Mother Forced to Pay Taxes on Deceased Child’s Student Loans

Student loans have taken over most of our lives.  They affect not only the students, but at times, the parents of the students as well.  Just when you think your done paying them, they always find a way back into your life.

This brings me to Roswell Friend.  Roswell attended Temple College in Philadelphia and took out $17,000/semester in student loans and his mother took out $55,400 in parent PLUS loans to pay for his tuition.  In August 2011, Roswell committed suicide and both his loans and the parent PLUS loans were discharged and canceled.  This may seem like bittersweet relief.  However, in June, his mother found out that she still owed $14,000 to the Internal Revenue Service (IRS) because the loans that were forgiven at her sons death were treated as income, which she must pay taxes on.

Discharge of Student Loans by Death

According to Federal Student Aid, “If you, the borrower, die, then your federal student loans will be discharged.  If you are a parent PLUS loan borrower, then the loan may be discharged if you die, or if the student on whose behalf you obtained the loan dies.”  This is exactly what happened to Roswell’s mother.  Upon death of her son, her parent PLUS loan was discharged.

What Happens to the Tax Owed on the Loans?

According to IRS rules, “loans that are forgiven in the case of death or permanent disability are treated as income.  When the borrower dies, the IRS will not seek taxes.  But when the borrower is a parent, it will.”  This means that the IRS can come after Roswell’s mother for the unpaid taxes on the parent PLUS loans.

Options for Parents Owing Taxes on Deceased Child’s Student Loans

• Show that you are unable to pay taxes.  Taxes owed will be wiped out after 10 years, if the parent can show that they are unable to pay the bill.  This may require a lot of work and showing of proof and other documentation.
• Ask for an “offer in compromise.”  They can have the bill reduced by asking for an “offer in compromise.”  To learn more about an “offer in compromise,” click here.

For more information about discharging student loans click here or contact your loan servicer.

Is it fair for the IRS to come after the parent of a deceased child for taxes on the parent PLUS loan?