Ask an Attorney FAQ: Student Loans: Until Death Do Us Part?
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As published in Alison's monthly Ask An Attorney column in New York Parenting
by Alison Arden Besunder, Esq. 

Q: I have a lot of student loans that I am still paying off after 20 years. My spouse guaranteed a student loan of her niece. What happens if either of us dies? Will my estate be required to pay my student loan in full? Will the lender look to my spouse’s estate (or me) if her niece defaults on her student loan?

Today’s students are graduating college and graduate programs with an unprecedented amount of student loan debt. There are 44 million Americans with student loan debt, an increase from 37 million in 2014. According to the Consumer Finance Protection Bureau, that student loan debt amounted to $1.31 trillion as of Dec. 31, 2016 (an increase of $31 billion; about $770 billion more than the total U.S. credit card debt). The average Class of 2016 graduate had $37,172 in student loan debt, a six percent increase from the prior year (as reported by www.federalreserve.gov and www.newyorkfed.org). According to the American Bar Association, nine out of 10 law students use student loans to pay for their education, with an average law school loan debt of $88,000.00 for public universities. According to the latest release from the Congressional Budget Office (https://www.cbo.gov/sites/default/files/recurringdata/51310-2016-03-studentloan.pdf), the federal student loan program will cause a loss of $170 billion over the next 10 years. And that’s before you get to the current tax proposal (which, as of the date of writing, has not been presented for vote).

And how much of these trillions in loans are repaid? Do they extinguish when you die? Is someone else responsible? Should you purchase insurance to cover the debt? You may be surprised to learn that many of these loans are forgiven and discharged based on various programs or on death.

Federal student loans

If a borrower on a federal student loan dies, the loan is automatically canceled and the debt is discharged by the government. Recipients of private student loans do not enjoy the same debt forgiveness on death. For private student loans, forgiveness on debt depends on the terms of the individual loan and the lender’s policies. Some private lenders might offer death insurance, whereby the debt is discharged on death. For lenders such as Sallie Mae (Sallie Mae’s Smart Option Student Loan, New York HESC’s NYHELPs loans, and Wells Fargo private student loans), these programs offer death and disability forgiveness policies. Some private lenders might offer a death discharge, but not all do. If the loans are only in the decedent’s name, the heirs or other relatives are not necessarily liable.

If the loan is forgiven, however, they will likely issue a 1099-C, meaning the amount of the forgiveness is taxable on the estate’s income tax return, and Uncle Sam may come looking to you for the appropriate tax rate on that forgiveness.

There are tax implications to debt forgiveness, which is treated as income. Even where the debt is forgiven due to disability or death, the tax authorities will impose a tax on the amount of the forgiven debt. In other words, the estate could owe as much as 35 percent on the full unpaid amount of the loan.

Can a spouse be liable for the debt?

A spouse does not have repayment liability on a federally-backed education loan. If a spouse is not on the student loan as a co-signer or joint borrower, the surviving spouse is not legally liable for the debt. (If the decedent and spouse lived in a community property state like California or Texas, the result might be different. It would depend on the type of loan and the laws of the individual state.) However, the same result might ensue if the debt can be collected from the decedent’s estate, thereby reducing the spouse’s share. That said, if the decedent took out the loan before marriage, the spouse is not likely to be liable unless he or she was a cosigner or a guarantor of the loan.

However, if the loan has a cosigner, the cosigner is legally responsible for the debt when the debtor passes away. If there is a provision in the loan agreement itself, the creditor (lender) could accelerate the debt and seek repayment immediately. The death of the borrower could thus trigger a default.

How much debt is repaid and how much is forgiven?

The number of students in default of their student loans hit a new high in 2016 of 8 million borrowers defaulting on more than $137 billion in education debts, up from 14 percent (5.4 million) with approximately $85 billion past due in 2014.

Alison Arden Besunder, is founding attorney of the law firm of Arden Besunder P.C. Follow her on Twitter @estatetrustplan.

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