The Moneyist: My sister co-signed our nephew’s student loans for $35,000. When he defaulted, she paid them off. Should his parents repay her?

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Dear Quentin,

I am the executor of my mom’s estate. I have three siblings. My mom is going to equally divide her assets among the four of us. There are two issues, however. My mom, one of my sisters and I all co-signed student loans for one of my nephews.   

After he graduated, he got a job and all was well. He eventually lost his job and disappeared, leaving all student loans unpaid. He moved, disconnected his phone and did not respond to text messages. We were then hounded by his creditors.  

We all paid off the loans to avoid having issues with our credit scores. My mom set up her will to deduct the amounts that she had paid from my nephew’s mother’s share before distribution, so that will even out her share.  

My sister and brother-in-law are terrible with money and could not afford to pay this back out of their own money.

I paid less than $4,000, so I am moving on. However, my sister, who is single and has no pension, had to pay over $35,000, and she is out of luck. I asked my mom to have her compensated from our other sister’s proceeds, but my nephew’s mother said it was not her issue.  

I don’t agree, but I am not going to ask my mom to go against her wishes. My only other thought is to get on the phone with my sister whose son defaulted and her husband, and ask them to pay my sister $35,000 when they receive money from my mother’s will. 

As a side note, my sister and brother-in-law are terrible with money and could not afford to pay this back out of their own money. This has now become an issue of some contention between the two sisters. What are your thoughts?

Out-of-Pocket Aunt

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Dear Aunt,

The easiest solution would be to rob Peter to pay Paul. Your mother deducts $35,000 from one sister, and redistributes it to the other. To refuse to reimburse this sister after your mother dies — assuming she predeceases her children— would be an act of bad faith. I don’t hold out hope that she will do that, regardless of what your sister might say on that call. 

Most people who ask to be released as co-signers on student loans due to unpaid debts on behalf of the student or graduate are refused, studies show. And even though lenders tend to advertise a clause whereby they can be released if the student or graduate stays up to date on payments for a certain period of time, they rarely reach out to the co-signer to remind them. 

Another complication, as outlined by my colleague Jillian Berman: “Many private student-loan contracts have provisions that allow for the loans to automatically be placed in default if the cosigner files for bankruptcy or dies, even if the borrower is making payments on time, according to the Consumer Financial Protection Bureau.” 

Your story should give pause to anyone who is tempted to cosign for a family member.

Your story should give pause to anyone who is tempted to cosign for a family member. Your compassion for your single sister’s predicament is commendable. But she should call your mother and advocate for herself, and also let her nephew’s mother know her position, and her wish for the money to be repaid one way or another.

Private student loans require a cosigner if the borrower has a low or no credit history. It’s just like signing a mortgage agreement or taking out a credit card. Anyone who signs a loan agreement should — in a worst-case scenario — be prepared to pay and kiss goodbye to that money.

Do I believe your nephew’s parents step up to the plate if/when they have the $35,000? Yes, I do. Are they legally obligated to pay the $35,000? No. Are they morally obligated? I’ll let you and your sister answer that. If your nephew’s parents agree to relinquish some of their inheritance? It’s a bonus.

Whatever your single sister decides to do, she should be open, direct and unapologetic. No more backroom deals.

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