First, let me say I realize this is a morbid question!

However, I’ve been trying to cover all of the possibilities when it comes to my massive amount of student loan debt. I graduated this past weekend with a doctoral degree and roughly a quarter million in debt.

Under the current rules, if I pay under IBR for 25 years, the remaining balance will be forgiven. However, that amount will also be treated as taxable income by the IRS, so I’ll still be on the hook for a substantial percentage of that amount as a lump sum tax payment in 26 years.

My question is this - if I get hit by a bus tomorrow, my loans are discharged. However, would that discharge also be considered “income” on my estate?  Should I be taking out additional life insurance to cover taxation of the discharge, or is that irrelevant?

I fully accept this is not legal advice for my specific situation - just curious if a sizable student loan discharge can impact my family after death.

Thanks!

Hmm.  Good question and one I don’t know the answer to.  Let me see if I can get some help with this one and let you know.

Technically yes, the discharge of the balance of your federal loans under any repayment plan is considered taxable under the death and disability discharge.  However the taxable amount would likely be contingent on the valuation of your estate at the time of discharge.  The current exclusion from estate tax amount is about $5,000,000, so if your estate is not valued over this amount it might not be taxed as income and taking out additional life insurance would not be necessary. It might be would be worthwhile to speak with a financial advisor who can help you make a decision based on your loan portfolio, assets, etc

Thanks!
I certainly lack any substantial value at the moment, so in the case of my death, things should work themselves out.

I plan to consult a financial advisor once I get settled into my career and have finances to be advised upon. At the moment, I’m glad to at least have some reassurance that, should I drop dead in the next few months, my husband and children will not be scrounging for loose change to cover the expense of my student loan discharge.

This is a great forum - thanks! Glad to have found a source of information that covers some of the less easily spelled-out details of the various programs.

Actually, it is income upon your death, via cancellation of indebtedness (reportable by form 1099-C). The estate tax exemption is ONLY for estate taxes, not income taxes. These are two completely different things. The estate tax is based on the value of your estate (homes, cars, possessions, cash accounts, retirement, life insurance, etc),  whereas the income tax is based on your income. While a cancellation of indebtedness from student loans might not seem to be income, it is under the IRC. Further, when student loans are forgiven for death or disability, that discharge is specifically NOT excluded as income per the regulations.

When someone dies there are two different returns to be filed: the 1040 income tax form and the 706 estate tax form. The reporting on each is different. Also, keep in mind that depending on your state, you might also have to pay state income tax on the student loan discharge.

I’d actually advise speaking with a tax attorney, who can help you determine your specific tax implications upon death and can help you structure your estate so as to minimize both your estate and your income taxes (federal and state, if applicable). A financial advisor does not know the tax code and can only help in trying to increase the value of your assets.