My father’s death revealed he paid my tuition using $90,000 in student loans. What happens to the debt and how RESPs can help

Most students who borrowed know exactly what they owe, since they took out the loan themselves. But things get much more complicated when debt unexpectedly shows up after a parent dies.

What happens if you end up getting surprised with a student loan-sized debt you weren’t expecting?

Imagine this scenario: Dave attended an expensive four-year university program. He covered his first year on his own, taking out around $30,000 in student loans. His parents paid the rest — or so he thought.

Years later, Dave's father died and his mother received a notice showing $90,000 in student loans tied to Dave’s education, all in his father’s name.

Dave is stunned. He never applied for the loans, and he didn’t cosign anything. But the debt was taken out for his education and it’s now sitting in his father’s name.

So what happens next? Does the debt fall to Dave simply because he benefitted from the education? Does it stay with his father’s estate after death?

Here’s what Canadians need to know when a parent’s death uncovers unexpected student loan debt — and when, if ever, someone could be on the hook for it.

Understanding different student loan types

The first step is understanding who actually borrowed the money. In Canada, there are student loans that students take out by themselves, and there are loans taken out by parents to help pay for a child’s education. The difference matters a great deal when someone dies.

Most post-secondary students borrow through the Canada Student Loans Program, often paired with a provincial loan, such as British Columbia Student Aid, Alberta Student Aid, Ontario Student Assistance Program, for example (3). The province of Quebec, and the Northwest Territories and Nunavut don’t participate in the integrated federal program, and offer their own separate, distinct student financial assistance programs. These loans are issued in the student’s name, and only the student is legally responsible for repaying them.

Parents can’t take out a federal Canada Student Loan on behalf of a child. If Dave’s father borrowed money through the federal student loan program, it would have required Dave’s name, consent and legal responsibility — which isn’t the case here.

Instead, when a parent borrows to help cover a child’s tuition, they usually do so in one of two ways:

• Personal loans or lines of credit taken out in the parent’s name
• Private education loans offered by banks or credit unions, issued in the parent’s name

In both cases, the parent — not the student — is the borrower and is solely responsible for the debt (4), which means Dave is not automatically responsible for the $90,000 in loans if they were taken out in his father’s name and he didn’t cosign.

But that doesn’t mean the debt simply disappears, either.

When a borrower dies, outstanding debts — including personal loans and private education loans — typically pass through the borrower’s estate before any remaining assets are distributed to heirs (5).

According to the National Student Loans Service Centre (NSLSC), if a person dies with a provincial or federal student loan debt, the NSLSC can forgive the debt and it will not pursue the decedent’s estate to cover repayment. However, this forgiveness excludes private student loan debt, wherein private student loan lenders reserve the right to either forgive student loan debt or pursue repayment through the person’s estate (6).

Whether the loan is forgiven or repaid depends on the type of loan, the lender’s policies and whether the estate has sufficient assets to cover repayment. What’s clear is that benefiting from an education doesn’t make a child legally responsible for a parent’s student-related debt.

The key question in cases like Dave’s is whose name is on the loan documents, not who went to school.

Understanding what creditors could go after

In Canada, a parent’s debt doesn’t automatically pass to their children. Creditors generally can’t pursue surviving family members unless they cosigned a loan or were joint borrowers. Simply benefiting from a parent’s spending — including education costs — doesn’t make a child legally responsible for the debt.

However, creditors can usually make a claim against the estate. Before assets are distributed to heirs, outstanding debts may need to be paid from estate assets such as cash, non-registered investments or property owned solely by the deceased.

How the Registered Education Savings Plan can help

One reason stories like Dave’s are so unsettling is that they often stem from ad-hoc borrowing rather than long-term planning. One of the most effective ways to plan for covering post-secondary education costs — without relying on loans — is through a Registered Education Savings Plan (RESP).

An RESP is a long-term, tax-advantaged account specifically designed to help families save for a child’s education. Contributions aren’t tax-deductible, but the money grows tax-deferred, and withdrawals are taxed within the student’s tax bracket, which is usually at a much lower rate.