Should You Pay an Adult Child's Debt?

A father and son go over bills in front of a tablet

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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 from Merrill Lynch, 79% of parents with adult children say they provide some financial support for their living expenses both large and small, from weddings to phone bills.

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

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 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 of paying your child’s debt, particularly if you’re planning to pay more than the $15,000 annual gift exclusion to them in 2021. 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, but a certain amount may be excluded.

Are You Co-Signed on the Debt in Question?

If your child is struggling to pay a loan or credit card you co-signed, there’s no doubt you should make payments. Refusing to help out, in this case, would hurt your own credit rating since these accounts are listed on your credit report as well. Pay the minimum at least, but think about a long-term solution, like removing yourself from the loan, if your child is unable to resume payment after a few months.

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

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 knowing 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 balance also opens up their available credit, creating an opportunity to run up big balances again. On the other hand, 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 also whether they’re likely to repay you. It’s one thing to help out a child who’s going through a tough time, another to help the one who simply is irresponsible and mismanaging their money.

You may decide to loan your child the money to repay their debts rather than gift the funds to them. 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, but can 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 you helping out.

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

As a condition of your help, you could require them to get financial help from a credit or another personal finance professional. At the very least, your child should get a grasp of basic finance concepts, like money management and debt reduction.

Or, If You Decide Not to Help out

If you decide not to help out, explain why. For example, “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.” Even if you don’t loan them money, you can still be there for guidance and support. Point them in the direction of good financial resources that can help them out of the situation.