It’s no secret that millennials are drowning in student loan debt.
These days, nearly half of student borrowers are behind on their loans. Bachelor’s degree recipients who graduate with debt owe an average of $33,000. Between 2008 and 2014, total student loan debt rose nearly 85%. It’s gotten so bad that most millennial college grads regret how much they borrowed.
Not only that, but older Americans are now carrying unprecedented amounts of student debt into retirement. The number of Americans age 60 and older with student loan debt has quadrupled over the last decade, according to a new report from the federal Consumer Financial Protection Bureau.
Bearing that in mind, here’s a question to ponder: What happens to your student loans if you die?
It Depends on the Kind of Student Debt
The fate of your student loans depends on whether you have federal loans or private loans.
If the borrower of a federally backed education loan dies, the loan gets canceled, and the government discharges the debt, according to the Federal Student Aid Office of the U.S. Department of Education.
That means if all you have is federal student loans, your family won’t have to pay the debt.
That goes for Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Consolidation Loans, Federal Family Education Loans and Federal Perkins Loans.
Your survivors will have to provide proof of your death to your loan servicer. Acceptable forms of proof include an original death certificate, a certified copy of the death certificate, or a complete photocopy of same.
To pay for your education, your parents may have taken out Parent PLUS Loans, which are also federal loans, but in this case the parent is the borrower instead of the student. If the student dies, the parent won’t have to repay the loan. If one parent dies but both parents are responsible for the loan, the surviving parent will have to keep paying it back. If only one parent is responsible for the loan and that parent dies, no one has to pay the money back.
Private Student Loans: A Different Ballgame
It’s different with private loans. If you received a student loan from a private lender, like a bank, your unpaid balance is more likely to become your family’s problem.
Millions of college students are in this boat. The number of private student loans has been increasing, the nonprofit Institute for College Access & Success reported in 2016. In the 2011-12 school year alone, about 1.4 million undergrads took out private loans for help pay for college.
Some private lenders will forgive the debt if you die, but most won’t be that lenient.
“Some lenders of private (non-federal) student loans offer a death discharge if the borrower dies. These include Sallie Mae, New York’s Higher Education Services Corp., Wells Fargo and Discover,” reports Edvisors, an online resource for paying for college.
That’s not the norm, though. Other lenders will come searching for money in a couple of likely places: your estate and your loan’s co-signers.
Your estate: Contrary to popular belief, you don’t have to be mega-rich to have an estate. Your estate includes assets you own such as cars, bank accounts, jewelry and your home (if you own your home).
Your creditors — your lenders and credit card companies — expect to be paid by your estate. They can file a claim in probate court, which oversees the handling of your estate. Because it may take a while to sort out your finances, creditors may agree to settle with your estate for less than the total debt.
Each state has its own laws governing estates. If you’re married, jointly held property like a home or joint bank account should be safe from creditors.
Your loan’s co-signers: If your parents or any other relatives co-signed your college loans, they could be on the hook for your debt if you die before the debt is paid off. And 9 out of 10 private loans have a co-signer.
If that’s the case, your survivors should look into your lender’s compassionate review process. On a case-by-case basis, some lenders will waive the co-signer’s legal obligations if the co-signer is on a fixed income and simply isn’t capable of paying off the debt.
If the co-signer is capable of making loan payments, the lender is less likely to forgive the loan.
Making matters worse, the death of the student borrower can trigger default, meaning the entire balance of the loan comes due immediately, student loan expert Heather Jarvis told The Penny Hoarder.
“Many private loans not only lack discharge provisions, but include provisions that trigger default upon the death of the borrower and/or co-signer of the loan, triggering acceleration of the balance and assessment of fees,” Jarvis said.
Additional things to know about discharge: Federal loans are dischargeable, but it isn’t automatic: Survivors must submit an application with the death certificate, and the discharge is likely taxable as income to the estate of the deceased borrower.
“Many private loans not only lack discharge provisions, but include provisions that trigger default upon the death of the borrower and/or co-signer of the loan, triggering acceleration of the balance and assessment of fees,” she said.
A Mighty, Protective Shield of Life Insurance
You can take steps to protect your family from financial hardship in case of tragedy.
Consider buying life insurance as a safety net if your family is co-signing some hefty student loans. You’ll want to purchase a life insurance policy that would cover the cost of any outstanding debt if you were to die unexpectedly. That way your relatives won’t be burdened.
Of course, most millennials — the people who are most likely to have college debt — don’t have life insurance, often because they think it’s just for older people.
Plus, millennials are delaying the kinds of milestones — like getting married or having kids — that usually get people thinking about things like life insurance. And fewer millennials are working full-time for companies that offer traditional benefits packages including life insurance.
Millennials and Generation Xers also overestimate the cost of life insurance, according to a recent report by insurance association LIMRA.
In some cases, it may be up to parent co-signers to insure their college-age offspring, just in the case the worst happens.
“Increased life insurance can help manage these costs,” Jarvis said.
Your Turn: Should private lenders be allowed to collect on student loans after the borrower dies?
Mike Brassfield is a senior writer at The Penny Hoarder. When he’s not working, he’s reading or being a dad. He can be reached at firstname.lastname@example.org.