As the line goes, death and taxes are the only two certainties in life. Now we may need to add student debt to that list. The numbers relating to it are astounding: cumulatively, 40 million borrowers now account for $1.3 trillion of student loans.
For most borrowers, student loans are a lifelong debt, one that they have to keep servicing year after year. But what happens when the borrower of a student loan dies? There's no straightforward answer to this question. It depends on the situation along with the lending institution. This is because student debt is unlike other forms and types of debt, which generally require collateral, or which are based on an expectation of future value appreciation.
Much will depend on what type of lender the deceased student used for the loan.
Loans From Federal Agencies
Federal agencies will discharge your student loan debt once you die. According to the U.S. Department of Education's website, student loans are also discharged if either the parent co-borrower or the student co-borrower dies. To be eligible for the discharge, a copy of the borrower's death certificate must be provided to the applicable lending agency by a family member or representative.
Private Lenders and Student Loans
Here's where things get complicated. Private agencies don't always cancel student debt upon death. Instead, many will try a number of different options to keep collecting on it.
First, they may attempt to collect the outstanding loan amount through the deceased's estate or insurance. This plan may fail if the student was relatively young and so didn't have a substantial estate or an insurance policy that covered his or her liabilities. The next route for private lenders is to tap the student's relatives, spouses or co-signers. If the student lived in a community property state, then spouses may automatically become liable for the deceased's loans, though it depends on the state (because certain community property states allow exemptions for education loans).
The ultimate responsibility for a student loan, however, ends up with any co-signers, whether they're the borrower's spouse, parents or even acquaintances. Certain private lenders will offer a hardship forbearance period during which co-signers are granted relief from making interest payments on the loan. However, interest on the remaining loan amount is compounded during this period. Thus, the remaining loan amount may have increased after the forbearance period is over. In certain exceptional circumstances, the lending agency may forgive the debt. However, currently there is no legal mandate for private lenders to forgive student loans under specified criteria.
That said, proposed legislation called the Christopher Bryski Student Loan Protection Act could provide additional protections for students against private lenders. The bill was inspired by the case of Christopher Bryski, a 25-year-old student at Rutgers University, who passed away due to a traumatic brain injury in 2010. Subsequently, his family inherited his student debt obligations. While Bryski's federal student loans were canceled upon receipt of the death certificate, his parents have had to continue to make interest payments on his private loans.
The bill, assigned to a Congressional committee as of October 2015, grants a number of protections to loan recipients against predatory lenders. For example, it mandates that lenders provide counseling services, with lenders required to clearly explain to potential recipients all terms and conditions of loan defaults, including in case of death. The bill also provides a way out for co-signers to be released from their debt obligations, provided they meet certain criteria established by the Consumer Financial Protection Bureau (CFPB) and the lending agency.
The Bottom Line
It's important to have extensive knowledge of the terms and conditions of any student loan before you sign up for it. Taking on this type of debt can have great implications, not only in life but, as it turns out, in death as well.