When a student loan bill is high, it’s tempting to pay only the minimum payment. In fact, when people need more cash, they may choose to refinance their student loans over a longer term.
This usually reduces the monthly bill, but means more interest incurred over time. If the borrower only makes minimum payments, they may die before they fully pay off their loan.
Jump ahead to these sections:
- Federal vs. Private Student Loan Discharges
- Tax Implications for Canceled Student Loan Debt
- What Happens If You Can’t Get Loans Canceled?
Refinancing isn’t the only reason for unpaid student loan debt at the time of death. There may have been an accident or an untimely death. Whatever the case, it’s important to know what actually happens to student loans when you die.
Federal vs. Private Student Loan Discharges
After death, the process of resolving a student loan is called “discharging.” For the most part, many federal student loan debts die with you. Private student loans, on the other hand, may pass to another person if there is a cosigner on the loan.
Whether you have a federal or private student loan, it’s possible to forgive or cancel student loan debt in a variety of cases. Let’s have a look at the details.
Discharging federal student loans
The federal government administers federal student aid, and usually offers low interest rates and easy-to-use payment processes after graduation. But, not all schools and programs can offer federal aid and some students may have a mixture of federal and private loans.
But when you die, federal student loan debt is usually discharged and doesn’t pass to anyone else. All your family members need to do is contact the federal student loan servicer and inform them of your death.
There may be additional paperwork to fill out or a need for a death certificate. This information should be included in the terms of your student loans, but studentaid.ed.gov’s site can help fill in the rest of the details.
If you become permanently disabled or sick, federal student loans have a clause called the "total and permanent disability clause." It allows for your federal student loan debt to be discharged if you cannot and will not be able to work during your lifetime. The determination is made by a doctor or other professional.
Discharging private student loans
Private institutions that loan money to students aren’t required to discharge your debt upon your death. Because of this, each private student loan can have different discharge terms. So, there’s no universal answer.
The best way to start the process of understanding your private student loans is to look at the terms for discharge or cancellation upon death in your loan documents.
The process starts by calling the bank or other financial institution and explaining the situation. The executor or administrator of your estate can handle the paperwork to get the debt canceled if possible, especially if there’s no cosigner for these loans. They’ll need proof of death in the form of the death certificate.
Later in this article, we’ll discuss what happens if your debt isn’t discharged on your death.
Tax Implications for Canceled Student Loan Debt
Until recently, federal student loans that were discharged upon death were treated as income, creating a hefty tax bill for the estate. This has since changed. In 2018, major tax changes removed the taxability of federal student loan debt discharged upon death.
Until recently, private student loan debt discharge was also taxed. However, the tax changes in 2018 excluded this from taxation as well.
What Happens If You Can’t Get Loans Canceled?
It's OK if you can't pay. Here's what to expect and how you can handle it.
Lenders may come to the estate for payment
A student loan company has the legal right to inquire with (and to receive notice from) the estate of the deceased in order to receive payment for student loans. If the assets of the estate are greater than the debts, the estate may owe payment of the student loan debt.
The financial institution may be willing to negotiate a lower payment than the total amount owed with the executor or administrator of the estate. Consider your student loan debt in making your estate plan - unresolved debt could decrease (or even wipe out) the amount inherited by your heirs.
You may receive calls from lenders as a family member or beneficiary
Lenders can be persistent in attempting to secure payments. They may try calling whoever is in charge of the deceased’s estate. This might be an administrator, an executor, or a universal successor.
Lenders may also contact other relatives of the deceased to find the contact information for the person in charge.
But, they can’t continue to call someone who isn’t the executor, so if you ask them to stop, they should. If you or other family members continue to receive calls, know that you’re protected by the Fair Debt Collection Practices Act (FDCPA).
As a spouse or cosigner, you may be responsible for some or all undischarged loans
In some states, your spouse’s student loans may be your responsibility. This is primarily true in states that are considered “community property” states: Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin.
In these states, many assets and debts are considered co-owned if they were acquired during a marriage (i.e., the student loan was taken out or refinanced during the marriage). Some of these states have exceptions that say the spouse is not liable at the borrower’s death. The rules are slightly different in each state, so you’ll want to talk to an estate lawyer about your situation.
For undischarged loans, the cosigner—who may not be a spouse—can also be responsible for the bill after a death. The cosigner is essentially a “co-owner” of the debt. This kind of situation can result in hardship. If you don’t have a substantial safety net, think very carefully about becoming someone’s cosigner. The death of a co-signer can also trigger the whole loan coming due, so if your co-signer is likely to pass before you, you may want to refinance to remove them as co-signer.
If you’re still deciding on a particular student loan, see if they are willing to include a clause stating that the debt is canceled upon your death.
With no cosigner or spouse, the loan cannot be paid
Even when private student loans that aren’t discharged at death, the loans may go unpaid. If there’s no living cosigner, no spouse, and not enough money in the estate to pay the debt, it will not pass to the next nearest relative. The debt will be discharged as part of closing the estate.
The line of inquiry shouldn’t pass to anyone else, and if it does, you can let them know you are not liable for the debt and cannot help them. This should end any inquiries.
Student Loan Debts After Death
Ultimately, there are a few important questions to answer about student loan debt after death. What is your connection to the person who had the student loan debt? Is there enough money in the estate to pay the balance?
Is there a clause that allows for the debt to be forgiven at death? Knowing these answers in advance will set you on a path to resolving this debt with less anxiety, friction, or conflict.
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- “Topic No. 431 Canceled Debt – Is It Taxable or Not?” Internal Revenue Service. 23 August 2019. www.irs.gov/taxtopics/tc431