Having a hefty student loan balance can make you feel like you might be paying off that debt for the rest of your life. But, what would happen if you die before your loans are paid off?
Would your student loans die with you? Would your next of kin be responsible for repaying your student loan debt? Would the student loans be charged against your estate? Does your college become responsible for the debt? Is the debt discharged or forgiven by the U.S. Department of Education? Or do your student loans just miraculously vaporize into thin air?
The answer depends on the type of student or parent loans and the terms of the loans.
Death Discharge of Federal Student Loans
Federal student loans are discharged upon the death of the borrower, regardless of how much you owe at the time of your death. Federal Parent PLUS loans are also discharged upon the death of the student on whose behalf the loans were borrowed.
Federal Grad PLUS and Federal Parent PLUS loans are discharged even if they have an endorser. (An endorser functions like a cosigner on the Federal PLUS Loan.)
To get the debt discharged, a copy of a death certificate must be provided to the loan servicer or the U.S. Department of Education.
There’s just one catch to discharging federal student loan debt. The cancellation of debt is treated as income by the IRS, leading to a tax liability. The federal government may send a 1099-C to the borrower’s estate or to the borrower of a Federal Parent PLUS loan. The tax liability is less than the cancelled debt, but it may still be a non-trivial sum.
However, the Tax Cuts and Jobs Act of 2017 added an exclusion from income for student loan debt that is discharged because of the death of the borrower or the death of the student on whose behalf the loan was borrowed, from 2018 through 2025, inclusive.
Cancellation of Private Student Loans
There is no law requiring lenders to cancel private student loans upon the death of the borrower.
About half of private student loan programs offer death discharges that are similar to the discharges on federal student loans. If the borrower dies, the private student loan is cancelled and the cosigner is not expected to repay the debt.
However, half of private student loan programs do not offer death discharges. If the borrower dies, the lender will charge the debt against the borrower’s estate. The cosigner becomes responsible for repaying the remaining debt after the estate is settled.
Cosigners should call the lender to ask about the lender’s compassionate review process. If the call center is confused, call the lender directly and ask to speak to the lender’s ombudsman. Lenders are more likely to forgive the debt when the borrower was killed in action while serving in the U.S. Armed Forces or as a first responder. Lenders are also more likely to forgive the debt when the cosigner is clearly incapable of repaying the debt or when news media are involved.
What If You’re Married?
If you die, your widowed spouse could be left responsible for paying off your student loans, depending on your state of legal residence and whether the loans were borrowed during the marriage.
In the nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — a surviving spouse may be held liable for repaying a private student loan following the death of their husband or wife, even if they didn’t cosign the loans, but only if the loan was taken out after the marriage.
If the loan was borrowed before the marriage or the couple did not live in a community property state, this spouse is not responsible for the loans unless they cosigned the loan.
Minimize Your Risk
Death is never a comfortable topic to think or talk about, but when it comes to the financial repercussions it could leave on your loved ones, prepare yourself in advance in the event of the worst. Consider these tips to help your loved ones deal with your debts in the event of your untimely passing:
- All federal student loans are discharged upon the borrower’s passing. For Federal Parent PLUS loans, the debt is also forgiven upon the death of the student for whom the loan was borrowed.
- For private student loans, death discharge policies vary from lender to lender, so consider each lender’s policies before you take out a loan. If you’ve already locked in to a private loan, consider refinancing the loans into a private student loan that offers a death discharge options.
- Seek out lenders who may offer special death and disability forgiveness policies, such as College Ave, Discover and Sallie Mae.
- If a lender doesn’t offer a death discharge, get a term life insurance policy with a face value equal to the current balance of your student loans and your other debts, so your heirs won’t need to cover the cost of repaying your student loan debt.
- If you are married and live in a community property state, learn your state’s laws. A prenuptial or antenuptial agreement might protect your spouse from your student loans. Consult with a qualified estate or tax attorney to review your options.