Have you ever wondered as a college student or as a parent of a college student, what happens to all of your student loans at death? “God forbid!” Here’s the good news and the bad news.
The good news: The Federal Government has a great deal for you. Now the bad news: you have to die first.
If your student loans are through a federal government agency, then generally speaking, those loans will be discharged (forgiven) at your death. That is to say, any federal student loan debt that you have at your death will not pass on to any heirs. No one will be left holding the bag for your unpaid federal student loans. Actually, every U.S. citizen who pays Federal Income Taxes will be left holding the bag, but we don't need to go down that path at the moment.
What about Parent Plus loans? So as you know, Parent Plus Loans are an obligation of a student’s parent, not the student. The good news is that federal Parent Plus Loans are also discharged at either the death of the student or the parent(s). That’s the good news. The bad news is that if the discharged loans are due to the death of the student, then the parent(s) will have to pay Federal Income Taxes on the loan amount forgiven. The IRS will issue a Form 1099-C (Forgiveness of Debt Form) to the parent(s) for the year that the debt was discharged. For example, let’s say your parents have a balance on a Parent Plus Loan of $30,000. If you were to die, the Parents would receive a 1099-C reporting $30,000 (the balance of the loan) as Miscellaneous Income. They would have to include that on their Federal Income Tax return and pay income taxes on that phantom income. So if they are in the 25% tax bracket they would have to pay $7,000 in additional income taxes.
Keep in mind, we are only referring to Federal Student Loan obligations. If you have private student loans, you need to check your Loan Documents to determine whether they provide for any such discharge at death. Most do not, but there are exceptions.
If you are considering consolidating/refinancing your Federal Student Loans with a private student loan, you should take the above discussion into consideration.
So, if you have Federal Student Loans, you now have one less thing to worry about. Fortunately, that gives you more time to focus your concern on how to pay back all of those loans.
We believe that together, we know more than any one or two of us, so if you have any additional information on this subject, please add to the discussion. Now you know something of what we know. Please share it with someone you know who needs to know it too.
Lee and Ed