What Happens to Your Direct Consolidation Loan If You DieUpdated January 28, 2016 Federal Student Loan Consolidation
If you have federal student loans, they will be discharged (eliminated) when you die. If you have private student loans, that’s another story.
Federal Student Loans
Because federal student loan debt is not considered part of your estate, the Department of Education and the loan servicer will not go after your assets after you die. Following your death, any unpaid federal student loans that you previously took out will be discharged.
To discharge the student loans after you die, your relative or another representative must notify the loan servicer (the company you make your monthly payments to) about the death. Your relative or other representative will need to provide a certified copy of the death certificate either to the school (for Federal Perkins Loans) or directly to the loan servicer (for Direct Loans, including Direct Consolidation Loans, or FFEL Program loans).
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The servicer will then cancel the Direct Consolidation Loan.
Private Student Loans
Unlike federal student loans, there is no legal requirement for the lender or servicer to cancel a private student loan after a borrower dies. This means that after your death the lender may go after the assets of your estate for repayment of the loan. It can also seek repayment from any co-signers.
Many students have a parent or grandparent co-sign their private student loans. Unfortunately, if the student dies, the co-signers are often on the hook to pay off the balance of the private student loan—something that is not required when it comes to federal student loans.
For this reason (among others), students who are planning on borrowing money for college should first look into grants and federal borrowing options before seeking private student loans. Also, federal student loans usually offer much better repayment terms than private student loans and tend to cost less overall. If you do decide to take out private student loans, be sure to read all of the loan documents very carefully to ensure you understand your legal obligations (as well as the obligations of any co-signers) in the event of your death.
If you are a co-signer and are having difficulties dealing with a private lender or servicer after the death of a student borrower (or you are having another type of problem with a private student loan lender or servicer), you can submit a complaint about your experience to the Consumer Financial Protection Bureau. Go to https://help.consumerfinance.gov/app/studentloan/ask to submit your complaint.