What is Death Discharge of a Student Loan?

Student loans are an eminent feature of the US society with an average debt of about $23,000 per student. Student debt are liabilities to be repaid and different types of borrowers adopt different forms of repayment plans that suit their needs best. But it isn’t always that easy to pay off those student loans accumulated over years.

That’s when student loan forgiveness programs come into picture and help a student borrower to come out of debt. Student loans are broadly of two types- Federal student loans and Private student loans. The former type of loans is funded by the federal government and carries a fixed rate of interest which sometimes, is also tax deductible.

Other than government agencies; banks and finance companies also offer student loans which are known as private student loans. Interest rates on private student loans are generally variable and higher than federal student loans. While there are student loan forgiveness programs available to both kinds of student loans; federal student loans are much more advantageous for such forgiveness programs. This is mainly because federal student loans qualify for the student loan forgiveness and discharge plans offered by the federal government which cover borrowers of different kinds under the varied programs that it offers. 

Discharge  of a loan means when the borrower is no longer liable to repay one’s loan. In other words, the loan is cancelled and the debt burden is removed. In the US economy, discharge of loan is generally associated with student loan, home loans and mortgages. However, discharge of a loan does not necessarily imply bankruptcy.

There can be some other reasons as well for discharge of loan. The Federal Student Aide, an office of the US Department of Education offers for forgiveness, cancellation and discharge of student loans under different circumstances to help student borrowers in genuine need. Other than discharge for bankruptcy, an individual might be eligible for a discharge if he/she withdrew from school but the school did not pay a refund that it owed to the U.S. Department of Education or in some cases, to the lender.

There is another plan called The Federal Perkins Loan Cancellation that applies to individuals who perform certain types of public services or certain types of occupations such as Teacher, Member of the U.S. armed forces, Nurse or medical technician et cetera. Also, an individual with Federal Student Loan might qualify for Total and permanent disability discharge programme if they are incapable of arranging in any gainful activity because of physical or mental impairment.

Death Discharge

Federal student loans are also discharged if the borrower dies. In case of parent PLUS loan, the loan may be discharged if the student himself dies or the student on whose behalf the loan was taken, dies. The loan is discharged on providing a copy of the death certificate by a family member or a representative to the school or the loan servicer who is responsible for handling the billing and other services on an individual’s federal student loan.  

Students with private student loans  are generally puzzled as to what will happen to their student loans in case of death. The possibility of death discharge of student debt depends highly on the terms and policies of private lenders in case of private student loans. Several private student loan servicing giants like Sallie Mae, New York HESC and WellsFargo mostly provide for disability and death discharge policies but it cannot be considered as a common policy among private lenders.

In  case an individual’s student loan is consolidated with spouse’s student loan, the death discharge option will eliminate only the dead spouse’s portion of debt and not the whole of it. In some cases the co-signer might be required to pay the left over private student debt and can only apply for discharge of loan in anticipation that his/her request will be considered.  

Conclusion

We all know life is uncertain and even if we don’t wish for it, death is going to hit all of us, someday. It therefore becomes essential for a prudent borrower to carefully understand the loan conditions and consider the worst scenario of his/her death before availing a student debt.  While there is a definite policy measure of death discharge in case of Federal student loan, the situation becomes dicey with Private student loans.

It is the responsibility of every individual to analyse all terms and conditions of the loan contract before entering into one and be sure of the consequences that may follow in case of death of the borrower.