Student loans from the federal government are one of the only debts that can be forgiven at death. Although some private lenders that offer student loans also offer loan forgiveness.
In June 2023, the average federal student loan debt in the U.S. was about $37,650.1 A high student loan amount may worry you, but in most cases, you don’t need to be overly concerned about your loved ones being saddled with student loan debt or other loans left behind.
Keep reading to learn what happens to different kinds of debt after the primary borrower passes away.
When a person passes away, their debts don’t necessarily disappear. In some cases, the deceased person’s estate or their family members become responsible for repaying any outstanding debts However, there are certain types of loans that may be forgiven upon the borrower’s death
Federal Student Loans
Federal student loans are eligible for loan forgiveness if the borrower dies. This includes Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans. Parents who have taken out PLUS loans to pay for their child’s education will also have the loan forgiven if the student dies.
To have a federal student loan forgiven, the borrower’s estate or family will need to submit a loan discharge application along with a copy of the death certificate to the loan servicer. Once processed, the outstanding loan balance will be discharged and no further payments will be required. This loan forgiveness also applies to joint consolidation loans.
Private student loans do not offer automatic forgiveness upon death. The lender will require the estate to repay the outstanding balance. However, the lender may allow a spouse or family member to assume responsibility for making payments on the deceased person’s private student loans.
Mortgage Loans
Mortgage loans are not automatically forgiven when a borrower dies. If the mortgage was jointly held with another person, such as a spouse, that person will remain responsible for making the mortgage payments.
For single borrowers the estate will need to continue making payments until the home is sold or refinanced. The sale proceeds must first pay off the mortgage loan balance before any assets are distributed to beneficiaries.
To avoid leaving mortgage debt behind, borrowers can purchase mortgage life insurance. This type of policy pays off the remaining mortgage balance upon the insured’s death.
HELOCs
Home equity lines of credit (HELOCs) allow homeowners to borrow against their home’s equity. If the HELOC has an outstanding balance when the borrower dies, their estate is responsible for repayment. A spouse or joint account holder will need to continue making payments to avoid foreclosure.
However, if the HELOC has a zero balance upon death, the line of credit account will be closed with no debt obligation. As long as there is no balance due, the HELOC debt is forgiven.
Auto Loans
Auto loan debts must be repaid by the deceased borrower’s estate The lender can repossess the vehicle if the outstanding loan balance is not paid off. To keep the car, the borrower’s heirs will need to refinance or assume the auto loan
If there is a co-signer on the auto loan, that person remains responsible for making payments and repaying the debt. Otherwise, the lender can take possession of the car and sell it to pay off the loan balance.
Payday Loans
Payday loans allow borrowers to take out a short-term cash advance which is repaid on the next pay date. These high-interest loans are not forgiven upon the borrower’s death. Payday lenders will make a claim against the estate to recover loan principal, fees, and interest.
If there are insufficient assets to repay the payday loan, the lender has to write off the debt. However, payday lenders may also make collection attempts against surviving spouses in community property states.
Personal Loans
Personal loans and lines of credit from banks and credit unions are not discharged upon the borrower’s death. The estate is responsible for repaying the outstanding balance. If the loan was co-signed, the surviving co-signer must continue making payments.
Borrowers can purchase credit protection insurance plans that will pay off loan balances if the borrower dies. This avoids transferring personal loan debts to family members.
Credit Card Debt
Credit card companies can collect unpaid credit card balances from the deceased cardholder’s estate. As with other unsecured debts, if there are not enough assets to pay the credit card balance, the lender has to write off the remaining amount.
Authorized card users are not obligated to repay the cardholder’s credit card debt. However, co-signers and joint account holders remain responsible for repaying the credit card balance.
Medical Debt
Medical debts are owed by the deceased patient’s estate, including any unpaid hospital bills, physician services, ambulance fees, and prescription medications. The medical providers and collection agencies can make a claim against the estate assets.
If there is insufficient money to repay medical debts, the deceased person’s family members are not personally responsible. The medical lenders will have to write off any unpaid balances.
Tax Debt
Unpaid taxes, interest, and penalties do not disappear at death. The deceased taxpayer’s estate remains liable for any amounts owed to the IRS and state tax authorities. If estate assets are insufficient to pay the tax debt, the IRS may collect from surviving spouses in community property states.
Key Takeaways:
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Federal student loans are the only type of loan that is forgiven automatically upon the borrower’s death. Private student loans are owed by the estate.
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Mortgages, HELOCs, auto loans, payday loans, and personal loans must be repaid by the deceased borrower’s estate. Co-signers remain responsible.
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Credit card debt, medical debt, and tax debt can be collected from the deceased person’s estate. If assets are insufficient, debts may be written off.
