How Does Student Loan Debt Figure into Estate Planning?
For some families, estate planning can be fairly straightforward: A valid will, a trust, health care surrogate, living will, and power of attorney are some of the essential estate planning documents that individuals, couples, and families discuss working on together with our attorneys. Many aging couples simply want to ensure that, once they pass, their children will be taken care of with what assets and retirement funds they have saved.
However, as the economy is changing and school is becoming more and more expensive, the student loan crisis has turned into a crisis. One out of five Americans has student loans, and, as of 2020, the total student loan debt in the U.S. amounted to almost $1.6 trillion. As a result, a number of clients are also now concerned not only about how to ensure that any funds and assets left to their children and loved ones are free from litigation and creditors, but also from the government potentially confiscating their inheritance as repayment for student loan debt.
With Federal Student Loans & Income-Driven Repayment Programs
A number of graduates with federal student loans participate in repayment plan programs that are based on what they can afford to pay instead of what they owe, known as “Income-Driven Repayment.” As a result, the government determines their loan payments based on the graduate’s tax returns and family size. The key figure taken from their returns is their adjusted gross income: If it goes up, monthly payments go up, if it goes down, they go down as well.
That being said, of course the availability of programs like these depends upon the direction of the Department of Education as well as any future changes made to these programs by Congress.
401(k)s and Traditional IRAs
If the graduate participates in a program like this, it is whether their inheritance is taxed that will often determine whether or not their student loans will increase. Inheritances usually do not involve the beneficiary paying taxes, but rather, the decedent paying taxes, with an exception: A 401(k) and/or traditional IRA. A beneficiary of these retirement accounts will usually see their Adjusted Gross Income increase, which can lead to an increase in student loan payments if these payments are based on income. However, it is possible that loan servicers will accept other documentation as proof of income instead of one year’s tax returns, such as pay stubs, which could help get around this issue.
Private Student Loans & Defaulted Debt
In addition, if it is a private student loan that the graduate has versus federal student loan with the government, it is possible for the student loan lender to use a judgment to garnish income received from a trust. Under those circumstances, the graduate should consult an attorney to see how the statute of limitations might be helpful to them in protecting their inheritance from being taken to repay the defaulted student loan debt and/or whether administrative discharge is possible by filing an adversary proceeding in bankruptcy. However, know that while it is difficult to get student loan debt discharged in bankruptcy, there are steps graduates can take to get out of default and into a repayment plan.
Contact Our Florida Estate Planning Attorneys to Find Out More
If you have concerns about leaving inheritance to a graduate who has student loans, working with an estate planning attorney is the best way to strategically ensure that you can safely leave your assets to that heir.
The Orlando estate planning attorneys at Gierach and Gierach P.A. has provided the very best in personalized estate planning services to clients throughout Florida for years. Contact us today to schedule a consultation and find out more about our services.