What happens to student and parent loans if the borrower dies?

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? Is your next of kin now responsible for repaying your student loan debt? Are the student loans  charged against your estate? Does your college become responsible for the debt? Would the U.S. Department of Education discharge or forgive the debt? Or do your student loans just miraculously vaporize into thin air?

The answer depends on the type of student or parent loans and the loan terms.

Federal Student Loan Death Discharge

Federal student loans qualify for student loan discharge when the borrower dies. 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 Direct PLUS Loan.)

To qualify for federal loan discharge, you must provide a copy of a death certificate to the loan servicer or the U.S. Department of Education.

There’s just one catch to discharging federal student loan debt. The IRS may treat the cancelled debt may as income, 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. Student loan forgiveness is also tax-free through 2025.

Private Student Loan Cancellation 

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 primary borrower dies, the private student loan is cancelled and the cosigner is not expected to repay the debt.

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 may become responsible for repaying the remaining debt after the estate is settled.

However, new loans taken out after November 20, 2018 are automatically eligible for cosigner release if the student borrower dies. The Economic Growth, Regulatory Relief and Consumer Protection Act

For loans extended before November 20, 2018, cosigners should 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. A private lender is 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 debt, depending on your state of legal residence and whether you borrowed the education loan after you got married.

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 a deceased spouse, even if they didn’t cosign the loans, but only if they took out the loan after they were married.

If the individual borrowed the loan before getting married, 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.
• 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 outstanding 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.