Should You Pay an Adult Child's Debt?

A father and son go over bills at a kitchen table
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Yellow Dog Productions / Getty

Deciding whether to help your adult children pay their bills can be a difficult decision. Several factors can come into play, but it comes down to two basic issues: the impact on your finances and whether paying the debt is truly helping or simply enabling your child.

Research from the New York Federal Reserve shows that many young adults between ages 18 and 39 are experiencing high levels of delinquency on credit cards and loans, which could cause them to lean on their parents for help. In a study by Merrill, 79% of parents with adult children said they provide some financial support for their living expenses both large and small, from weddings to phone bills.

Can You Afford to Pay Your Adult Child's Debt?

Consider your own finances first. Are you still paying debt of your own? Would helping your child affect your retirement savings, or would it make it difficult to pay your own monthly living expenses? What if you have to go into debt so you can help your child pay off the debt they created? Be careful about helping your child if it means putting your own financial security at risk.

Are There Tax Implications?

There could be tax implications if you pay your child’s debt if you’re planning to pay more than the $15,000 annual gift exclusion in 2021. This limit increases to $16,000 in tax year 2022. Consult your tax planner or accountant to understand the potential impact on your income taxes.

The IRS defines a gift as "any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return." The donor is generally responsible for paying the gift tax.

Are You Co-Signed on the Debt in Question?

There’s no doubt that you should make payments If your child is struggling to pay a loan or credit card you've co-signed. Refusing to help out in this case would hurt your own credit rating because these accounts are listed on your credit report as well. At least pay the minimum to prevent the account from going into default, but think about a long-term solution, such as possibly removing yourself from the loan, if your child is unable to resume payment after a few months.

Your co-signature also gives the lender the right to come after you for payment. They could sue you and get court permission to garnish your wages or levy your bank account. You’ll be fully responsible for any remaining balance on co-signed accounts if your child gets a bankruptcy discharge for your joint debts.

Beware Unintended Consequences

Paying your adult child's debt could create a dependency that's difficult to break. They may not practice good financial habits if they know you’ll be there to bail them out. Make it known that you’re helping them out just one time, and enforce strong financial boundaries if your child comes back to you for help.

Reducing your child’s credit card balances also opens up their available credit, creating an opportunity for them to run up big balances again. It could also have a positive impact on their credit score, which could let them qualify for more credit cards.

Keep in mind that agreeing to loan your child money creates a lender-borrower relationship, which you should approach as any lender would. Assess not only whether your child can afford to repay you, but whether they’re likely to repay you as well. It’s one thing to help a child who’s going through a tough time, and it's another to help one who simply is irresponsible and mismanaging their money.

You may decide to loan your child the money to repay their debts rather than give the funds to them. But be aware that having your child owe you can put a strain on your relationship, especially if your child can’t afford to repay you or isn’t committed to repaying you. Your child may agree to repay you when they’re desperate for help, then later resent you for requiring them to pay you back.

If You Decide to Help out

Explore the financial habits that got your child into debt and come up with a plan to turn things around. Make this a condition of helping them out.

You can strike a deal with your child. You might agree to pay half the debt if they’ll pay the other half by making a lump sum payment or matching their payments each month, similar to an employer 401(k) match.

You could require them to get financial help from a credit or another personal finance professional as a condition of your help. Your child should get a grasp of basic finance concepts, like money management and debt reduction.

If You Decide Not to Help out

If you decide not to help out, explain why. You might say, “We can’t afford to help you right now,” or “We believe that it’s best for you to work your way out of this situation on your own.” You can still be there for guidance and support even if you don't loan them money. Point them in the direction of good financial resources that can help them out of the situation.

Article Sources

  1. New York Federal Reserve. "Quarterly Report on Household Debt and Credit," Pages 24-28.

  2. Merrill. "The Financial Journey of Modern Parenting," Page 2.

  3. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”

  4. Internal Revenue Service. "Frequently Asked Questions on Gift Taxes."

  5. Federal Trade Commission. "Co-Signing a Loan."