What Happens to Student Loan Debt When You Die?

There are two issues many people prefer to avoid thinking about: death and debt. Unfortunately, student loan debt is a part of life for many college graduates nowadays, especially for students obtaining advanced or professional degrees. Within the first quarter of this year, the total national student debt was over $1.5 trillion for the first time, at a staggering $1.521 trillion in national student debt. 

61% of 2015 college graduates in North Carolina graduated with student loan debt. A 2018 report indicated that Class of 2017 graduates had accumulated $39,400 in student loan debt. However, students are not alone in their debt load. The same report showed that $81.5 billion of the debt is in Parent PLUS loans.

Since the majority of graduates in North Carolina will likely have some amount of student debt during their lifetime, it's only appropriate to ask what happens to your student loan debt when you die?

Below are the different types of loans and what happens to the debt in the event the borrower passes away. Although it may not be a pleasant topic, it is imperative that you consider your debt as you work on your financial and estate plans.

Types of Student Loans:

●     Federal student loans.If the debt is a federally backed education loan that the student took on by him or herself, then the loan is automatically canceled when the student dies, and the government discharges the debt. These loans have no co-signer, and the legal terms that govern the loans specify that the debt is canceled upon the death of the student.

●     Private student loans. Whether a private student loan is canceled after the borrower’s death depends on the specific lender’s policies and the loan’s legal documents. Check with the lender to find out if they offer any death discharge protection. Some, but not all, private lenders provide this protection to their borrowers.

●     Refinanced student loans.When you refinance your student loan debt, the terms of your old loan are replaced by new terms you agree to when you sign the refinancing documents. While there may be some financial benefits to refinancing your student loans, the terms of your new loan and policies of your new lender will now control your loans. You may lose death discharge protection if you had it in your original loan but it is not present in the new ones.

●     Parent PLUSloans.When a parent takes out a PLUS loan to help pay for a child’s education, and either the parent (borrower) or the child (student) later dies, the federal government will forgive the debt. However, if the student dies, the borrower may receive a 1099-C form, which treats the wiped-out debt as taxable income. As is the case with all tax issues, you should discuss your situation with a qualified tax advisor.

●     Co-signed student loans. If you have a co-signed student loan and the primary borrower passes away, you are still on the hook for the debt. As the co-signer, if you die, the primary borrower may be required to pay the entire balance of the student loan in full. In this event, it is essential that the primary borrower check the lending agreement and discuss the situation with the lender to see what relief, if any may be available.

Seek Professional Advice

If you have student loan debt, make sure to let your estate planning attorney know to make sure your loans are taken into account when preparing your will or trust. Depending on the type of student loan you have, your estate may or may not be burdened with your debt after you pass away. Factoring in your loans when designing your plan helps ensure that your family is completely protected. 

How does a Revocable Living Trust help me avoid probate?

One of the biggest misconceptions about Revocable Living Trusts is that they are only for the wealthy. However, even if you have only accumulated a moderate amount of wealth or assets, having a trust might be a useful tool to consider for your estate plan.

Probate is the court-supervised process of settling an estate after someone dies. It is a time-consuming process and can sometimes end up being costly. Additionally, it is completely public – anyone can see the distributions made and who they are made to.

A Revocable Living Trust, however, allows for greater privacy since any assets that were titled in the name of your trust during your lifetime will generally avoid the probate process and will not become part of the public record. At the same time, a Revocable Living Trust can be altered, revoked, or amended any time during the lifetime of the person who created it – without the consent of the trustee or others – allowing privacy at death and flexibility during life.

While it is important to fund the trust by adding your assets to it, it is also important to have a will that will work in conjunction with the trust. A carefully drafted will can allow for assets that were not in the trust at the time of your death to “pour over” into the trust during the probate process.

Revocable Living Trusts are useful tools, but it’s important to keep in mind that they are not a magic solution to all of your problems. Without further planning, most Revocable Living Trusts cannot help you avoid income taxes, avoid estate taxes, shield assets from your creditors, or help you qualify for Medicaid.  While options may be available such as a credit shelter trust to reduce the amount of estate taxes due for some people or a spendthrift trust to prevent a creditor from accessing some assets, these are issues that would need to be carefully addressed on a case-by-case basis.

Whether or not to create a Revocable Living Trust will vary from person to person based on their needs and estate planning goals. If you would like to talk about whether one will be beneficial to you, we recommend talking with an attorney or tax advisor. As always, don't hesitate to contact us if this is something you would like to discuss.

Planning For Incapacity

While it is never something we want to consider, planning for incapacity is an important part of making an estate plan. There are many methods and tools available to make sure that your wishes are respected and that the people you trust the most will be the ones making important decisions on your behalf.

Some useful tools to consider include:

• Health Care Power of Attorney: A health care power of attorney becomes effective after a physician determines that you are unable to make or communicate health care decisions yourself. It is a legal document giving authority to the person (or people) of your choosing who you trust to make medical decisions on your behalf.
• Advance Directive / Living Will: A living will is the legal document that you can use to direct whether you want your life prolonged in specific circumstances. It is a great way to be able to direct your health care power of attorney so that they can best champion your wishes in the event that you cannot make them clear at the time.
• Advance Instruction for Mental Health Treatment: An advance instruction for mental health treatment works much like an advance directive or living will, but instead applies when one lacks the capacity to make or communicate mental health treatment decisions. This document gives your appointed agent the power to make decisions regarding mental health treatment – and includes specific directions for your agent to follow regarding the use of medication, shock treatment, and/or admission to a mental health facility.
• Power of Attorney: A durable POA is a great choice for many people as it allows for you to appoint an attorney-in-fact who can basically step in to your shoes and act on your behalf with regard to your financial affairs.
• Revocable Living Trust: While you can be your own trustee of your RLT during your lifetime, you can also appoint a secondary, or successor, trustee to take over in the event of incapacity. Since a trustee only has power over the property held in trust and subject to the trust document itself, the grant of power is generally less broad than a POA, creating an RLT may be an option to consider if you want to put greater restrictions on the actions of your attorney-in-fact.
• Standby Guardianships for Minors: if you have minor children but become incapacitated, having a standby guardian for any minor in place can ensure that the people you trust the most will be able to fill in for you to make decisions on behalf of the child.

We highly recommend that you put a plan in place so your wishes are followed in the event of incapacity, and perform periodic reviews of your documents to make sure nothing needs to be changed or updated.