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| The Basics | Should parents bail out their adult kids?
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Some people see no harm in a financial rescue, but experts see a minefield of complications. Here's how to handle requests from your offspring.
By Liz Pulliam Weston
A funny thing happened on the way to writing a column about how awful it is when parents bail out their adult children financially.
I found a plethora of money experts, financial planners and therapists who roundly condemned "economic outpatient care," as the practice was dubbed by "The Millionaire Next Door" authors Thomas J. Stanley and William D. Danko.
These authorities gave me terrific quotes about how handouts hurt parents and kids alike -- and then many proceeded to tell me how they'd handled the loans, or gifts, or matching funds when their own adult children needed financial help.
I don't think the experts are being hypocritical -- not at all. They reflect the challenges of parenting in the 21st century, where the children of the relatively affluent baby boom generation face more economic uncertainty, bigger debt loads and more financial temptations than their parents did.
Most boom-era parents had the economic winds at their back. They graduated into a decent job market and enjoyed strong appreciation of their homes and (for the most part) stock portfolios.
Today's graduates, by contrast, are a bit more behind the eight ball:- The economy is far from robust, meaning more 20-somethings are unemployed or underemployed.
- Instead of getting free money in the form of grants to pay for college, they're taking out student loans -- an average of about $20,000 at last count, an amount that's nearly doubled since the mid-1990s.
- And then there's the Demon Credit Card -- pushed on college campuses today with a vigor that was unheard of a generation ago, when few college kids had plastic. The median credit card debt for undergraduates has risen by 32% since 1998, to $3,730, according to a Nellie Mae study; for graduate students, the amount owed has risen 59%, to $7,831.
Graduating back home
Erik Stout, a 24-year-old mortgage loan officer, lives at his parents' Horsham, Penn., home while trying to pay off $10,000 in credit card debt and $28,000 in student loans accumulated during college. Many of his friends who got apartments after school, he says, have also boomeranged back home.
"After about eight months of living on their own," Stout said, "they are moving back with their parents because it is just too hard to pay all of their bills."
The exception? One friend who was able to convince his parents to take out an equity line of credit against their home to pay off his student loans and credit cards. The friend then bought a house to live in.
"He helps to pay off the line of credit, but it was a big financial burden lifted off his shoulders," Stout said. "He is my only friend that has since moved into his own house after graduation."
As Stout has discovered, those who graduate deep in debt often find it difficult to save for other goals, such as home down payments and retirement, further delaying their entry into fiscal adulthood. Sometimes they wind up with trashed credit or worse; people in the 25-to-34 age bracket were the second-fastest growing group of bankrupts in the 1990s.
Helping can backfire
But the line between helping and enabling is a fine one, indeed. One bailout can lead to another, as children become dependent on their parents instead of economically self-sufficient.
"If you look at the research as noted in the book 'The Millionaire Next Door,' parents who feel compelled to financially support their children do more harm than good," contends psychologist Gary Buffone, author of "Choking on the Silver Spoon: Keeping Your Kids Healthy, Wealthy and Wise in a Land of Plenty" (2003, Simplon Press). "Typically, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more."
A financial rescue can have emotional repercussions as well -- for the whole family.
"(Parents) have to ask themselves, 'Is giving money healthy for our relationship?'" said Los Angles psychologist Eileen Gallo, co-author of the forthcoming book "The Financially Intelligent Parent: 8 Steps to Raising Successful, Generous, Responsible Kids" (June 2005, New American Library). "When adult children take money, they can feel dependent, and those feelings of dependency can cause resentment."
Parents can feel resentful, too, about being constantly hit up for cash. But sometimes they keep stepping in as a way to keep the apron strings firmly tied.
"Parents may feel the need to keep (the kids) close to home," said Elaine Cole, a therapist in Sherman Oaks, Calif. "It can be about power, control, loneliness. . . . (Parents) may defend against that with dollars."
