I have been trying to find a straight answer to this for sometime and feel like I have heard answers of yes and no for the same question. Background- for future financial planning I want to make sure that my wife and family are ok in the event of my death prior to my federal direct loans being paid off or forgiven (currently working towards PSLF).
We live in a non-community property state (FL). I know that my federal loans would be discharged due to death, however, would my wife be responsible for paying tax on the discharged amount? I seem to find various answers to this question and there would be no guarantee for private loans but my loans are completely federal.
Thanks in advance.
May 3, 2014
This seems like a pretty straightforward question, but it is actually fairly complicated.
You are right that the federal loans would be forgiven in the event of your death. The problem is that cancelled debt is usually treated by the IRS as income, triggering a tax.
This site has a short explanation of how it works: http://www.studentloanborrower…..and-death/
Your question is very complicated to answer because estate law can be very state specific. Because this is really a tax and estate planning question more than a pure student loan question, I don’t want to speculate about what the answer would be.
In order to get a definitive answer, you should ask the attorney who is preparing your will. I would ask this attorney the following questions:
1) Will my estate be responsible for any taxes due to the forgiveness of student loan debt?
2) Is there a way we can structure our assets so that my wife does not incur that tax burden if I die?
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