Children cannot inherit their parents’ student loan debts – or any other debts, for that matter.
When a parent with a federal student loan passes away, the government forgives the debt.
Picture the loan being wiped clean, ensuring that it doesn’t affect the child or any other loved one.
Related: What Happens to the Student Loan Debt of the Spouse that Died?
The same holds true for private student loan lenders like Sallie Mae and SoFi. They also offer loan forgiveness upon the borrower’s death.
But there’s a twist.
Cosigners remain liable
If the child had been a cosigner to their parent’s loan, they would be on the hook for repayment depending on when the loan was borrowed. This isn’t about inheriting debt but rather about fulfilling the agreement the child made to repay the loan if the primary borrower couldn’t.
To stop that from happening, the parent can ask the loan servicer for a cosigner release or refinance with a new lender. Another benefit of refinancing? Getting a lower interest rate and better loan terms that may make the monthly payments more affordable.
Note: Purchasing life insurance to protect a cosigner is unnecessary for private student loan debt borrowed after Nov. 20, 2018. Federal law mandates that lenders must release the cosigner if the primary borrower dies for loans taken out after that date.
Creditors can go after the estate
Now let’s say the parent had some assets — a house, a car, or some savings. Private lenders may pursue the deceased parent’s estate in order to recoup the outstanding loan amount. In a scenario like this, they could potentially lose part or all of the inheritance her mom intended to leave behind.
To avoid such a situation, it’s wise for parents with outstanding loans to:
Purchase a term life insurance policy with a face value equal to the current loan balance and other debts.
Consult with an estate planning attorney. This legal expert can help ensure that their wishes for their children’s inheritance are fulfilled, even in the face of loan repayments.