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Student Loans Can Follow You Beyond The Grave

When a person dies with debt, creditors can tap the value of the estate to recoup their money in the probate process, whether for credit card debt, a car loan, a mortgage or a personal loan. But does this also apply to student loan debt? That depends on the source of the debt.

Forgiven loans are taxable

If the debt is from a federal student loan, even if cosigned by a parent, it will be forgiven if the student borrower passes away. However, forgiven cosigned loans are treated as income, and are taxable to the surviving parent. Yes, the parent may escape having to pay the full amount of the debt in the probate process, but the taxes alone can be considerable, and this can create a significant burden that can compound the grieving process.

Private loans

Private loans and some state loans are not so readily forgiven. If a parent co-signed on a student's private loan, they can probably expect to see a bill for the full amount of the loan in probate.

Given that a young person's estate is not likely to be large enough to pay off lingering student loans, parents can find themselves in a financial bind depending on the types of loans their child had taken out.

The importance of pre-planning

While no one wants to contemplate the death of a child, these situations happen, and it's important to understand that student loan debt will show up in the probate process. Whether it shows up as a tax or a total amount due depends on what type of loan the student had taken out, and if a parent had co-signed the loan.

While it's best to consider all aspects of a given loan before taking one out, no one expects to lose a child, and the rules governing debt payback can come as a surprise. These scenarios also illustrate the importance of estate planning for people of any age.

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