Is Student Loan Debt Passed On After Death?
Uncover the crucial factors determining what happens to student loan debt after a borrower's passing. Understand the responsibilities involved.
Student loan debt affects millions across the United States, often representing a significant financial commitment. A common concern among borrowers and their families is what happens to this debt if the borrower passes away. The answer is not always straightforward and depends on several factors, primarily the type of loan involved and its specific terms. Understanding these distinctions provides important clarity for borrowers and their loved ones.
Federal Student Loans
Federal student loans are generally discharged upon the death of the borrower. This means the outstanding balance is canceled, and the borrower’s family is not responsible for repayment. To initiate this process, a death certificate must be submitted to the loan servicer or the U.S. Department of Education. This policy applies to various federal loans, including Direct Subsidized, Unsubsidized, and PLUS loans.
Parent PLUS loans, which are federal loans taken out by parents to help finance their child’s education, also have specific discharge provisions. If the student for whom the Parent PLUS loan was taken out dies, the loan is discharged. Similarly, if the parent borrower of a Parent PLUS loan passes away, the loan is also discharged.
Federal student loan discharge due to death has tax implications. Historically, discharged debt could be considered taxable income. However, under current law, balances discharged due to death are not considered taxable income by the IRS for federal tax purposes if the discharge occurs between January 1, 2018, and December 31, 2025. This tax exemption is temporary, and its extension beyond 2025 is not yet determined.
Private Student Loans
The handling of private student loans upon a borrower’s death is less uniform compared to federal loans. Private student loans are typically not automatically discharged when the borrower dies. The terms governing what happens to these loans are determined by the specific loan agreement and the individual lender’s policies.
Some private lenders do offer death discharge, meaning they will cancel the debt if the borrower passes away. However, this is not a universal practice and often depends on the lender’s discretion or specific clauses within the loan contract. It is advisable for borrowers and their families to review their private loan documents carefully or contact the lender directly to understand their particular policy regarding death discharge.
If a private student loan agreement does not include a death discharge clause, the lender may pursue repayment from the deceased borrower’s estate. This debt could become an obligation of the estate, potentially impacting the assets available for heirs. Refinancing a private loan with a lender known to offer a death discharge policy is one potential strategy to consider.
Implications for Co-Signers and Estates
Student loan debt can have significant implications for co-signers and the borrower’s estate after the borrower’s death, particularly with private loans that are not discharged. When a private student loan has a co-signer, that individual is generally responsible for the remaining loan balance upon the primary borrower’s death. This responsibility holds true unless the loan agreement explicitly includes a provision for co-signer release upon the borrower’s death, which is not always common.
Legislation enacted in 2018 made new private student loans originated after November 20, 2018, eligible for co-signer release if the student borrower dies. However, for older loans or those not covered by this provision, co-signers could face immediate repayment demands, as some lenders may accelerate the entire balance. Co-signers should understand their obligations and communicate with the lender.
If a student loan is not discharged upon the borrower’s death, the lender can seek repayment from the deceased borrower’s estate. Any assets held by the estate, such as property or savings, may be used to satisfy the outstanding debt before any inheritance is distributed to heirs. Heirs are generally not personally responsible for the deceased’s debts unless they were a co-signer on the loan or jointly owned the debt. Should the estate lack sufficient assets to cover the debt, the remaining balance may ultimately go unpaid.