The psychological dynamics get even more complex if some adult kids are getting help while others aren't. Financial planner Victoria Collins of Irvine, Calif., advised one wealthy family whose two self-sufficient sons deeply resented the tens of thousands of dollars given to their divorced, underemployed sister.
The brothers felt they were being punished for being economically responsible, since they weren't getting cash from their folks. "And they worried about the (subsidy's) effect on their future inheritance," added Collins, co-author of "Best Intentions: Ensuring Your Estate Plan Delivers Both Wealth and Wisdom" (2002, Dearborn Trade).
So how is a parent today expected to navigate these treacherous waters and figure out when to step in and when to hold back?
The answers are as individual as families, but here are some thoughts to guide you:
Get real
Parents need to take a clear-eyed look at their emotional as well as financial situation. If the hand-outs are jeopardizing the parents' finances, their marriage or their relationships with their kids, something definitely needs to change.
A good look at the kids' financial situations wouldn't hurt, either. Some kids are simply unwilling to accept that they need to take a step down on the economic ladder when they leave home.
"They're imitating the parents' lifestyle," Gallo said, "even though they're no longer living there."
Take your time
You usually don't have to respond to a request for help right away, Gallo said, and you probably shouldn't. Knee-jerk reactions can obligate you to a course of action you might later regret, while planning your response can give you an invaluable opportunity to teach your progeny something about handling money.
"Take a day or a week," she said, "and think about what you want to do."
Analyze the request
Will the money help your child eventually become more self-sufficient? Or will it just lead to more requests for help?
Many parents are happy to help with a home down payment, for example, because home ownership can help build wealth over time. Buffone and his wife gave each of their children a lump sum for that purpose; other parents provide "matching funds," promising an amount equal to whatever the child saves.
And most wouldn't have a problem stepping in during a true emergency, such as if a child or grandchild needed medical care.
But what your kid thinks of as an emergency may just be the result of bad decisions and lack of planning -- behavior that will only continue if you keep supporting it.
"Sometimes you have to step back, hold your breath . . . and let what happens, happens," Cole said. "If he's financially responsible, the kid will come through."
And if he's not, he may learn a valuable lesson.
Formulate a plan
If you're going to help a child pay off debt, as Collins did with one of her children, a formal agreement with a stated interest rate and repayment schedule is a smart choice. Insisting the child stick with the payments is another.
If financial weaning is necessary, consider ways you can help your child be more self-sufficient.
The wealthy family Collins advised, for example, decided to gradually reduce the amount of money the daughter was getting while paying for some courses so she could update her job skills.
Communicate the plan
You should have learned this when your kids were still toddlers: Clear expectations and definite limits can forestall a lot of whining.
Adult children need to know when help won't be forthcoming, when it will and how long the economic outpatient care will continue.
One of Gallo's acquaintances, for example, agreed to help his recently graduated son out of $6,000 in credit card debt -- but only by paying half, and only on the understanding that this was a one-time-only event.
"He said, don't ever ask me again," Gallo said. "Today the son is in his 30s and financially responsible."
Stephen Stoltz got a similar edict from his folks. The Lubbock, Texas, college student agreed to destroy his credit cards in exchange for his parents paying his $3,500 balance, and he understands that all financial aid will end when he graduates.
"They were understandably in shock that I had any debt," Stoltz said, "much less that amount."
And, finally:
Stick to your guns
Psychologists will tell you that any time you change a behavior, members of your family may try to get you to revert to your old ways so that the comfortable status quo can be preserved. You can imagine how much more emphatic yours kids' efforts may be if the change means they wind up with less money.
They might not appreciate it now, but remember that your efforts to make them financially self-sufficient could ultimate result in happier, less resentful and more empowered kids.
Saying no "is the hardest thing to do -- it's a loss for both parent and child," Cole said. But the alternative can be grim.
"I see in my patients so many parents," she said, "who just love the life right out of their kids."
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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