“The fastest-growing chunk of the U.S.’ $1.7 trillion student-loan pile is the one held by the oldest borrowers. There are now about 8.7 million Americans aged over 50 who are still paying off college loans,” Financial Advisor Magazine cautions. The pandemic moratorium on payments is due to run out two months from now, with no progress on an election promise of debt forgiveness. Once the moratorium is lifted, social security payments can be “docked” to repay student loan debt.
Two types of student loans are proving particularly onerous, authors Alexandre Tanzi and Madison Paglia point out:
- Loans taken out by people who lost their jobs after the 2008 financial crisis in order to qualify for different jobs
- Loans taken out years ago by parents now living on Social Security in order to fund children’s education
One of the first steps in estate planning with student loans in determining what kind they are:
- Direct loans are funds from the federal government.
- Federal Family Education Loan Programs are funds from private institutions insured by the federal government.
- Private student loans are funds from private lenders without any government involvement.
Generally, the federal government will discharge a person’s federal student loans upon their death. This process is not automatic, and often, in settling the estate, a Geyer law attorney will need to request loan relief. The accountant will then need to be involved, as the debt forgiveness creates a taxable event.
Private lending companies may or may not forgive debts in case of death. Some companies make a claim against the estate. But even if the loan is forgiven the estate will be liable for tax on the “discharge of indebtedness income.”
For those grandparents who have the means to repay their loans but have chosen not to do so, there are estate planning measures that can protect wealth from creditors:
- Life insurance can provide funds for your beneficiaries to pay back any balances owed upon your death.
- Trusts created to distribute assets to heirs can also protect wealth from creditors.
Once again, it is wise to have both the attorney and the accountant aware of the plan and the planning tools used.
“It’s not unusual for clients to think of their financial lives in silos,” Andy Schwarts, CFP®, writes in Kiplinger.com. But, he wisely points out, your advisors work best when they work together!
– by Ronnie of the Rebecca W. Geyer & Associates Blog Team