If you have student loan debt and are thinking about the future, you might be concerned that the debt will affect your estate planning. It is true that taking out loans could change how you plan in several ways.
What Happens to a Student Loan When the Borrower Dies?
Student loans don’t really disappear when the borrowers die. (The same is true when borrowers declare bankruptcy.) Unfortunately, the loan issuers can attempt to collect from the borrowers’ estates after their deaths.
During the probate court process of distributing an estate, the executor has to give creditors notice of the deceased person’s death and the probate action. The creditors then have a short time period to make claims against the estate. If they make valid claims, the executor must pay back the debts owed to the creditors with money from the deceased person’s assets. Any money that is left over goes to the heirs. But if the debts are large (as student loans often are) or the assets are small, there might not be anything left over for the heirs.
What If Someone Co-Signed on the Student Loan?
If someone co-signed on a student loan along with the student borrower, the situation is even worse after the borrower dies. Some student loans contain clauses requiring full repayment upon the student borrower’s death. This means that the co-signer is suddenly on the hook for thousands of dollars, all at once. Alternatively, the co-signer may need to keep making payments in the borrower’s place, often for many years. The co-signer usually has no option to discharge the loan when the borrower dies.
Can Borrowers Still Leave Assets to Their Heirs?
Despite the requirements of the probate process and the issues for co-signers discussed above, student loan borrowers do have the opportunity to estate plan in a meaningful way. A few options that leave money to family without the risk of creditor claims in probate include:
- Placing assets in an irrevocable or living trust
- Taking out life insurance or opening a retirement account
- Making lifetime gifts
All of these methods remove the borrower’s ownership of the funds or make distribution to another person upon the borrower’s death mandatory. As a result, student loan companies most likely will not be able to access the assets to repay the loans.
In debt and want to start planning your estate? Local attorney Andrew Szocka, Esq. provides thorough and speedy estate planning help in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455-8430.