The average college student with student debt loans will think about an estate plan as often as he or she thinks about a retirement plan. The reality of the matter is that college students are focused on graduating, starting their career, or making a new name for themselves. However, in today’s economy, the student loan debt continues to increase dramatically. In fact, Americans owe about $1.3 trillion in student loan debt and about 1 out of every 3 consumers over the age of 40 is still paying off student loans. Consequently, it’s important to understand the impact that student debt loans has on your estate plan.
Student debt loans have become one of the greatest financial burdens. When you speak with a professional estate planning attorney, it is important to mention any outstanding debts including student debt loans as this influences your estate planning equation. In most situations, debts of the decedent must be paid in full in order for the decedent’s heirs to receive any of the decedent’s assets. Furthermore, the type of student debt loan will determine what will happen to that debt when the decedent passes away.
Federal Student Debt Loans vs. Private Student Debt Loans
When a decedent with student debt loan passes away, the situation can be dealt in two different ways depending on whether it is a federal student debt loan or private student debt loan. A federal student debt loan is where the federal government directly lends money to the borrower. A private student debt loan is when an individual borrows money from a private lender without government assistance.
With a federal student debt loan, your debt will be discharged upon your death. Although this sounds relatively easy, the process calls for assistance and it requires someone to request a loan relief from an appropriate agency. Also, while loan forgiveness is guaranteed by federal lenders, there is still a catch to this process known as “cancellation of debt (COD) income” or “discharge of indebtness income”. While federal lenders may recognize that your student loan is forgiven, these types of income force the heirs of the decedent/borrower to pay tax on the addition income. This income tax can be substantially high depending on the loan amount and the decedent’s income bracket. To make matters even more complicated, if the decedent’s assets are not allocated through their Will to pay for these income taxes, the wishes of the decedent’s estate will not be followed and the assets can be sold off through abatement.
With a private student debt loan, your debt, in most cases, is not discharged after death. Instead, student loans are classified as any other liability for your estate and must be paid for through your estate. In fact, most creditors will try to file a claim with the estate in order to get repaid. Private student debt loans typically come from a large number of companies whom have different policies regarding what happens when a borrower passes away. While some private loan companies may forgive the borrower’s debt, the estate will still be liable on the tax of the “cancellation of debt (COD) income”.
Estate planning certainly has many complexities which can change based on the decedent’s assets and liabilities. Therefore, it is essential to create an estate plan around these assets and liabilities in order to make sure that your wishes are carried out and that your heirs are not paying the price for it. Contact a professional estate planning attorney for guidance in creating a proper estate plan. If you need assistance in creating or modifying an estate plan, please contact Attorney Inna Fershteyn today.
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