If you die before you’ve repaid your student loans in full, they obviously won’t be your problem anymore. But could college loans become a problem for your spouse, your parents, or your children? Maybe. It depends on what type of student loan you have and what your lender’s policies are. And it could even lead to a tax bill.
Federal student loans
If all your student loans are federal student loans, good news: your loans must be discharged when you die, according to the Federal Student Aid Office of the U.S. Department of Education. Your survivors just need to give your loan servicer acceptable proof of your death, such as an original death certificate, a certified copy of the death certificate, or an accurate and complete photocopy of one of those documents. The types of college loans that fall into this category are Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct Consolidation Loans. Death discharge also applies to Federal Perkins Loans; the only difference is that since the school is the lender, you may need to provide the proof of death to the college. If the school has designated a servicer for your loan, the proof of death goes to the loan servicer. 1
Parent PLUS loans death
Parent PLUS loans are also federal student loans, but the parent is the borrower instead of the student. If the student dies, the parent will be relieved of the obligation to repay the Parent PLUS loan upon providing acceptable proof of death to the loan servicer. If one parent dies but both parents are responsible for the loan, the surviving parent will have to continue paying it.
If only one parent is responsible for the loan and that parent dies, the Parent PLUS loan will be discharged.2 (Related: Digging out of Parent PLUS loan debt)
Private student loans without a cosigner
Private lenders’ policies on forgiving student loan debt if a borrower dies before repaying the loan vary depending on the institution and circumstances of the student loan. Many will discharge some or all of the student loan. For more information and examples, see the end of this article.
The best time to find information about a private lender’s policy is before you apply for a student loan or at least before you finalize the loan, so you fully understand the possible long-term financial impact of your loan. For loans you already have, your loan terms should state what happens to your loan balance in the event of the borrower’s untimely death.
If you can’t ascertain a lender’s policy, the safest assumption is that they won’t discharge the loan upon death. But if you’re shopping for a private student loan, try to get the lender’s policy in writing before ruling them out because you can’t find their death discharge policy online. Furthermore, keep in mind that your actual loan agreement, not something you find on a lender’s website, will be the final word on your loan terms.
Private student loans with a cosigner
Federal student loans usually don’t require a cosigner, but private student loans frequently do. According to the research from the Consumer Financial Protection Bureau, the overwhelming majority of private student loans had a cosigner, typically a parent.3
If the primary borrower of a private student loan dies, the cosigner may be required to continue making the payments. That can be a real hardship for some families.
A private lender’s policy on a cosigner’s obligations after the primary borrower dies can also vary, depending on the institution and the student loan terms. Some will let the cosigner off the hook.
If you have a private student loan account that does require your cosigner to keep making payments if you die, you have a couple of options for relieving your cosigner of that potential obligation.
One is to refinance your loans in your name only; this might be an option if your credit and/or income has improved since the time you took out the loans. Another option is cosigner release. Not all lenders offer it, but those that do will evaluate you much like they would if you were refinancing.
Perhaps the biggest problem with having a cosigner on your private student loan account is that if your cosigner dies, the lender could call the entire loan due under the loan’s automatic default terms. Following investigation by the Consumer Financial Protection Bureau, which fielded numerous complaints, many major lenders cut back on the practice.3 Still, it remains a possibility depending on the terms of the loan.
Income tax on cancellation of student loan debt
The IRS generally considers canceled debt to be taxable income. For many years, even if a lender discharged a student loan balance due to a permanent disability or death of the borrower, his or her estate or surviving family members would still owe taxes on the value of the canceled debt. (Related: What happens to your debt when you die)
But as of January 2018, student loan debt that is discharged due to permanent disability or death is no longer subject to federal taxes — temporarily. The new law covers eligible loans discharged between January 1, 2018 and December 31, 2025. It is unclear whether Congress will renew the legislation in 2025.
Be aware, too, that state taxes may still apply. It is wise to consult a tax professional.
Student loan debt acquired during marriage versus before marriage
Whether you live in a community property state or not matters when it comes to student loans that you take out after marriage, according to Nolo, a major publisher of legal guides. In the community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — a student loan that you take out when you’re married may be considered a community debt even if only the student signed as the borrower on the loan. That means a surviving spouse could be on the hook for a student loan after a partner’s death. For student loans that either spouse took out before getting married, however, the surviving spouse shouldn’t be responsible unless the borrowing spouse refinanced the student loan after marriage and added the surviving spouse as a cosigner.
“As with other debts in community property states, it generally does not matter whether or not a surviving spouse cosigned the loan, as long as they were married at the time the loan was taken out,” Black said. Since some student loan accounts discharge when the borrower dies, there may not be any remaining liability, even in a community property state, and some community property states have exceptions for debt incurred for education.
“Any surviving spouse should check the laws of their state and how they apply to their particular situation,” Black said.
Matthew Carbray, managing partner with Ridgeline Financial Partners in Avon, Connecticut, said that in certain community property states, if assets are held in joint accounts, income from a spouse can be used to pay off student loan debts, even if the debt was incurred before marriage. “In equitable distribution states (most states, which don’t use community property laws), a loan without a cosigner would normally be the responsibility of one spouse only, though it would become taxable to the deceased spouse’s estate.”
Black added, “Even if a surviving spouse is liable for a student loan, it can never hurt to call the lender and attempt to negotiate a lower payoff amount.”
Purchasing life insurance to pay off your student loans
Carbray said his firm would recommend protecting a cosigner and any other beneficiaries with a small term life insurance policy.
Indeed, parents or students can purchase life insurance and the proceeds can be used to pay off private student loan accounts in the event that the student borrower, parent borrower or parent cosigner dies before the loan is repaid in full. A term life insurance policy equal to the full private student loan balance would prevent survivors from having any problems repaying the deceased’s student loan obligations. For loans that are discharged upon death, life insurance proceeds can help pay for any income tax due on the canceled debt.
Learn more from MassMutual...
This article was first published in August, 2016. It has been updated.