Lending money to a family member can get sticky

Sticky Situations: Lending Money to Family, Kids and Their Parents’ 529 Savings Plans

There is an old adage that warns, never lend money to family or friends. And if you’ve managed to adhere to such a thing when someone you love has been in a real bind, it’s possible that you’re much stronger than I am and I dare say, most of your fellow readers as well. The secret is to help if you can, but in a way that strengthens that relationship, not destroys it.


Male and female hands exchanging a stack of 100 dollar bills

Does the Lender Get a Say?

Dear Mary: Last month I lent my sister $500 to pay for her rent since she said she was in a jam. Well, it’s been months now and she hasn’t paid me back, yet she’s eating out every day and getting a weekly manicure! Needless to say, I’m angry. What can I say to get my money back? Seething in Seattle

Dear Seething: My business side says to review and enforce the terms of the Promissory Note she signed. The “sister” part of me says you probably didn’t think you would need that. A written agreement makes sure that everyone has the same expectations—even sisters.

As it is, you expected her to tuck five $100 bills inside a mushy Thank You note before she ate another meal or stepped foot inside a nail shop. Her expectations? Who knows, but obviously it wasn’t that.

She may think you’ve got so much money you haven’t even missed it. I don’t blame you for being upset, but is $500 worth destroying your relationship? That’s what will happen if you allow your anger turn into bitterness. You need to accept that she may never pay you back. Consider it an expensive lesson. In the meantime and as soon as you are not seething, say, “Let’s figure out a repayment schedule that’s comfortable for you.”

Do everything you can to work it out then write it down. If she ever pays you back, consider it a bonus. And the next time you decide to lend money to anyone, put your expectations in writing while everything is warm and friendly—before you write the check.

College-Dough Oh-No

Dear Mary: We’ve been putting money in a 529 Plan for our daughter’s college education for the past several years. But Rebecca recently told us she has decided to attend beauty school instead. Now that the surprise has worn off, we’re concerned about penalties when we withdraw the money. How much will we lose, and is there any way to avoid it? Paco and Trish

Dear Paco and Trish: I’ve got great news for you. That money can be used at any accredited trade or vocational school—not only colleges and universities—to pay for tuition, room, board, fees, books, and supplies. If you have more in the account than the total cost of Rebecca’s vocational training and related costs, you can withdraw the balance. Federal law imposes a 10-percent penalty on earnings for non-qualified distributions. This means that you will get back 100% of your principal and 90% of your earnings.

Another option is to change the beneficiary to another child or qualifying family member at any time to keep the account going and avoid (or at least delay) taking non-qualified withdrawals if Rebecca’s education doesn’t require those funds.

Your particular fund may have additional provisions so be sure to check with the fund manager. You can learn more about 529 College Savings Plans at SavingForCollege.com.

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1 reply
  1. NF says:

    I have a best friend who has asked to borrow money, for many years, to do various things, including bailing her husband out of jail. Call me a schmuck, and yes, the last loan put a huge crevasse in our relationship, but I actually amortized the loan(s) using an online program. I was paid back promptly, with interest(what I would have lost from investments). It worked out well for both of us. Call it cold, calculating, but I could not afford to lose that money based on our income/budget.


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