My MIL co-signed loan; granddaughter defaulted. Need advice!

I love my mother-in-law, but there are times I could...never mind!

Today, she called me for advice.  She co-signed a student loan for her grand-daughter (from here on, "GD"), who is over 21 now. The girl can't keep a job, and just lost another one. She's crashed 2 cars in a 6-month period. In a nutshell, she's irresponsible. I don't think she's into drugs, etc.--just has the family propensity toward fiscal craziness.

Anyway, she's defaulted on this loan. MIL said that GD's mom co-signed the other 3, 1 for each year of college. MIL only co-signed #4, for $11,000. Also, her Mom is a nut, and hates the rest of the family, so I don't think that talking to her would help MIL in any way.

The IRS is coming after MIL, and has been sending letters, threatening to garnish her wages. MIL is about 70. Taking $11,000 out of their meager retirement funds would really be a problem. Oh, and MIL has been trashing the many letters, and ignoring the many phone calls!

I once advised her not to co-sign for loans. Arggghhhh!

I'm not a lawyer but I can't see any hope for MIL with this. She co-signed that loan, and now is legally responsible for it. GD is broke, so she can't help in any way.

I can only think of 2 things she could do, neither one is pleasant:

!. She could take GD to court to get the money; but GD has no money. This is also not something you want to do to a family member.

2. MIL could take out a loan herself, to re-pay the defaulted student loan--and saddle herself with more debt. Also, what would this teach GD about life?

I'm very angry with GD for taking advantage of MIL and DIL. She violated familial trust, and obviously doesn't value all of the things her grandparents have done for her. They adore her, and this is how she treats them.

I told MIL that she needs to have a very serious talk with GD. No more nice-guy stuff. I'm not advocating that she sever her ties with her, but she needs to impress on GD how hurt she is, and how angry and how much this impacts on her grandparents' future. This girl needs to GROW UP, and get her life on track NOW.

I also think she needs some professional counseling about her money habits. I also think she may be bi-polar.

Sorry to drone on, but can anyone suggest a solution for MIL, and/or provide some links to websites that could give her legal advice? Thanks!

I'm confused, why is the IRS involved?

I don't think there is much that can be done about student loans.   It must've been some kind of private loan because the ones directly from the government don't require co-signers.  I think you're MIL is on the hook for this since her granddaughter doesn't have anything that they can go after.  They have probably given up trying to get anything from her.  It would be easier on her financially if she dealt with it and set up some kind of repayment plan.  I know when the IRS garnishes for back taxes they don't leave much of a paycheck.

The IRS is involved because the government is the final guarantor on student loans.

What you said above is absolutely true.  An option for them would be to declare bankruptcy, but that is not a good option. It wrecks your credit, you lose tangible things like houses, cars etc.   And even then I don't think you can bankrupt student loans.

So many people offer to co-sign, not really understanding that they are also "co borrowing."

By signing their name to the financial documents, your Mom and Grandma essentially borrowed money from the bank.  Their understanding with the GD was that they would not be paying the money back, but that the GD would be.

However, now since the GD has not lived up to the obligation, the money is still due.  As co-borrowers, the obligation now falls to your Mom and Grandma to pay the money back.

So far as taking the GD to court. I have to ask "to what end?"  She has no money. You can't get blood from a stone.  There is no job to garnish wages from.

Another lesson in the life of hard knocks  

My ex SIL went through something like that not long ago with her oldest son.  He was in debt for about $5,000 and she tried to help him. She co-signed a loan for him to get some money to pay off his debt to give himself a fresh start.  A day or 2 after he got the money he declared bankruptcy. My SIL who is on long term disability with a fixed income, ended up having to pay back the money on her own.

Denice said:

 
I know when the IRS garnishes for back taxes they don't leave much of a paycheck.

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Not sure about the US, but in Canada, Revenue Canada garnishes 30% of all income sources, including pension cheques.

Thanks Denice.

All the irresponsibility that led to this (including MIL) is water under the bridge now. A lawyer and a payment plan is all that can help now.

peaches08 said:

I'm confused, why is the IRS involved?

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It probably is a Federally-issued student loan. There are 2 types: that, and private loans.

First thing I would do is change my will. 

Your MIL has to pay it back, she has no choice. Even bankruptcy does not forgive student loans. She might be able to refinance, or get another loan (with a manageable payment schedule) if the IRS is asking for the entire amount. 

Maybe granddaughter could work off some of the loan by helping out / working for her grandparents, but it doesn't really sound like that's going to happen.

Do either of them own a house?  If so, what about a Reverse Mortgage?

http://seniorliving.about.com/od/housingoptions/a/reverse_mortgage.htm

Basically it sounds like a lien against the house that is repaid upon death and sale of the house.

Guess what? This may not have happened at all!

MIL emailed me. Her credit card got scammed last month (when she was in Cancun, on vacation, NOT GD's doing) GD only owes $200 on her student loan.  MIL told me that the IRS was contacting her; now she days Discover (her credit card people) were the ones. I have no idea what's going on.

What MIL first told me makes no sense.  She said that GD bilked her mother the past 3 years for the student loan, so this new info makes no sense!?!?!?

I know I have taken out two student loans, one years ago when my credit was bad the second one two years ago when I wasn't working.  I didn't have a co-signer for either one.  With a conventional loan I would've needed one at least with the first one.  I haven't heard of any one needing a co-signer for a student loan.  There are gap type loans that make up the difference between the student loan amount and the actual amount of the school which are conventional loans and require a co-signer if the person can't qualify for a loan.

Update, and some good news:

Her granddaughter is NOT in serious arrears, except for a $200 payment (she just lost her job). GD provided MIL with her passwords, etc. to see her online account, and is telling the truth. Boy, am I HAPPY!

MIL told me that the loan was sold to another company, who is super-aggressive with this stuff.  Also, before this transpired the other day, GD had already gotten in touch with a student loan official regarding the problem; they are looking into it. MIL plans on getting a lawyer, or at least, legal advice about this.

I'm still not sure about the Discover credit card thing. All I can think of is that, when MIL co-signed the loan, she had to provide a credit card number to keep on file, and the lender was able to transfer the debt onto her credit card. DH had a similar thing happen in the emergency room, even though his injury was covered by workman's comp. They wanted his credit card as a back-up in case the insurance refused to pay/or only gave him a partial reimbursement. (BTW, he told them, in the finest United States Marine-ese what they could do with that idea, and they dropped it!).

I'm so glad that my niece is honest.  I really hated to think ill of her. And, it also seems that help is on the horizon for MIL.