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If you’re a college student, or the parent of a young adult, death is probably the last thing on your mind. But the continued spread of the coronavirus has brought the risk of death into focus for many Americans, leaving millions of relatively young people with one morbid question: What will happen to my student loans if I die?
“It seems to be the theme of the day,” said Betsy Mayotte, president and founder of The Institute of Student Loan Advisors (TISLA), as she recalled a recent conversation with a borrower that asked her what would happen to their debt if they were to contract the virus and die.
Over 44 million Americans have student loan debt, averaging $35,359, according to data by Experian. In a recent survey that targeted adults with student loans, more than 70% reported not knowing what will happen to their debt in the event of their death.
The answer to this question depends on several factors, including the type of loan you have, the date it was issued, and your lender. Here’s what to know.
Are federal student loans discharged if a borrower dies?
If you only have federal student loans, the answer is pretty simple. In the federal program, if a student dies, any loans that are in their name are discharged, Mayotte says.
The same rules apply to Parent PLUS loans. If the student for whom the loans were obtained, or the parent borrower dies, the loans must be discharged by the loan servicer.
But there is one recent development that helps federal borrowers even further: these discharges are now tax-free.
In the past, if a federal loan was discharged due to death, the student’s or the borrower’s estate would be responsible for paying taxes on the canceled amount. The IRS changed the rules in 2018, and the amount discharged after a death is no longer counted as taxable income.
To get a federal student loan discharged, a family member or a legal representative of the deceased must submit a request directly to the loan servicer and include an acceptable proof of death, such as the original or a certified copy of the death certificate.
A simple discharge in the case of death is one of many provisions available to help protect federal borrowers. That’s why most experts will tell you to limit your borrowing to these types of loans.
Are private student loans discharged if a student dies?
For private loans, things can get a little complicated, since there can be several outcomes depending on the year the loan was issued, whether there is a co-signer in place, and the rules established by the lender.
“The problem with private loans is that every single loan product is different,” says Mayotte. “Historically, for a lot of private loans, the borrower’s estate or their co-signer, if there was one, would often still be left on the hook.”
Thankfully, things have changed. In 2018, Congress updated the Truth in Lending Act (TILA) — the federal law that requires consumer disclosures from creditors and lenders, to say that if you die — lenders must release both the co-signer and your estate from any financial obligations related to student loan debt.
However, Adam Minsky, a Massachusetts-based attorney who specializes in student loan law, points out that this only applies to private loans that were originated after the amendment went into effect in 2018. “Older private loans are not subject to this requirement,” he says.
This means that if you took out a private student loan in 2015, and have a co-signer, that person could still be liable for that debt if you die. Minsky also says that depending on the state’s law, it may be possible for a student loan creditor to go after the deceased borrower’s estate if the loan was issued prior to the amendment.
Besides that, if you’re married, and live in a community property state, such as Arizona, New Mexico, Nevada, or Wisconsin, your spouse could also be liable for that debt if you die, even if they didn’t co-sign the loan, as long as it was taken after the marriage.
Like with federal loans, you won’t have to pay taxes on any amount discharged by the lender, regardless of the year the loan was issued — at least for now. According to Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com, the tax-free status was added in the tax law passed in 2017, and it will be in effect until 2025.
If you want to know exactly what will happen to your private loans, your best bet is taking a look at your contract to see if there’s anything specified — if there aren’t any details, don’t fret. Most private lenders offer what’s known as a “compassionate review,” in which any survivors can request a death discharge. There is no guarantee that this will work, but it’s still an option to explore, as each lender evaluates these on a case-by-case basis.
What can you do?
Each private lender has their own way of dealing with student loan discharge, but you can still prepare yourself and safeguard those around you from carrying your financial burden by doing the following:
Check out the terms: The first thing you can do is look at your promissory note, since this will give you a better idea of how the lender deals with these cases. The promissory note is the contract that contains all of the details of the loan which you agreed to, including the total amount, interest rate, and repayment terms.
“Check the note, and see what it says about what would happen should the student pass away,” says Mayotte. If this isn’t stipulated, or if you can’t find your promissory note, you can always contact the lender to obtain this information directly.
Consider a life insurance policy: If you have private student loans that were issued before 2018, then life insurance is something you could look into. Life insurance policies, particularly term policies, cost next to nothing, especially for a young individual who is relatively healthy.
David Gastwirth, a senior insurance strategist at American Business, a life insurance brokerage firm, says that life insurance can serve as a safety net when taking out student loans to protect the borrower’s estate, co-signer, or spouse in case the student dies while the loan is still outstanding.
According to Gastwirth, a 10-year term policy worth $250,000 for a 20 year-old woman who’s in fair health, costs around $125 a year — or less than $11 a month.
When taking out a life insurance policy, make sure to take into account the entire cost of the loan, including any interest accrued while you’re in school and other fees. “It’s always better to have a bit more than a bit less,” says Gastwirth.
If you’re unsure where to start, you can always contact a life insurance broker, or check out an online marketplace, such as Health IQ, to explore your options.