My mother took out a Parent PLUS Loan on my behalf in my freshman year. She died last month just after I graduated from college. Is her PLUS Loan forgiven? Are there any potential tax consequences to me or my dad if the PLUS Loan is forgiven?
If the borrower of a federal student loan dies, the loan is cancelled. For example, if the borrower of a Parent PLUS Loan dies, the debt is discharged. It will not be charged against the borrower’s estate, nor is the cancelled Parent PLUS Loan debt treated as income to the student or the surviving spouse, if any.
The Parent PLUS Loan is also eligible for the death discharge upon the death of the student on whose behalf the parent borrowed. In such a situation, the parent borrower will receive a 1099-C from the U.S. Department of Education for the cancellation of debt and will have to report the cancelled debt as taxable income on his or her federal income tax return.
Similarly, federal student loans may be cancelled if the borrower becomes totally and permanently disabled. The cancelled debt will be treated as taxable income to the borrower, even though the borrower’s income must be less than 100% of the poverty line for three years after the discharge is granted.
Unfortunately, current law requires the U.S. Department of Education to treat loan forgiveness due to disability, death of a child or financial hardship as taxable income to the borrower. The federal government gives with one hand and takes back with the other. These policies are morally bankrupt, but Congress has yet to pass legislation correcting these lapses in the law.
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