The fact that student loan debt is a significant hardship for people and families all around the country is scarcely a secret. The third quarter of 2022 saw a total of $1.745 trillion in student loan debt in the United States, according to the Education Data Initiative. Federal student loans account for about 92.7% of all debt.
The same Education Data Initiative analysis estimates that the average individual debt balance, which takes into account both federal and private loans, will be around $40,780.
What would happen if the worst happened and the borrower passed away without paying off their college loan in full? It’s crucial to give this question some thought. Moreover, the response differs depending on the loan type in issue.
What happens to federal student debt when you die?
In the event of a borrower’s passing, the procedure for handling federal student debt is the simplest. Federal student loans are discharged, claims the U.S. Department of Education. Parent Plus loans are covered by this policy as well. A Parent Plus loan will be forgiven if the parent who took out the loan or the student who received it pass away.
There are other monetary repercussions of the debt cancellation, though.
According to Conor Mahlmann, a student loan counselor at Student Loan Planner and a certified student loan specialist, “the discharge is typically taxable.” “The taxes on the discharged loan would be the responsibility of the estate. It would fall under the category of unsecured debts that the estate must pay, along with all the other unsecured debts.
Nevertheless, for the time being, this death discharge tax obligation has been disregarded through 2025 as a result of the Tax Cuts and Jobs Act’s passage.
What happens to private student loans when you die?
Even though the Education Data Initiative estimates that just 7.3% of student loan debt is related to private loans, it’s crucial to know how to handle this financial load if necessary. The remaining private student loans can be managed in a number of different ways when the borrower passes away.
By lender, private loans can differ. Some loans will be paid off following the borrower’s passing. Others charge the obligation to the estate of the deceased, according to Betsy Mayotte, the organization’s president and founder.
On their websites, certain lenders, like Sofi, make it extremely apparent that they will forgive the loan if the borrower passes away. Another lender that typically forgives student loan debt in the event of a borrower’s passing is Earnest.
However, Mahlmann notes that in this instance as well, taxes on the discharge would need to be paid and would be the responsibility of the decedent’s estate.
What happens to co-signed loans or a spouse’s loans?
The settlement is more complicated if a co-signer or spouse was involved with the private student loan debt. Once more, each lender has a different policy.
“In some circumstances, the co-signer is still liable if the primary borrower should pass away, but in other cases, it is forgiven,” adds Mayotte. “The terms of the Borrower’s particular Private Loan shall be set forth in the Borrower’s Promissory Note.”
When a borrower passes away and the deceased person’s estate is unable to pay the remaining sum, a co-signer may be held accountable for repayment.
According to Mahlmann, “a co-signer could be held responsible for making payments on the remaining balance” if the lender doesn’t include death discharge clauses and there is a balance that can’t be paid from the borrower’s estate. This is only accurate for personal loans obtained before November 20, 2018. Co-signers are then shielded from having to deal with the balance in the event of a borrower’s passing.
In the same situation, if the student loans were acquired during the marriage and the couple resides in a community property state, one spouse might also be compelled to make the payments. It’s also important to keep in mind that in some cases, a cosigner’s passing could result in the student loan going into default automatically. Even if you have always paid your loan obligations on time, this can still happen.
According to debt relief lawyer Leslie Tayne of Tayne Law Group, “this means that the full balance becomes due immediately.” Despite the fact that you are probably not legally compelled to do so—the promissory note would specify this—some banks check public death records for this reason.
Does my cosigner have to pay my student loan debt if I die?
If you have a cosigner, what happens to your student loan debt when you pass away? If you pass away, many private student loan servicers will make your cosigner liable for your debt; this is normally true of all private loans.
In fact, if you or the cosigner pass away, the cosigned loan payments may be expedited. If you don’t have the money to pay off the loan, this may make the debt due immediately to some lenders and result in a default.