Cancellation of student loans can be difficult and is allowed only under certain extreme circumstances. Federal student loans can be canceled in the event of death, but private lenders are not required by law to cancel outstanding loans upon death of the borrower. How your private loan is handled after your death depends on several factors including whether there are any co-signers to the loan and the specific policies of your lender.
Federal student loans such as the William D. Ford Direct Loan and Perkins Loan are fully canceled in the event of your death. Your survivors must furnish an original or certified copy of your death certificate to the holder of the loan to get the loan canceled. In the case of a Perkins Loan, the death certificate must be submitted to the school where the funds were used.
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Federal PLUS Loans
PLUS loans are loans taken by parents for the education of their children. A PLUS loan is canceled on the death of both the parents who took the loan. If one of the parents dies, the surviving parent still has to pay off the PLUS loan. A PLUS loan can also be canceled if the student for whom the parents took out the loan dies.
Private lenders are not required by law to forgive any loans in the event of your death. If there was a co-signer to the original loan, the co-signer will be required to pay off the loan. If you took out an individual loan, the creditor can lay claim on your estate for repayment of your loan. Your estate includes any house, cars and bank balances. The money from your estate will be used to pay off all your creditors and whatever is left will be inherited by your family. If your estate is not enough to pay off your loans, than the creditors have to write off that portion of the unpaid balance.
In the event of your death, your loan is not inherited by your family. If you were the sole signer of the original loan, the creditors cannot legally pursue your family to pay off any balances. Unfortunately, some creditors may try to force family members to pay back the debt. In such a circumstance, if the family members contest the creditor's claim, the lender may write off the loan.
Some Lenders May Discharge
Some private lenders offer disability and death discharges. If you have a private student loan, it may help to learn more about the lender's death-related policies.