Having a hefty balance can make you feel like you might be paying off that 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 ? Are the student loans charged against your estate? Does your college become responsible for the ? 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 when the 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 Federal .) on the
To qualify for discharge, you must provide a copy of a death certificate to the or the U.S. Department of Education.
There’s just one catch to discharging . The IRS may treat the cancelled may as income, leading to a tax liability. The federal government may send a 1099-C to the ‘s estate or to the of a Federal . The tax liability is less than the cancelled , but it may still be a non-trivial sum.
However, the Tax Cuts and Jobs Act of 2017 added an exclusion from income for that is discharged because of the death of the or the death of the student on whose behalf the was borrowed, from 2018 through 2025, inclusive. 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 .
About half of programs offer death discharges that are similar to the discharges on federal student loans. If the dies, the is cancelled and the is not expected to repay the .
Half of the will charge the against the ‘s estate. The may become responsible for repaying the after the estate is settled. programs do not offer death discharges. If the dies,
However, new loans taken out after November 20, 2018 are automatically eligible for student dies. The Economic Growth, Regulatory Relief and Consumer Protection Act if the
For loans extended before November 20, 2018, cosigners should ask about the ‘s compassionate review process. If the call center is confused, call the directly and ask to speak to the ‘s ombudsman. Lenders are more likely to forgive the when the was killed in action while serving in the U.S. Armed Forces or as a first responder. A is also more likely to forgive the when the is clearly incapable of repaying the or when news media are involved.
What If You’re Married?
If you die, your widowed could be left responsible for paying off your , 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 may be held liable for repaying a following the death of a , 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 is not responsible for the loans unless they cosigned the .
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 ‘s passing. For Federal Parent PLUS loans, the is also forgiven upon the death of the student for whom the was borrowed.
- For private student loans, death discharge policies vary from to , so consider each ‘s policies before you take out a . If you’ve already locked in to a , consider refinancing the loans into a 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 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 . doesn’t offer a death discharge, get a
- If you are married and live in a community property state, learn your state’s laws. A prenuptial or antenuptial agreement might protect your from your student loans. Consult with a qualified estate or tax attorney to review your options.