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To avoid burdening family members, borrowers can purchase credit protection insurance and mortgage life insurance plans to pay off specific debts at death.
What Debts Can Be Inherited?
Most debts that are not forgiven at death will be handled by the estate through probate, with a few exceptions. All of this is mainly dependent on what safety nets were put into place by the deceased individual. Did they have a life insurance policy? Did they have retirement accounts or enough assets to cover debts?
Here is a brief overview of how different types of debt are handled in probate:
If you have any loans or credit card debt with a joint owner, co-signer or co-applicant, they will be held responsible for the debt after your debt. Personal installment loans and credit card debt with a joint account holder will not become the estate’s debt. The joint account holder or co-signer will take on the remainder of the balance.
Since credit card debt is a form of unsecured debt, the card owner is typically the only one who can be held responsible for the remaining balance. The credit card company will need to make a claim on the deceased individual’s estate. But if there is not enough money in the estate to pay off the credit card debt remaining, then all credit card companies who made a claim will have to write off the balances.
While the joint owners of a credit card will be responsible for the debt owed, an authorized user on a credit card has no ownership over the account. An authorized user will not be required to pay off the debt after the credit card owner has passed.
Auto loans are secured debt, meaning that if the car payments are not made, the loan servicer could repossess the vehicle. The remaining debt on a car loan is paid out of the estate if the heirs so choose.
Those in control of the estate can choose to take on the car loan themselves to keep the vehicle, sell the vehicle to pay the balance, or let the lender repossess the vehicle if they don’t wish to keep it.
Mortgages, like car loans, are secured loans set up against collateral. The collateral on a mortgage loan is the home you purchased with it. The estate will be used to pay creditors the remaining balance on the house, so it is not foreclosed on.
If you left the house to someone else and your estate cannot pay off the mortgage loan debt, the new owner will be responsible for the mortgage payments after your death.
Medical bills tend to be the first debt handled by the estate in the probate process. Medical debt is paid out of the estate. Some of the smaller medical bills may just be closed out and declared uncollectible.
If you received Medicaid benefits after turning 55, it’s possible that your state may make a claim on your estate to get back some payments you received. If there is not enough money in the estate to handle all the medical debt remaining, the remaining balances may need to be written off.
There are plenty of ways to better prepare your finances to make your passing as smooth as it can be for your loved ones. Even though our own death is not something we want to spend much time thinking about, making proper preparations could give you peace of mind that the people you love the most will be taken care of and not have any added stress while grieving their loss.
Here are a few ways to prepare your finances to make things easier after your passing:
Everyone with a spouse and children, whether young or old, or any other loved ones who depend on them financially should have a life insurance policy.
Life insurance policies provide a death benefit to the policy holder’s beneficiary after they pass. This death benefit is money that can help the life insurance beneficiaries handle funeral expenses, long-term financial needs, and debts left behind.
A large life insurance payout can make all the difference when debt collectors come knocking on the doors of your family. If you have not purchased a life insurance policy yet, doing so as soon as possible is one of the best things you can do to ensure that your family members have what they need.
An Estate and Its Assets
Just as your assets pass to your estate, most of your debts will also be passed onto your estate. Your debts will not automatically be put on the shoulders of your family unless they were joint account owners or co-signers.
The process of dividing up a deceased person’s debt is called probate. The probate process can be quite complex depending on what financial planning was done before death and how much outstanding debt has been left behind. Probate will deal with all creditors that come forward, from mortgages, credit card debt, bad credit loans, and more.
During the probate process, creditors have a specific number of months to make a claim against your estate. When this happens, the beneficiaries of your estate handle the unpaid debts using the assets passed down to the estate.
Community property states have laws that dictate that any communal property shared by the deceased individual and their surviving spouse must be sold off to pay debts. In this case, the living spouse could be responsible for handling debts in a community property state if they wish to keep the communal property.
Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, South Dakota, Tennessee, Texas, Washington, and Wisconsin. There are elective provisions for communal property in Alaska and Oklahoma.
Student loans forgiven at death? It depends.
FAQ
What debts are forgiven upon death?
Student Loan Debt
Most federal student loans are forgiven upon the death of the borrower. This means that the remaining loan balance is typically not passed on to the borrower’s estate or their surviving family members.
Can a loan be forgiven after death?
A loan isn’t automatically forgiven after death. Lenders may recover it from the deceased’s estate or from any co-signer, if applicable.
Do you inherit your parents’ student loan debt?
If a borrower dies, their federal student loans are discharged after the required proof of death is submitted. The borrower’s family is not responsible for repaying the loans.
Are credit cards automatically cancelled when someone dies?
When someone passes away, it’s often up to their family to settle their estate, which includes all of their finances. If your loved one had credit cards, it’s important to cancel their cards once they pass away since credit cards typically don’t automatically cancel when the cardholder dies.