03 Sep What happens to student loans when borrower dies?

Q. I am the co-signer of three student loans with my granddaughter that are being administered by Navient. My question is: Are the loans callable if either one of the signees dies unexpectedly? I have suggested my granddaughter to consolidate the loans, which are in excess of $125,000, to no avail.
— Gramps

A. It depends.

We wish we could give you a more precise answer, but we would first need to know the types of loans that were taken out originally.

“Federal student loans normally do not require a cosigner because the loan is not dependent on your credit history – with the exception of Direct PLUS loans – which require the endorsement of a cosigner if you have a weak credit history,” said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

He said if the borrower of a federal student loan dies – whether there was a cosigner or not – the loan is discharged by the government and the estate will be under no obligation to pay the loan.

This includes Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Consolidation Loans and Federal Perkins Loans, he said.

“Before the government can discharge the loan, your survivors will need to present the loan servicer with proof of death, which may include the original death certificate, a certified copy of the death certificate, or an accurate and complete photocopy of either of the above,” he said.

The same does not apply for private loans, however.

To take out a private loan, Green said, a borrower must meet the lender’s credit requirements.

“Sometimes these requirements will make it necessary to have a cosigner before being approved for the loan,” he said. “This means that the cosigner is responsible for the debt if the primary borrower fails to pay for any reason—including death.”

Private student loans (including refinanced loans) are more like traditional personal loans, which means that private lenders may potentially come after your estate for repayment when you die, Green said. However, if the loans are only in your name, your children or other heirs are not generally considered liable.

It is important to understand that with private loans, the death of either signer (primary or cosigner) can trigger default, he said.

“In other words, the loan is `called’ and the entire balance becomes due immediately, even if the surviving signer has never missed a single payment,” Green said. “It is rare for a private lender such as a bank or credit union to release a cosigner from a debt upon the death of the primary borrower.”

Some lenders such as Sallie Mae’s Smart Option Student Loans, offer death and disability forgiveness policies, but this isn’t the norm and should not be expected by all lenders, he said.

In some cases, it might make sense for parent cosigners to purchase a life insurance policy for their child. In the event of death, parents would receive a sum of money to help cover the repayment of cosigned student loans, Green said. If you decide to go this route, it would be best to buy a life insurance policy that covers the entire amount of the outstanding debt, he said.

Please realize with this issue that the answer to student loans upon death is anything but straightforward. It all depends on the types of loans you have, the state in which you live, if you have a cosigner, and many other factors.

“A possible solution is to seek removal from the loans if your granddaughter’s credit rating has improved since she first took out the loan,” Green said. “She may be able to refinance the loans in her own name, and/or consolidate them into one monthly payment both for ease and a potentially lower rate.”

From a financial planning standpoint, removing $125,000 of debt from your credit report may be beneficial as well, Green said.

No matter which option you choose, make sure you and your family are protected by understanding your lender’s policy regarding death discharge and reviewing it in depth, Green said.

Preparing now can save your family from financial trouble down the line.

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