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With all the talk surrounding President Joe Biden’s student loan forgiveness plan in the headlines, it’s easy to forget that borrowers and their families have other things on their minds when it comes to their student debt. .
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For example, what happens to federal student loans when a beneficiary dies? As dark as the subject is, there was a time not so long ago when this question was asked by more and more borrowers.
In 2020, Betsy Mayotte, president and founder of The Institute of Student Loan Advisors (TISLA), spoke to Money about the growing number of debtors asking her what would happen to their student loans if they contracted COVID-19 and were dying. “That seems to be the theme of the day,” she remarked at the time.
As the threat of the coronavirus has faded, wondering what will happen to your student loan debt if the borrower dies is still a relevant question. According to a 2019 survey by Haven Life Insurance Agency, 73% of student borrowers did not know how their debt would be handled if they died.
The answer, fortunately, is that if a federal student loan holder dies, their debt will be discharged by the US Department of Education (ED).
What happens to federal student loans when a borrower dies?
According to Forbes, a family or spouse can apply for a loan discharge if the deceased borrower has one of the following federal student loans: Subsidized Direct Loans, Unsubsidized Direct Loans, Direct PLUS Loans, and Direct Consolidation Loans.
The same applies to the now discontinued Perkins Loan and Federal Family Education Loan (FFEL) that some borrowers may still have, according to GoodRx Health.
Parent PLUS loans will also be discharged by ED if the borrowing parent or the student to whom the parent provided the loan dies. Because only one parent can be responsible for a Parent PLUS loan, a surviving parent NOT enrolled on the loan will not be responsible for repaying the loan.
To have a loan forgiven (unforgiven; this term is used to indicate the elimination of debt due to job loss or inability to pay), acceptable proof of death (death certificate, a certified copy of the death certificate or one or a complete copy) must be given to the Student Loans Manager.
What about private student loans?
As mentioned above, there are a number of federal student loans available to borrowers, but they are all overseen by the Department of Education and have standard policies, including death discharge regulations. a debtor. However, private student loans are an entirely different matter.
Private loan terms differ “from lender to lender,” according to Forbes, so in the event of the death of a borrower or student loan holder, the lender’s agreement and policy should be carefully checked. before assuming that a discharge will be applied. There is absolutely no guarantee that a private lender will pay off a deceased person’s debt.
“The problem with private lending is that every loan product is different,” Mayotte says. “Historically, for many private loans, the borrower’s estate or co-signer, if there was one, was often still left behind.”
Now, in the case of a co-signed loan, companies will normally discharge a debt if the primary borrower dies, but can require the borrower to continue to repay the loan if the co-signer dies, according to Forbes.
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Borrowers who have refinanced a federal loan are in a difficult position because their loan has changed from a dischargeable federal student loan to a possibly dischargeable private student loan. Again, in the event of a borrower’s death, the company providing the refinanced loan will need to be contacted and their policy reviewed.
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