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Could student loans eliminate someone’s intended legacy?

On Behalf of | Nov 8, 2023 | Estate Planning |

Personal debt can have a strong, negative impact on someone’s legacy. What they leave for their loved ones when they die may decrease substantially because of their financial obligations. Hospitals that provide end-of-life care, credit card companies and other creditors can bring claims in probate court. Generally speaking, it is necessary for the personal representative of someone’s estate to pay their debt before distributing assets to their family members.

The more debt someone has when they die, the less of their property will pass to their selected beneficiaries. Certain debts create a longer-term strain on an individual’s finances than others. People can often pay off credit cards with a few years of careful budgeting. Student loans, on the other hand, may require decades to pay in full.

Some student loans will lead to probate claims

There are many factors that influence what happens to the balance of someone’s student loans when they die. One of the most important considerations is whether or not their parents or possibly their spouse co-signed for those loans. In scenarios involving cosigners, the other party may have an obligation to pay those loans in full. Sometimes, they can coordinate with the estate of the student borrower to cover some or all of those obligations.

The next consideration is whether the student loan is a federal loan or a private loan. Even those who initially take out federal loans often refinance and then have a private student loan. Federal loans often do not lead to estate claims. It is possible to discharge the debts after someone’s death if there is no cosigner.

The same is typically not true of private student loans. Private lenders can and likely will bring a claim against someone’s estate in probate court. Particularly if someone has a graduate degree, as would be true of those working as physicians or in academia, private student loans could add up to tens of thousands of dollars. Some people specifically set aside resources to cover student loan obligations if they die. Others take steps to protect their assets, such as moving property to a trust.

Identifying the financial obligations that can negatively affect someone’s legacy may benefit those who want to leave as much as possible for their loved ones after their passing. Seeking legal guidance to manage assets and debts strategically can help someone to craft the legacy that they hope to leave behind.