Federal Student Loans
This has been a topic before, but let’s revisit it. What happens to student loans if the borrower passes away before the loans are paid off? This can be a big concern for younger clients, especially those who need to plan for their young children in addition to doing general estate planning.
(This article covers federal student loans. The terms of private student loans vary by provider.)
According to StudentAid.gov: “Federal student loans will be discharged due to the death of the borrower or of the student on whose behalf a PLUS loan was taken out.” This means that the borrower’s estate will not have to pay back those student loans. Getting the loans officially discharged requires someone (such as a parent, spouse, or friend) to submit proof of the borrower’s death, usually a death certificate.
“Loan discharge” generally refers to the cancelation of a borrower’s obligation to repay some or all of the remaining amount owed on a loan due to circumstances such as school closure, a school’s false certification of a borrower’s eligibility to receive a loan, a school’s failure to pay a required loan refund, or the borrower’s death, total and permanent disability, or bankruptcy. (See here and click on "discharge"; see also here.)
Ordinarily, debt forgiveness is considered taxable income by the IRS. However, the Tax Cuts and Jobs Act of 2017 provides that loan balances discharged due to death are not considered income for federal tax purposes (PDF of the law found here - see page 28). This law applies to borrowers passing away in the years 2018-2025.