There are four scenarios that may occur with student loans if the borrower dies:
-
Federal student loan (with or without co-signer): the loan is forgiven and no one owes any money
-
Federal PLUS loan: the loan is forgiven but the parents will owe taxes on the forgiven amount.
-
Private student loan with no co-signer: the loan is not forgiven and the lender will attempt to collect the amount due from the estate of the student.
-
Private student loan with co-signer: the loan is not forgiven and the co-signer owes the remaining balance.
Federal student loans are forgiven when the borrower dies once proof of death is submitted. No money will be owed and the debt will not be passed on to anyone else. This is the only type of loan that can be entirely forgiven.
If the type of federal loan is a PLUS loan that a parent borrower takes out on behalf of a student there may be a large tax liability. If a PLUS loan is forgiven because of a student death, the parents will receive a form 1099-C from the Internal Revenue Service which details the amount of the student loan forgiven. This amount is treated as taxable income at the parents’ ordinary income tax rates.
If the student loans are private student loans, such as those from Sallie Mae, Discover, Wells Fargo and others, the answer to this question becomes more complex. If the student dies, some lending organizations do allow the loans to be forgiven. Some private student loan lenders will go after the remaining balance due from the deceased student’s estate, and usually they have high priority in line.
If the student has a cosigner for the loan, things get even more complicated. Since cosigners are legally obligated to pay the debt if payments can’t be made, upon the death of a student, the cosigner will owe the entire remaining balance. Also, the death of the student or the cosigner can automatically trigger a default on the loan, meaning that the entire balance of the loan is due immediately. Precisely because of this, it is highly recommended that student loan borrowers with cosigners purchase a life insurance policy that at least covers the projected balance of the student loan.