Life is ironic at times. And more questions are coming up about what happens if I die and owe federal student loans.
Here is the answer.
A Death Discharge is available for these types of federal student loans: Direct Loans, Grad PLUS Loans, Federal Family Education Loan (FFEL) Loans, and Perkins Loans.
There are two types of federal student loans to consider with a Death Discharge: Parent PLUS and regular student loans.
Parent Plus Loans After You Die
So you did a good thing and helped someone go to school. You may have taken out a Parent PLUS loan or even consolidated more than one into a new Direct Loan and opted to repay it under the Income Contingent Repayment (ICR) program.
As it stands right now if the holder of a Parent PLUS loan dies or the student dies who received the benefit of the loan – the loan can be discharged.
Student Loan Holder Dies
If the student is the obligated part on a federal student loan and passes away then the loans will be discharged and since the balance will be zero there will be no claim against the estate or remaining assets of the student debtor.
No Tax Liability
As it stands as of the date of this article, federal student loans are discharged tax-free the balance goes to zero.
The no tax liability death discharge is currently scheduled to expire at the end of 2025 when the tax provision it is a part of will expire. Hopefully, the law will be extended.
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Of course, tax rules can change so be sure to confirm the current tax liability by seeking advice from a licensed tax professional you trust.
How to Get a Death Discharge
The executor of the estate or someone managing affairs for the deceased person will need to contact the Parent PLUS or regular federal student loan servicer and advise them of the death. They will have to supply an original death certificate when requested. A notification alone is not going to be sufficient.
Document all communications with the servicer and send items requested by some means that provides proof of delivery.
Here is the Big Problem
There are many people who are repaying their federal student loans under an income-driven repayment plan. As it stands right now, people taking that approach will make payments for 20-25 years and if the loans are forgiven before they die, the forgiven amount will be taxable. The IRS will expect income tax to be paid on the forgiven amount unless the responsible party is insolvent or up to the amount the responsible party becomes insolvent.
If the person dies after the loans are forgiven, the Internal Revenue Service (IRS) will proceed against the remaining assets of the debtor to collect the forgiven student loans through the repayment program.
So, if you are older it may make more sense and cost less money overall if you extend out the repayment term passed when you estimate you may die. When you pass the student loan can pass with you.
Private Student Loans
There is no standard policy or rule when it comes to private student loans. You are on your own there.