Helping Your Adult Child with Debt – Without Compromising Your Own Finances
Young adults are drowning in debt – and often times, their parents are getting pulled in with them.
The average 25- to 29-year-old carries more than $35,000 in debt, according to PNC Financial Services. And while the student debt crisis has been highly publicized as of late, it’s not the only source of overwhelming debt. In fact, only about 40 percent of 20-somethings say their debts include college loans.
In a recent survey, just shy of 80 percent of millennials reported feeling overwhelmed financially.
Increasingly, mom and dad are getting overwhelmed, too. Well-meaning parents may offer up cash, open joint credit card accounts or shoulder the burden of student loans in order to help their kids – risking their own retirement and credit scores in the process.
But bailing out a child without resolving the cause of debt rarely works. Parents are better off sticking to offerings of advice, not cash. Here are some tips for helping young adults dig their way out of debt.
Rather than give money, help your kids discover how to save money. Offer to review your child’s expenses in order to identify cash that can go toward paying down debt. If your son or daughter isn’t receptive to the idea of sharing personal financial details, encourage them to use an online budgeting tool or offer to pay for a professional financial adviser.
Dealing with Student Debt
Bankruptcy isn’t an option for getting out of education debt, so it’s important that young adults keep up with student loan payments. If repayment is simply unmanageable, encourage your child to explore income-based repayment plans for federal loans, which are capped at 10-15 percent of discretionary income. If your kid works for the government, she may qualify for tax-free loan forgiveness after 10 years. But even graduates with private student debt may be able to find relief with a lower-rate refinance or consolidation loan through another lender or a credit union. And of course, reviewing their budget periodically is the simplest way to identify places where unnecessary spending can be allocated toward debt.
Young adults often struggle with credit because their limited credit histories and low credit scores lead to high interest rates. But because 20-somethings often have inflexible expenses such as student loans, they may feel forced to continue relying on credit for everyday purchases. Let your child know that he can call up his creditor and ask for a lower rate. If the creditor won’t work with your kid, it may be worth it for them to find a card with a lower rate, and transfer the higher-rate balance.
If credit card debt is really out of control, however, other measures may be necessary. Depending on your son or daughter’s financial situation, bankruptcy may be a way to wipe out unsecured debts such as credit card debt for a fresh financial start. Because young adults often don’t have much credit to begin with, bankruptcy can actually allow them to begin building their score by eliminating obstacles such as maxed-out credit limits and late payments.
If your child just can’t get debt under control – or if you’ve lost control of your own finances helping your child – bankruptcy can be a solution in some cases. Consider speaking with an experienced bankruptcy attorney to determine your best strategy for breaking free from overwhelming debt.
Help Your Kid Dig Out of Debt, by Kerry Hannon, CNN Money