Getting Your Grad Out Of The Nest

Experts agree that the class of '05 faces much better job prospects than last year's graduates. However, a survey by Monstertrak found that 60 percent of this year's class would be moving in with Mom and Dad. Most students cite student loan and credit card debt as the main reason for moving home.

Take a look at this "financial snapshot" of the average college grad:

Student loan debt: $26,089
Credit card debt: $2,864
(Source: Nellie Mae)

Consider that the average grad will earn about $30,000 in their first job. Think about how much is left over after taxes and monthly debt payments. That doesn't leave a lot to cover rent, car payments, insurance, and basic cost-of-living items. This may make it a little easier to understand why some grads can't make ends meet without help from Mom and Dad.

But can parents' financial support actually hurt more than it helps? As a matter of fact, it can. You need to help give kids an incentive to leave, and doing their laundry, cooking dinner and covering all major costs is not going to do it. Case in point: about 45 percent of last year's grads are still living at home.

The key is for parents to use this transition time to help kids become financially responsible and financially independent. Vera Gibbons, a special correspondent for Kiplinger's Personal Finance magazine, shared some down-to-earth suggestions on The Early Show.
Give Gifts Wisely: Starting with the graduation gift, parents can help teach kids financial sense and management. Instead of giving cash, consider giving your child shares of appreciated stock. You get the tax advantage of not having to pay a capital gains tax, and your child learns a little about investing. Savings bonds are another good option.

Hire Your Grad Yourself: If your grad does not have a job, expect it to take at least seven to eight months for him or her to find one. In the meantime, living completely off of Mom and Dad is clearly out of the question. This does not teach your child any valuable lesson, and may spark some resentment on your part. If you own a family business, put your grad to work. This benefits you both: your child gets a salary, and you can deduct their salary from your taxes.

If you don't have a family business, help your grad by tapping into your own network of friends and business associates. If nothing else, consider paying your grad to do jobs you typically hire others to do, such as mowing the lawn, cleaning the house, etc.

Jump-Start Retirement Savings: You will do your children a big favor if you help them learn the value of saving for retirement. Gibbons has two suggestions:

First, if your child does have a job, encourage him to contribute to the company 401(k) plan. Many young employees don't feel they can afford to save for retirement. Only about 9 percent of 21- to 24-year-olds participate in company plans. (source: Employee Benefits Research Institute) But if you offer to match their savings dollar-for-dollar, or match half of their savings, etc., they will be more likely to save.

If your grad doesn't have a job or has a job that doesn't offer a 401(k) plan, open an IRA for your child and make an initial contribution. You can be sure that this is something your child won't do himself; less than 3 percent of 21- to 24-year-olds have an IRA. Be sure to share the beauty of compound interest with your child. Show how your initial contribution will grow over the years.

Help Tackle Credit Card Debt: This is a big one. Lots of parents do end up paying off a child's credit card debt because they don't like to see their child struggle, particularly if the card carries a high interest rate (which most do). But this isn't a great strategy.

Gibbons compares it to putting gas on a fire, because it simply enables kids to continue spending. Instead, loan your child the money to pay off the debt (or part of the debt) at a low-interest rate. That way, they are still making regular payments out of their own pockets, but aren't throwing away precious dollars on interest.

Some parents like to give their grads money to help with a car or house downpayment. However, Gibbons believes that putting that cash toward credit card debt is the way to go, because all of that debt looks bad on a credit report. If you don't have good credit, you can't get a good deal on a car or a house, even if you have some money for a downpayment.Finally, Gibbons reminds parents who have adult kids at home that they need to take a few steps to protect themselves. Helping your child while hurting your own financial situation is unwise.

Insist on Insurance Coverage: Most grads will no longer be covered under their parents' insurance policies. The rules vary, depending on the policy, so make sure you check this out. Your child may be tempted to skip insurance, figuring he or she's perfectly healthy and will eventually receive insurance through an employer. This is a big mistake. If your non-insured grad would need medical attention, guess who would probably wind up footing the bill? That's right - you!

Many people are familiar with COBRA coverage, which allows students to temporarily remain on Mom and Dad's policy. However, this costs big bucks and is probably not your child's best option. Instead, consider either a short-term policy, which typically only covers major emergencies, or an individual policy with a high deductible. Both options will protect parents' pocketbooks while offering grads relatively cheap monthly payments, as little as $40 to $60.

Don't Neglect Your Savings: Financial planners seem to agree that too many parents delay their own retirement savings to help their kids. Remember: As much as you want to help, it's not worth risking your own financial security. Your child has years to improve their financial situation, while retirement might be staring you in the face.

Stamp Out Bad Habits: Unfortunately, studies show that many grads have poor financial IQs. If you haven't done so yet, this is your opportunity to help your child understand how to create a budget, the importance of an emergency fund, the evils of credit card debt and more. Make sure your grad knows that you will not always be there to bail him out in a pinch. Don't be co-signing on loans or more credit cards. Set a good financial example so your child can be self-sufficient. You'll be doing both of you a favor.