Federal Parent PLUS Loans are forgiven when the parent borrower dies or when the child they borrowed the loan for dies. The U.S. Department of Education won’t go after the surviving spouse or any other family member to repay the debt. And that’s true even if you live in a community property state like Wisconsin.
The federal government won’t go after the spouse or child upon the death of the borrower.
But debt cancellation isn’t automatic.
What happens to Parent PLUS Loans if the student dies?
Parent PLUS Loans are forgiven when the student for whom the parent borrowed the loan dies. If the parent consolidated the loans into a Direct Consolidation Loan, the portion of the loan that paid the Parent PLUS Loans would be forgiven when the child dies.
What happens to Parent PLUS Loans if the parent becomes disabled?
The Education Department will discharge the remaining loan balance if the parent suffers a total and permanent disability. It won’t do the same if the child they borrowed the loans for becomes disabled. Read more about what disabilities qualify for student loan forgiveness.
How to get Parent PLUS Loans discharged due to death
After the parent or student dies, a family member or representative must contact the student loan servicer and request a death discharge. They’ll need to send proof to the student loan servicer that the parent borrower has died. The proof of death can be:
The original death certificate.
A certified copy of the death certificate.
An accurate and complete photocopy of one of those documents.
Surviving family members or the trustee can get the death certificate from the funeral home that handled the burial service or the state where they died.
73% of all student loan borrowers surveyed said they don’t know what happens to their student loans when they die, according to Haven Life, a life insurance agency backed and owned by MassMutual.
Taxes may be owed
Although the federal government forgives parent loans at the parent or student’s death, it doesn’t mean the family is entirely off the hook.
The IRS usually treats debt cancellations as taxable income. This means the government could send a 1099-C to the deceased parent’s estate, alerting the executor that taxes need to be paid.
But here’s the silver lining: thanks to the Tax Cuts and Jobs Act and President Biden’s American Rescue Plan, that potential liability is temporarily paused.
Both laws contain provisions ensuring that all student loan discharges and forgiveness are tax-free at the federal level — temporarily. Both laws are set to expire in 2025 unless they’re renewed.
But families should still be cautious.
While the federal government won’t tax any student loan forgiveness, the state might tax the forgiven student debt. In such a case, setting aside some funds for tax season is a wise move.
You can’t inherit your parent’s debt — but there’s a catch
Children cannot inherit their parents’ student loan debts – or any other debts, for that matter.
When a parent with a federal student loan passes away, the government forgives the debt.
Picture the loan being wiped clean, ensuring that it doesn’t affect the child or any other loved one.
Related: What Happens to the Student Loan Debt of the Spouse that Died?
The same holds true for private student loan lenders like Sallie Mae and SoFi. They also offer loan forgiveness upon the borrower’s death.
But there’s a twist.
Cosigners remain liable
If the child had been a cosigner to their parent’s loan, they would be on the hook for repayment depending on when the loan was borrowed. This isn’t about inheriting debt but rather about fulfilling the agreement the child made to repay the loan if the primary borrower couldn’t.
To stop that from happening, the parent can ask the loan servicer for a cosigner release or refinance with a new lender. Another benefit of refinancing? Getting a lower interest rate and better loan terms that may make the monthly payments more affordable.
Note: Purchasing life insurance to protect a cosigner is unnecessary for private student loan debt borrowed after Nov. 20, 2018. Federal law mandates that lenders must release the cosigner if the primary borrower dies for loans taken out after that date.
Creditors can go after the estate
Now let’s say the parent had some assets — a house, a car, or some savings. Private lenders may pursue the deceased parent’s estate in order to recoup the outstanding loan amount. In a scenario like this, they could potentially lose part or all of the inheritance her mom intended to leave behind.
To avoid such a situation, it’s wise for parents with outstanding loans to:
Purchase a term life insurance policy with a face value equal to the current loan balance and other debts.
Consult with an estate planning attorney. This legal expert can help ensure that their wishes for their children’s inheritance are fulfilled, even in the face of loan repayments.
Bottom Line
Parent PLUS Loans are forgiven when the parent or the child from whom they borrowed the loans dies. Your surviving family members can’t inherit the debt.
Before that day comes, there are other opportunities to get rid of your student loan debt. For example, the Education Department will forgive your loans if you work in public service for a decade or make payments for at least 20 years. They’ll also cancel up to $20 thousand of your federal loans if you earned less than $125 thousand annually during the pandemic. Read more about how to apply for loan forgiveness.
Let’s talk if you want to explore your forgiveness and repayment options. During our call, we’ll devise a strategy to help you fit your Parent PLUS Loans into your budget as you prepare for the next chapter of your life.
Blog
December 21, 2022
#Forgiveness
