Should You Pay an Adult Child's Debt?
Will helping them pay off their debt cause more harm than good?
After the economic crisis, young adults are increasingly having trouble living on their own. More adults age 25 to 35 are living with their parents, often because living alone on a single income is impossible. Your child may be struggling so much that they ask for more than their old bedroom; they may ask for help paying off their debts. Or, if you see them struggling financially, you may consider volunteering your help. Either way, don’t make any hasty decisions. Take some time to think about it, discuss it with your spouse, and then give your answer.
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?
Look over your own finances first. Are you in debt yourself? Can you comfortably afford to pay off the debt? Will you have to postpone retirement because you’re paying off your kid’s debt? Or what if your money is so tight that you simply can’t afford to put food on your own table? What if you have to go into debt so you can help your child pay off the debt they created? Don’t pay off their debt to your own detriment.
Will it Make You Owe More Taxes?
Consider any tax implications of paying your child’s debt, if you’re planning to pay more than $13,000 this year as a gift to them. The IRS website has details on the gift tax and your tax planner or accountant can explain the potential impact to your income taxes.
Are You Co-Signed on the Debt in Question?
If your child is struggling to pay a loan or credit card you cosigned, 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 since the banks are forbidden from collecting from your child.
Beware Unintended Consequences
Pay your child’s debt and they could start thinking of you as their safety net. They may not practice good financial habits knowing you’ll be there to bail them out if they mess up. Make it known that you’re helping them out just one time and stand your ground if your child comes back to you for help.
Reducing your child’s credit card balance also opens up their available credit, enabling 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.
If your child asks for financial help, you become their lender and you should treat the relationship similar to a 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. 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. You pay half the debt if they’ll pay the other half. You can make a lump sum payment or match their payments each month, similar an employer 401(k) match. You could also require them to get financial help from a credit or another personal finance professional as a condition of you helping out. At the 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.