While nothing is as certain as death and taxes, dealing with student loans after someone dies is not as clear-cut. Whether a spouse has to pay off a spouse's student loans depends on whether he was a cosigner and where he lives. Additionally, he may incur a tax liability even if he doesn't have to pay off the loans.
Federal Student Loans
If the student loan owed by the borrower is federally insured the taxpayers pay the debt. Once a borrower is declared permanently disabled or dies, federally insured student loans are discharged and they are not held against their estate of the deceased. This applies to Direct Loans, the Federal Family Education Loan (FFEL) Program and Perkins loans. If you didn't co-sign on the loan and it was federally funded, you're not responsible.
If your spouse funded his education in part by PLUS loans or he signed on as a parent borrower for his children, the loan balance can be waived. PLUS loans are also discharged if the parent borrower dies. If the student for whom the borrower took out the loan dies, the loan is discharged.
Private Loans and Co-Signers
Some private loan providers offer the same discharge benefits as federal loans. However, many others do not. Whether the spouse is liable for the debt after her husband's death is determined by the loan agreement. If the spouse co-signed the loan, the loan company might pursue her for the balance. However, the company attempts to collect from the estate first. If the estate isn't able to cover the outstanding amount and the spouse co-signed the loan, the loan company might go after her.
If the spouse lives in a community property state -- Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin -- the loan provider might pursue him. Community property states, where married people are held to own all their assets jointly, generally take the view that both spouses are liable for debts incurred during the marriage even if one of them did not co-sign on the loan. Check with your state to see if any additional laws apply.
The process for discharging loans is not automatic. A loved one or representative must send a certified copy of the death certificate for a federal Perkins Loan. If the loan is a Direct Loan or under the FFEL Program, send the certificate directly to the loan servicer. Keep in mind that it might take the school or servicer some time to complete the process. For private student loans, a spouse can ask for a review to see if a discharge is possible.
Repercussions and Considerations
Even if the spouse doesn't have to pay off the debt, repercussions may still exist. She might have to pay taxes on the cancelled amount of the debt, for example. This is referred to as cancellation of debt income. While the amount of tax won't outweigh the benefit of not having to pay the full amount of debt, the spouse should be aware of this possibility at tax time.
- Federal Student Aid: Forgiveness and Cancellation
- ABC News: What Happens to Student Loans When You Die?
- The Wall Street Journal: When Student Loans Live On After Death
- MSN Money: How to Deal with Student Loans After Death
- Forbes: There's No Escape: Death, Taxes And Student Loans
- Fox Business: What Happens to Student Loans Debt After Death?
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