When it comes to large financial commitments like private student loans, it’s important to consider every possible outcome — even the ones that aren’t particularly pleasant to think about.
What happens to your student loans after you die depends on several different factors, such as your lender, when you took out your loan, and who took out the loan in the first place. While most federal student loans are discharged when the student passes away, private student loans function a little differently.
A 2018 amendment to the federal Truth in Lending Act (TILA) stipulates that lenders must release a deceased student’s cosigners and estate from financial obligation related to student debt. However, this law only applies if you took out your loan after the law went into effect in November 2018. If your loans originated before then, it all comes down to your lender’s policies.
If You Took Out the Student Loan Yourself
Every lender has different terms for private student loans, so the most important thing is to check with your current lender to learn more about their death and disability policies.
Many private loans will discharge your loans completely if you die, but this isn’t a given across the board — if your lender’s policy agreement doesn’t include language guaranteeing loan discharge after you die, your student loans will be treated as part of your “estate” like any other debt.
If you don’t like your current lender’s death discharge policy, consider refinancing with a company that will forgive your private student loans in the event of your death. Most lenders will need to see a death certificate before they discharge your loans, so make sure your parents or another trusted person has contact information for your loan provider in case of an emergency.
If Your Parents Took Out the Student Loan
Will your parents stay on the hook for your private student loans if you die? For the most part, this also depends on the lender. Some companies will discharge the loan, but others might require that your parents repay the loan even after your death.
This is another great reason to look into your lender’s death and disability policy when taking out or refinancing your private student loans. It’s a grim consideration, but preparing for the worst will help you protect your family from unanticipated financial burden.
If your current lender would require your parents to repay your loan in the event of your death, look into refinancing with a company that will forgive your debt postmortem. If now isn’t a good time to refinance, you may want to consider taking out a life insurance policy until you can switch lenders — this way, if worse comes to worst, your designated beneficiary will receive money they can use to help pay off your remaining debt.
If You Used a Cosigner to Take Out Your Student Loan
When you add a cosigner to your private student loan, that person becomes equally responsible for repaying your debt. This means your cosigner may be required to keep paying off your loans even in the event of your death.
Thankfully, many lenders will discharge the cosigner’s responsibility to repay the loan if the primary borrower dies. Once again, the best strategy is to review your lender’s policy — even if the agreement doesn’t include specific language on cosigner release in the event of death, most lenders will perform a process called “compassionate review” to determine whether or not to forgive your debt.
Keep in mind that these rules only apply if the primary borrower dies. If your cosigner is the one who dies, you’ll still carry the responsibility for repaying your loan.
Are Discharged Student Loans Taxable?
Not for now! Student loans discharged because of death or disability used to be subject to income taxes, but recent laws have changed that.
As of 2017, student loans discharged due to death or disability don’t count as taxable income. This means your family and cosigners won’t be taxed on discharged loans in the event of your death.
The new rule will stay in effect until 2025, so all discharged private student loans are exempt from taxation until at least that time.