What Happens to Student Loans When You Die?

Neither student loans nor death are pleasant subjects for most people to discuss. However, with the ever-rising rate of student loan debt in the United States, the question of what happens to that debt in the event that the borrower dies is an important one that should be considered by everyone who has a student loan.

What You Should Know

First, the good news: if you have federal student loans, they are discharged upon death. This means that the debt is cancelled, and there is no further obligation to pay back these loans. The discharge rule applies to all types of federal student loans, including undergraduate loans, graduate loans, Stafford loans, Perkins loans, and Parent PLUS loans. However, there is one important caveat to this rule. The cancellation of debt is generally considered to be taxable under the Internal Revenue Service rules. This also applies to the cancellation of student loan debt due to death, which arises when a Parent PLUS loan is cancelled after the student dies. This leaves a grieving parent in the position of having a substantial student loan forgiven — yet owing a large debt to the IRS.

One lawmaker is attempting to provide some relief for families who have received tax bills after the death of loved ones due to student loan debt discharge. The Andrew P. Carpenter Tax Act would specifically exempt cancelled student loan debt as taxable income for families of veterans who were killed while on active duty in the military. The act was named for a service member who was killed in Afghanistan whose family later received a $1,000 tax bill for discharged student loan debt.

The state of New Jersey is also acting to provide some relief for families whose children die with outstanding student loans. Under this new law, loans issued by the state’s student loan agency to borrowers who die or become permanently disabled would be forgiven. This legislative effort began in part after an investigative journalist revealed the aggressive tactics the agency had been using to collect the debt of students who had since passed away. That included filing lawsuits against grieving families and hiring debt collection agencies to go after families who had recently lost their children in tragic circumstances. This law would provide some relief to these families by forgiving their debt in the event of death or disability.

However, a tax bill is a small hurdle compared to what some face after the death of a loved one with student loan debt. As a general rule, private educational loans are not discharged by death. Some lenders may forgive the loan, while others will attempt to collect it by going after your estate. If you were married at the time of your death, the lender may attempt to recoup the money from your spouse, even if he or she did not co-sign the student loan.

If you had a co-signer for your private student loan, the situation may be grave. A co-signer is responsible for paying your loan in the event that you are unable to do so; if you die, then you are obviously not able to make payments on your student loans. The co-signer will become fully responsible for your student loan debt. In some cases, he or she may find that your death has triggered default. This means the entire amount is immediately due, putting that person in the nearly impossible position of paying tens of thousands of dollars just weeks or months after the loss of a loved one.

One California man, Francisco Reynoso, found himself in this situation after his son died in an accident. Although he makes just $21,000 per year, he is now responsible for the entire amount of his son’s student loan debt — an amount that neither he nor his lawyers can determine, as the companies that service the loans cannot seem to give him an exact answer about how much is owed.

If you have student loans, carefully consider what will happen in the event that you die or become disabled. You may want to take out a life insurance policy, or work towards getting a co-signer release if you have a co-signer on private student loans. While you cannot control every circumstance in life, you can help to make sure that your loved ones are not burdened with your student loans after you die.