How Parents Can Help Their Financially Challenged Kids
It's surprising how much money parents are giving to their adult children and how long they do it. According to a recent University of Michigan survey, 41% provide financial support to their 23-28 year-olds. The average amount given is an astonishing 10 percent of their income!
It's natural for parents to want to extend help and support to their children, especially when they are struggling. But sometimes providing this help can do more harm than good. Here are a few rules for what works.
Can you afford to help: First things first. If you have credit card debt and are making small/minimum payments, are not saving enough for your own retirement, etc, then you cannot afford to give money to your kid. If you are drowning in your own financial storm, then throwing some financial support to your kid will assure one thing: you both will drown together.
Offer to Boomerang: Instead, parents can offer to have their adult child move back in, thus providing a low cost living arrangement for their boomerang kid and a once-in-a-lifetime opportunity to improve their financial situation and get a fresh start. If you offer to do this, the first thing to realize is that your adult child is no longer, well....a child. Instead he should be considered a household companion who can contribute and help run the household.
Setting rules for charging rent, contributing to household duties, curfews, etc. can also help to set the boundaries and give the parents and their boomerang kid a sense of what is in and out of bounds.
Cover Health Insurance: By Sept 23rd, all employer provided health insurance policies will be required to allow a parents child to stay covered on the parents' existing health insurance, up to their 26th birthday. Check with your provider. Some will not be activating this change until January. This is an especially good option if your kid has pre-existing health conditions. But don't assume that staying on a parent's plan is always the better option. For example, for a healthy 20-something adult, you can buy an individual health policy for about $150 per month, which may be less than paying extra to remain on a parents' existing policy. Check out sites like this for a low-cost policy.
Resist financial bailouts: Resist the urge to pay off your kid's credit card debt and student loans. Instead, urge them to make their payments more affordable by consolidating their student loans or using the Income-Based Repayment option, (a new option available last year) where the payment is capped at 15% of discretionary income. They can also opt to stretch out payments over 12 to 25 years to make payments more affordable.
Never co-sign for credit cards: Under the new credit-card rules, those under age 21 cannot get a credit card unless they have sufficient income or their parents co-sign for it. Parents should never co-sign for their kids cards. Doing this puts their own credit on the line. Parents who want to monitor their kid's use of a credit card can set it up so that they are designated to receive duplicate statements and have on-line access to view the account activity. Also, help your kid create a debt pay-down plan and establish savings goals.
