I am lucky enough to have no college debt or debt in general. This is largely in part to my decision go to state school and the help of my father. While my Dad did pay for my college (Thanks Dad!) he also taught me about the importance of savings, investments, and living within your means. Recently, I wrote an article about whether you should lend your parents money. Many of you said yes. I’m wondering, do you feel the same way about helping children?
Would you help your child with debt?
1) Can you afford it? College debt is one area where parents are consistently helping children. College is a HUGE cost so knowing your limits is key. I have one friend whose parents paid for all of her school (and her four brothers and sisters) and have had to sell their car and downsize their home to pay off their debt. In my opinion, this is crazy. Helping children is fine, but not when it will drastically alter your life. To avoid this set a budget. In my case, my father gave us $40,000 each to go towards school. Once that money was gone we were on our own. For this reason, I chose a state school that was $8,000 a year instead of going to an out of state that was $40,000 a year. Being upfront helps to create boundaries and makes children more responsible for their choices.
2) Are you a co-signer? If your child isn’t making payments and you’ve cosigned the loan the bank can come looking for you to take over this debt. This happened to my step-grandmother who co-signed on a grandchild’s student loans and is now being held responsible for his law school debt. This is a tough situation. If your child is unable (or is refusing to) pay back their loans you will be responsible for their debt. In this case, it could hurt YOUR credit if you don’t help. You will be held responsible for the cost no matter who racked up the debt.
3) Consider why your child needs help. Why does your child need help? Have they been using you as a safety blanket and continuously asking for money or was there a tragic event? If they are in need of help due to an illness, job loss, or other emergency then helping is a no-brainer, BUT if your child’s spending is frequently out of control then you may want to reconsider offering financial help.
4) Is this the only way to help? Can you help your child with their debt in other ways? Are they struggling to find a job (or a well-paying job)? Could you help them with their resume to get a better job? Are they struggling to live within their means? Can you help them learn to budget, coupon, or any other money saving tactics? Choosing not to pay off your child’s debt doesn’t mean you’ll be neglecting them in their time of need. Use your knowledge and the resources you do have to help.
5) Are you enabling bad behavior? During my twenties I’ve made some mistakes financially (like that time I spent $1,400 in four days) but when a few mistakes turn into massive debt you have to reconsider your situation. If every time I had a financial problem my Dad gave me money to fix it, I would never have learned the importance of budgeting and keeping track of money. If your child is spending their money on frivolous items (Starbucks coffee, vacations, electronics etc.) and is unable to pay loans because of this, it may be time to consider getting them into credit counseling or financial planning classes instead of just bailing them out.
6) Is this a gift or a loan? – If you are choosing to help your child with their debt as a gift, you already are comfortable with never seeing that money again. You can give a tax free gift of up to $12,000 to an individual. If this is not the case and this is a loan, it needs to be addressed in a business like manner. Make sure to have a contract that is signed and clearly states the terms of the agreement.
7) How will it effect your relationship? – If you do loan your child money and are not paid back, how will this effect your relationship? How will you feel if you don’t help? Discussing openly with your child the reasons behind your decision is an easy way to help prevent hurt feelings.