Here’s what happens to your student loan debt when you die

Average individual debt is estimated to be about $40,780 when both federal and private borrowing is accounted for, according to the same Education Data Initiative report.

So what happens when the worst happens and the borrower dies without fully paying off their student debt? It is an important question to consider. And the answer varies depending on the type of loan in question.

What Happens to Federal Student Debt When You Die?

The process for dealing with government student debt in the event of a borrower’s death is the simplest. According to the US Department of Education, federal student loans are being phased out. This policy also includes Parent Plus Loans. If either the parent who took out a Parent Plus loan or the student who was the beneficiary of the loan dies, the debt is forgiven.

Debt relief, however, has other financial consequences.

“The relief is usually taxable,” says Conor Mahlmann, a certified student loan expert and student loan consultant for Student Loan Planner. “The estate would be responsible for taxes on the redeemed loan. As an unsecured debt, it would be consistent with any other unsecured debt to be paid by the estate.”

However, thanks to the passage of the Tax Reduction and Employment Act, this tax liability for the death tax has been removed until 2025.

What happens to private student debt in the event of death?

While only about 7.3% of student loan debt is tied to private loans, according to the Education Data Initiative, it’s equally important to understand how to manage this financial burden should the need arise. If the borrower dies, the remaining personal student loans can be wound up in a number of ways.

“Private loans vary by lender. Some are released after the borrower’s death. Others settle the debt against the estate of the deceased,” says Betsy Mayotte, president and founder of the Institute of Student Loan Advisors.

Some lenders, such as Sofi, state very clearly on their websites that they will discharge the debt if the borrower dies. Earnest is another example of a lender that, in most cases, pays off student loans in the event of the borrower’s death.

But here, too, taxes would have to be paid on the relief, which the estate would have to bear, says Mahlmann.

What happens to co-signed loans or loans from a spouse?

If the private student loan debt involved a co-signer or belonged to a spouse, the solution is less straightforward. Again, the policy often varies from lender to lender.

“In some cases the co-signer is liable if the main borrower dies, but in other cases they are forgiven,” says Mayotte. “The borrower’s promissory note should contain the rules for their particular personal loan.”

A co-signer may actually be responsible for repayment if a borrower dies and the deceased’s estate cannot cover the remaining balance.

“If there’s an outstanding balance that can’t be paid from the borrower’s estate, and the lender doesn’t have death clauses in place, a co-signer could be on the hook to make up the outstanding balance,” Mahlmann says. “This only applies to personal loans taken out before November 20, 2018. After that, in the event of the borrower’s death, the co-signers are protected from having to deal with the balance.”

In the same scenario, a spouse could also be asked to make the payments if the student loans were arranged during the marriage and the couple lives in a joint property state. It’s also worth noting that in some cases, the death of a co-signer can trigger an automatic student loan default. This can happen even if you have made all loan payments on time all along.

“That means the entire balance is due immediately,” says debt relief attorney Leslie Tayne of the Tayne Law Group. “While you probably have no legal obligation to notify your lender of the death of a co-signer – this would be outlined in the promissory note – some banks check public death certificates for this reason.”

How to report a death to a student loan servicer

Reporting the death of a student loan holder is usually a straightforward process, whether the loan is private or federal. Proof of death must usually be submitted to the credit servicer by a family member or other representative.

Specifically in the case of federal student loans, there are a handful of acceptable forms of documentation that can be used in such cases:

• Original death certificate
• Certified copy of a death certificate
• An exact or complete photocopy of one of these documents.

“The exact process depends on the loan servicer. When a borrower dies, a family member should gather the appropriate paperwork and then contact the servicer for each loan to determine next steps,” says Tayne.

How to be prepared and protect your family

While thinking about death is never easy or pleasant, when you’re in significant debt, it’s important to lay the right foundations to protect your loved ones. There are several steps you can take to minimize the financial burden on your heirs or family members if you die with unpaid personal student loan debt.

“First, borrowers need to make sure their families or survivors know how to access their provider’s online portal in the event of death,” explains Mahlmann. “This applies to all financial accounts in general.”

In addition, borrowers who have non-mortality private student loans should ideally have adequate life insurance to ensure that the loans can be paid off in the event of death without incurring any financial strain on their families. It may also be worth exploring refinancing with another lender that offers mortal insurance, Mahlmann says.

Those holding loans with a co-signer may also want to explore their options. “If you have a very sick co-signer, it can be a good idea to seek a co-signer release,” says Tayne. “This is a process where you show your lender that you are now financially able to manage your loans yourself and have the co-signer removed. And if your co-signer dies, you should seek refinancing immediately.”

take that away

It’s important that those who are in debt on a student loan — and even their family members and loved ones — know what happens in the event of the borrower’s death. Credit requirements and death clauses should be checked at an early stage. And if you’re holding student loan debt that doesn’t include death relief, you’ll need to consider several steps, including getting enough life insurance to cover the outstanding debt or refinancing the loan with a lender that offers a discharge policy.