Credit counselors advise parents, children to seek budget help
By Connie Prater
It's not just big banks that are getting bailouts these days. Two out of five people with adult children say they have paid off debts for their offspring -- most notably, car loans and medical bills, according to a new CreditCards.com scientific poll. 
The survey follows up on a similar poll conducted in late August 2009 that measured intentions, not acts. It found men were more willing than women to pay off large debts for their children -- with or without an expectation of ever being repaid. The latest poll took the issue out of the hypothetical realm and asked if anyone had ever actually repaid their children's debts. The survey finds that 42 percent of people with adult children said they have paid off a debt for their children at some point.
The poll bears witness to what credit counselors say they're seeing more and more in debt management sessions as an increasing number of their clients are parents drowning in -- their children's debt.
"We have a lot of parents who call us and say, 'Hey my kids are in trouble. What do I do?'" says Michael McAuliffe, president of Family Credit Management, a Chicago nonprofit credit counseling agency.
Look to the economy, record job losses and home foreclosures for reasons why children are tapping their parents for money. McAuliffe cites another potential reason: "It used to be that kids would be embarrassed to ask for help. Not anymore."
Giving a hand or a handout
The stigma has been reduced, he says, perhaps by a generation used to having their parents take care of virtually everything for them and a culture where financial failure is becoming more commonplace. "Thirty years ago, to file bankruptcy, that would be considered a terrible thing," McAuliffe says. "But the stigma has been reduced. More are asking for help."
The poll was conducted Nov. 20-22, 2009, by GfK Roper, which surveyed 1,004 adults 18 or older, via random digit telephone dialing. The poll was commissioned by CreditCards.com. The margin of error for the full sample is +/- 3 percentage points. (See poll methodology.)
About 45 percent of the respondents had children over the age of 18. They were asked if they had ever paid off a debt for an adult child and, if so, what kind of debts they had paid off.
The most commonly repaid debts were:
- Auto loans (40 percent).
- Medical debt (37 percent).
- Utilities (31 percent).
- Credit cards (30 percent).
- Student loans (29 percent).
- Mortgage (11 percent)
- Other transportation-related bills, such as car repair, gas or tickets (5 percent).
- Personal loans (4 percent).
- Other kinds of loans (6 percent).
Respondents were also offered "gambling" debt as a choice; no one said they paid off a son or daughter's gambling bill.
Women were slightly more likely to pay off their adult child's credit card debts than men (33 percent versus 26 percent). Parents from the Northeast were least likely to say they paid off a child's debt (34 percent), while people living in the Midwest were more likely to do so (52 percent).
What's a parent to do?
McAuliffe says parents should not be guided by guilt or feelings of obligation when hit up for loans or to pay off debts.
| A PARENT'S GUIDE TO PAYING OFF CHILDREN'S DEBTS: |
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Parents are advised not to pay off their children's debts if they don't have sound retirement plans in place for themselves.
"If you don't have your retirement on track, then to me, that's the end of the discussion," he says. "What are the cold, hard facts? Retirement pensions aren't there like they used to be. Social Security is not going to provide the same kind of income that previous generations had. There's not going to be anyone there to help you. No matter what, you cannot afford to help your children."
Throwing good money after bad
The old saying about not throwing good money after bad money definitely applies to these situations, McAuliffe says. Just paying one month's mortgage for a struggling child is short-sighted and won't likely solve the problem if lack of income is the cause. If parents do decide to pay off their children's debts, they should do so with a big-picture plan in mind.
Key questions to ask their children: "Is the house up for sale? Is there equity in it? Is work down to part-time? Are you looking for employment and are you going to be able to get it in a reasonable time frame?" McAuliffe says.
Another key question: Is this a gift or a loan? The August 2009 CreditCards.com poll found people with children were more willing to pay off debts of $1,000 or more if they expected to be repaid than if they were giving the money with no strings attached.
If lending the money, McAuliffe suggests parents consider using social lending Web sites such as Prosper.com, which allow users to borrow money from friends, relatives or strangers and repay it over time. The advantage for parents is they aren't calling an adult child asking about a late payment -- another potentially awkward family moment.
| If you're paying off the credit card, make sure that they are closing those credit cards and cutting them up. |
| -- Michael McAuliffe Family credit counselor |
Changing habits
Adult children facing hard times should be prepared to make sacrifices. "If I'm loaning a significant amount of money and my kid is paying off their debt, if they are still going out to eat regularly, if they are still paying money for cable TV and multiple cell phones, that needs to be looked at."
McAuliffe acknowledges that parents may be reluctant to tell their children to rein in their spending. "That's hard for a parent to say, but you can say, 'Hey, I want you to go talk to a credit counselor and have them evaluate your budget.' If you're paying off the credit card, make sure that they are closing those credit cards and cutting them up," he says.
To adult children, McAuliffe advises: "If you're borrowing money from your parents, make sure that you've made sacrifices yourself. Too often they are still going out to eat, still having their cable TV and still not modifying their spending habits at all."
Cash alternatives
Instead of paying off debts, parents can offer to help their children in other ways.
"Maybe babysit for them or do other nonfinancial assistance," McAuliffe says. "If they can't afford their home and you can't afford to make their mortgage payment for them, let them move in with you. There are nonfinancial kinds of assistance that you can provide that can help them financially."
A new study released by the Pew Research Center found 13 percent of parents with adult children report at least one son or daughter has moved back home in the past year. One in 10 18- to 34-year-olds in the Pew poll say the bad economy forced them to do so. Social scientists have coined a new name for these return-to-nesters: "boomerangers."
Parents who pay off their children's debt should be aware of the message they are sending and children should know this, McAuliffe says:
"If you get into a jam, there's not always going to be someone there to bail you out."
Poll methodology:
The survey was conducted from Nov. 20-22, 2009, by GfK Roper Public Affairs & Media on behalf of CreditCards.com. Random digit dialing phone interviews were completed with 1,004 adults, all 18 years of age or older. The raw data were then weighted by a custom designed computer program that automatically developed a weighting factor for each respondent, employing five variables: age, sex, education, race and geographic region. The margin of error was plus or minus 3 percentage points for the full sample.
