didn’t pay, the state could swoop in to garnish your wages or grab your state tax refund.
While Governor Chris Christie did not respond to the ProPublica/NYT investigation, the New Jersey state house fast-tracked a bill from January 2016 that proposed forgiving state student loans in the event of death or disability. Christie signed S-743 into law on Monday, Dec. 5.
What This Change Means for Student Loan Borrowers in NJ
The new law is a victory for students and families in New Jersey, who had previously been advised by the state to purchase life insurance to cover student loan debt in the event of a tragedy, according to ProPublica.
“How anyone could ask a mother — who just lost her son — to pay for his student loans is incomprehensible,” Sen. Paul Sarlo (D-Bergen) chairman of the Senate budget and appropriations committee, told NJ.com.
“Student loan payments should stop at death, and with this law in place, they will.”
Meanwhile, private loan forgiveness after death or permanent disability is at the whims of each company — just one more reason to research your financial aid options thoroughly before signing on the dotted line.
Your Turn: Have you ever managed someone’s debt after they passed away? Were you surprised at the responses you received?
Lisa Rowan is a writer and producer at The Penny Hoarder.