Have you ever considered what happens to student loans when the borrower passes away? What about the funds set aside in a 529 account or state prepaid tuition program if either the owner of the account or the beneficiary dies unexpectedly? Keep reading to learn more.
Are Student Loans Canceled After Death?
There are two primary types of student loans: federal and private. The government issues federal student loans. Banks, credit unions, online lenders, and other financial institutions offer private loans.
Federal and private loans function differently but have one thing in common when the owner or beneficiary dies. Both require proof of death (usually either an original death certificate or an acceptable copy of it) before you can submit a post-mortem change of status for a student loan.
Federal Loans Dissolve
Federal student loans automatically dissolve once the proof of death is received.
- Your spouse, family members, and friends will never have to worry about paying the balance due because the federal government cancels the debt altogether.
- The government dissolves Parent PLUS loans if the parent or the student die before paying off the loans. Students are never liable for a Parent PLUS loan in their name after their parent dies.
Private Loans Might or Might Not Dissolve
Some financial institutions offer death discharges, but not all do. If discharge is not an option, the institution can collect the balance remaining on your loan from your estate.
- In some states, your spouse is automatically liable for your debt, but this isn’t the case everywhere.
- Cosigners on private loans could be responsible for the debt. Some banks have an accelerated payment plan after the recipient dies. Other institutions demand payment in full immediately, often resulting in default if your cosigner doesn’t have the funds to pay.
- Each financial institution has different policies in place. It’s essential to familiarize yourself with the fine print of the student loan you choose so you know what to expect.
Releasing Cosigners from Potential Debt
Knowing someone else is responsible for your student loan debt after passing can be disconcerting. Luckily, there are a few ways you can remove that burden from your cosigner in advance, including cosigner release and refinancing options.
Some lenders offer cosigner releases after you’ve proven capable of handling your loan payments responsibly. After several on-time payments, you can apply for the institution to remove your cosigner from your loan altogether. The terms of cosigner release vary by institution, so you’ll want to consult your specific company’s policies to learn more.
If you can’t get a cosigner release from your current lender, you can also look into refinancing your loan with a new institution. Some lenders don’t require cosigners at all, while others require them at the loan’s inception but will let you release them after a set amount of time or payments. Don’t be afraid to ask questions and dig into the details of what is available.
What Happens to Prepaid (529) Plans?
A 529 plan is an account where an owner can deposit funds to withdraw later. The funds then pay for the educational expenses of a beneficiary. Each plan can only have one owner and beneficiary, so there should be a plan for a successor in case either the owner or beneficiary (or both) passes away before using the funds.
If the Beneficiary Passes
If the beneficiary of the 529 plan dies, the account owner still maintains control of the fund. Different plans include their own regulations, but typically the owner can choose a new beneficiary or withdraw the funds from the account. Withdrawing the funds usually comes with fees if the owner uses the money for non-educational purposes. The account owner should consult a financial adviser to determine the best approach.
If the Account Owner Passes
The situation is trickier if the owner of a 529 account passes. Many 529 accounts allow the owner to choose someone else to control the account in an emergency. If the account owner has already selected someone, the account simply passes to them.
If the account owner didn’t choose someone, a judge might have to step in and take care of it. Sometimes the executor of your estate can also take control of the fund or choose someone else.
Another option is for the fund to go directly to the beneficiary if they are eighteen years old or older. Each state has its own guidelines, so consider checking with a finance professional or your state’s education department for clarification.
Protect Yourself from Unexpected Debt
Student loans are an everyday reality for many individuals pursuing higher education. These loans provide the financial support necessary to attend college and earn a degree. No one expects to pass before they pay off their student loans, but life is unpredictable. No matter your age or how healthy you are, it’s crucial to have a plan in place so your family isn’t left with unexpected burdens if the worst happens.
Creating an end-of-life plan isn’t as daunting as it sounds, especially if you have help. Explore our expert advice guides for more resources on end-of-life planning, prepaid funeral arrangements, and ways to protect your assets and your loved ones.