What happens to the debt if the student is unable to repay the loan due to an early death? It all depends on the kind of student loan and the lender.
Generally, unpaid federal student loans are discharged when the program receives notice of the student’s death, and no claims are filed against the student’s estate or family.
Student loans from a private lender are a different story. Private loans are usually treated like other unsecured debts, such as credit card debt. Without specific collateral securing the debt, the creditor will file a claim against the estate. With a student or new graduate it is unlikely there will be many assets in the estate available to pay debts, potentially leaving the lender high and dry.
To protect themselves, lenders often require a co-signer on the loan. The co-signer assumes responsibility for payments on the loan when the borrower either won’t or can’t make the payments. This includes the death of the student.
When looking at financing options, carefully review provisions of the loan agreement concerning the obligation after the death of the student. You may be able to negotiate better terms ahead of time. If better terms are not available, co-signers may want to consider a term life policy to cover the debt.
Life and Estate Planning is about preparing for the worst. Knowledge is the key to making effective plans. Peace of mind comes from knowing what to expect.