If you have substantial student loan debt, it might seem like your student loans have a life of their own. So would they live on even after your death? Like all things related to student loans, it’s complicated, and depends on the type of loan, whether or not you have a co-signer and, in some cases, what state you live in.
If You Have Federal Student Loans
My husband still had federal student loans when he died. Making them disappear was simple: I called the company that serviced the loans and sent them a copy of his death certificate.
Federal student loans all come with an important piece of protection for borrowers: If the person whose education was financed with the loan dies, the loan is forgiven. The person’s estate is not responsible for paying the loan, regardless of what type of loan it is.
This is also true of Parent PLUS loans, which are a type of federal student loan. However, parents whose child dies before the Parent PLUS loan has been repaid will get a form 1099-C after the debt is canceled, and the canceled debt will be treated as taxable income. This can lead to an unforeseen and substantial tax liability.
If you live in a community property state and you or your spouse acquired federal student loans during your marriage, you are likewise not responsible for the loan balance. It will be discharged as soon as you send in your spouse’s death certificate.
If You Have Private Student Loans
Here’s where things get tricky. Private student loans do not always have the same protections for borrowers or borrowers’ heirs as federal student loans. They are generally treated like any other personal loan: The lenders could go after your estate after your death. If you don’t have any assets, this isn’t a big deal. But if you do have assets you’d like your family to inherit, they will need to have a way to pay off your student loans first.
If you have a private student loan with a cosigner, things could be even more complicated. Your cosigner would not only still be liable for paying back your student loans, but your death could be considered a “default,” and could cause the entire balance to be due immediately, even if the payments have always been on time.
If you live in a community property state—that’s Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin—AND you took out the private student loan after you got married, your spouse will likely be responsible for paying back your student loan even after your death. If you are unsure about the terms of the private loan after a borrower’s death, be sure to contact the company that services the loan.
Protecting Your Family
If the only student loans you have are federal, here’s one piece of good news: Your family is already protected from your student loan debt if you pass away before paying it off.
If, however, you have loans from a private lender, it’s a good idea to protect your heirs. The easiest way to do this is by getting life insurance that is at least enough to cover the amount you owe on your student loans.
As with everything related to estate planning, knowing the fine print about your student loan debt is essential to creating an effective strategy for protecting your family after your death.