I took out $50K in student loans, but now I’m living on disability. Is my spouse responsible — and will my family have to pay off my student debt if I die?
Question: I graduated from college in 2003, with over $50,000 in student loans. Right after graduation, I was offered the opportunity to consolidate them at 3% interest, paying less than $300 monthly with a state-managed higher education student financial-aid program.
Due to poor health I had to put the payments on hold for one year on two separate occasions. I am now living on Social Security disability and can barely meet the monthly payments, along with my other obligations. I live in Puerto Rico, which is a community property state, but my wife and I have a prenuptial agreement separating our financial burdens.
What can I do to reduce or even cancel these payments? If I die, will my wife and heirs be obligated to pay the reminder of my student debt?
Answer: Federal student loans are cancelled upon the death of the borrower and are not charged against the borrower’s estate. Federal Parent PLUS loans are also discharged upon the death of the student on whose behalf the parent borrowed.
The death discharge occurs even if the borrower is married and lives in a community property state.
To receive a death discharge, the surviving spouse or other family member should send a certified copy of the death certificate or a clear photocopy to the loan servicer.
If a death certificate cannot be obtained, alternative documentation of death may be acceptable if it includes the borrower’s name and date of birth. Examples include a letter from the funeral director or clergy on official letterhead or a death announcement from a local newspaper.
Any payments made after the date of death will be returned to the borrower’s estate.
Federal student loans may also be eligible for a disability discharge if the borrower is totally and permanently disabled. Borrowers may qualify based on certain Veterans or Social Security Administration determinations or if a doctor certifies that the borrower can’t engage in substantial gainful activity due to a disability that has lasted or will last for at least 60 months or which will result in death.
There are several deferments and forbearances that can temporarily suspend the obligation to repay federal student loans, including a deferment for active cancer treatment, an unemployment deferment and an economic hardship deferment.
Switching the federal student loans into an income-driven repayment plan might also provide some financial relief, since it will base the monthly loan payment on a percentage of the borrower’s discretionary income, as opposed to the amount they owe.
About half of private student loans offer a death discharge that is similar to the death discharge on federal student loans.
Otherwise, the private student loan will be charged against the borrower’s estate and the co-signer, if any, will be responsible for repaying the remaining debt.
Even if the spouse didn’t co-sign the loan, the spouse may be responsible for the debt if they live in a community property state and the private student loan was borrowed during the marriage. The spouse is not responsible for any private student loans borrowed before the marriage unless they co-signed the loans.
Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico, Texas, Washington and Wisconsin.
It is generally best to have a prenuptial agreement to specify any obligations concerning debt, income and assets, even if you don’t live in a community property state.
If a lender doesn’t offer a death discharge on their private student loans, consider getting a term life insurance policy on the borrower to protect the borrower’s spouse against the borrower’s death. The life insurance policy should have a face value equal to the amount of debt and a term equal to the repayment term of the loan.
Some lenders will forgive private student loans upon death of the borrower even if they don’t have a formal death discharge policy. Call the lender’s ombudsman and ask for a compassionate review. Lenders are most likely to forgive private student loans if the borrower was killed while in service on active duty for the U.S. Armed Forces or as a first responder.
Normally, the IRS treats the cancellation of debt as income to the borrower. However, the Tax Cuts and Jobs Act of 2017 added an exclusion from income for federal and private student loans that are cancelled due to death or total and permanent disability from Jan. 1, 2018 through Dec. 31, 2025.
Discharge of student-loan debt due to death or disability may still be treated as income for state income tax purposes even if it is tax-free on federal income tax returns.
Mark Kantrowitz is Publisher and VP of Research for Savingforcollege.com, a guide to saving and paying for college.
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