What happens to the balance owed on student loans if you die?

The answer depends on which kind of student loans you signed, or that someone else signed or co-signed on your behalf.

If the student loans were issued by one of the federal loan programs, the answer is easy. Here’s the relevant information from the StudentAid.gov site:

If you, the borrower, die, then your federal student loans will be discharged.  If you are a parent PLUS loan borrower, then the loan may be discharged if you die, or if the student on whose behalf you obtained the loan dies.

The loan will be discharged if a family member or other representative provides a certified copy of the death certificate to the school (for a Federal Perkins Loan) or to the loan servicer (for a Direct Loan or FFEL Program loan). For more information, contact your loan servicer.

The trip up is that not every student loan is from a federal government program. Some are actually private loans that one arranges directly via a financial institution. You might even have a mix of private and federal loans on your record once you left school or graduated.

One of the reasons that could happen involves the maximum one can borrow per year from individual federal loan programs.

Another reason cited in some research that students are not following up on the process needed to apply for federal student loans – which starts with the Free Application for Federal Student Aid and the array of financial data that is required from the family.

And it’s fair to say that some of the marketing material I’ve seen makes private loans seem very attractive to a student and his or her family as compared to a federal loan.

But The Wall Street Journal reported that 90 percent of private student loans issued in 2011 had co-signers. And as with any other loan that has a co-signer, the co-signer can be held responsible for repayment even if the parties themselves thought or agreed otherwise.

A snippet from WSJ:

If the student can’t pay the bill, “the lender can go after the co-signer for the entire balance,” says Persis Yu, a staff attorney at the National Consumer Law Center’s Student Loan Borrower Assistance Project..

Now, what happens?

Jennifer De Paul wrote a piece for Brazen Life that explains a followup detail she noticed first hand – and then realized was a trend: Overwhelming Student Debt has Parents Getting Life Insurance on Their Kids.

A snippet:

When my parents first announced at Thanksgiving that they were taking out a life insurance policy on me, I was taken aback and slightly offended. In fact, I thought it was a cruel joke.

Why would they need to do such a thing? I’m only 27. The mere thought of it was grim.

But they did have a reason: my student loan debt. Since they co-signed with me for the loans, they’d be left with the debt if I ever—god forbid—died.

Some of Jennifer’s reference material came from a Financial Times‘ article: US Parents Warned on Student Debt Peril.

On a personal note: my adult daughter brought Jennifer’s article to my attention, and then she and I refreshed our memories on what we had done to finance her college education. The answer was this: All of the loans she or I signed were under the federal programs that are forgivable in case of death, as she and I worked together to meet the financial aid application deadlines and I had the good credit to qualify for Parent PLUS loans when those were needed.

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