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Pros & Cons of Paying Off Your Adult Child’s Debt & Loans

By Valencia Higuera

debtIt doesn’t matter whether your kids are school-aged or fully grown adults – if they’re in trouble, you’ve got their backs. However, if your children have made poor financial choices and need help paying off massive debts, you may question whether you should step in and help.

Although it’s not necessarily your responsibility to fix your kids’ financial messes, you realize the impact that debt can have on their future. Too much of it can lower their credit scores, limit their ability to get a home mortgage or auto loan, and may even impact their employment prospects. Writing a check and clearing your children’s debts can certainly lift a heavy burden, but it may not be the best move. There are both pros and cons of taking this action, so it is best to take your time, weigh both options, and come to a decision that you feel will be best for you and your child’s unique situation.

Advantages of Paying Off Your Children’s Debt

1. Give Your Children a Fresh Start

Many young adults get their first credit card while in college. This provides an opportunity for them to establish a credit history at an early age. However, the responsibility of managing a credit card can be too much for some students. Between poor budgeting and overspending, some end up with maxed out accounts.

Paying off such a debt can give your children a fresh start. However, along with financial help, they need to be educated on the right and wrong ways to manage credit and money – or else they may find themselves in the same situation all over again.

Here’s how you can help give your kids a clean slate:

  • Review Monthly Expenses and Income. There are several budgeting apps available, such as Mint and MoneyWise, that may prove to be very helpful. Or, if you prefer, you can teach your kids how to create a personal budget the old-fashioned way: with a pen and notepad. They need to list and calculate all their fixed monthly expenditures (such as transportation, housing, and utilities), and then subtract this total from their net income. “Budgeting” might sound like an ugly word because it implies frugality and financial limitations, but it can help your kids see exactly where their money goes each month, and help them assess whether they’re living within their means.
  • Trim Monthly Expenses. Your children are on the right track if their monthly expenses are lower than their monthly income. However, if they’re spending more than they’re bringing in, work with them to trim costs. For example, you may suggest taking public transportation to reduce fuel costs, clipping coupons to save money on groceries, cooking meals at home, shopping at secondhand stores, or finding a cheaper place to live.
  • Create a Monthly Spending Plan. Help your children create a spending plan for each month. This establishes how much they can spend in specific areas based on their disposable income, which are any funds remaining after they pay their bills. For example, based on your children’s income, they may only be able to spend $50 per month on recreation and $150 per month on food. Suggest the envelope budgeting system to help your kids stay on budget. Have envelopes for various spending categories – entertainment, grocery shopping, gas – and store a specific amount of cash in each one on a weekly or monthly basis. For each category, only spend what’s inside the envelope and nothing more.
  • Provide Credit Knowledge. Credit cards are useful, if used responsibly. After paying off the debt, sit down with your children and discuss good credit habits. If you don’t know much about credit yourself, go online and research the topic. Encourage your kids to only charge what they can afford and to pay off balances in full each month to avoid debt and interest charges. Make sure they understand the importance of timely payments, and suggest paying credit card bills as soon as they arrive in the mail, or creating a reminder on their cellphone or computer. Also, encourage them to obtain a free credit report at least once per year.

2. Protect Your Personal Credit Score

To help your children establish a credit history, you may have cosigned a loan or credit card. This was a nice gesture; however, cosigning has its risks. Although you’re not the primary account holder, any activity associated with this account shows on your credit reports, including late payments and balances. Additionally, you’re responsible for this debt if your children don’t pay.

Cosigning works if the primary account holder makes each and every payment. However, if a payment is skipped (or they’re stopped altogether), it could appear on your credit file. This negative activity can remain on your credit for up to seven years and reduce your score. And, since you’re liable for this debt, the creditor will contact you for payment.

If you cosigned a loan but your child can no longer afford the payments, repaying this debt is the only way to protect your score and avoid problems with creditors, such as judgments, collection accounts, and lawsuits. However, don’t just pay the debt and move on. Think of it as a loan, and only help if your child agrees to repay the money:

  • Establish Payment Arrangements. Determine how much your child can repay, whether it’s the entire amount or only a portion. Next, decide how long to spread out the payments – perhaps 12, 24, or 36 months, based on what’s feasible. If you choose to charge interest, decide how much. You can charge a rate comparable to many bank loans, or slightly lower. Use an online loan calculator to compute monthly payments based on the amount, term, and interest rate.
  • Get the Agreement in Writing. A formal written agreement between you and your children highlighting all of the aforementioned terms can alleviate any wrong ideas. For example, you may pay off a debt under the assumption that your children will repay the money, but they may view your gesture as a gift. This potential misunderstanding can be easily avoided by putting your expectations in writing. After your kids read the agreement, you both need to sign the contract and retain copies for your individual records.

3. Help Your Children’s Credit Score

Since the amount owed to creditors makes up 30% of credit scores, too much debt can lower your children’s score significantly. A low credit score makes it harder for them to get a mortgage, auto loan, and other types of financing. Additionally, a low rating may result in higher insurance premiums. However, if you pay off all or some of the debt, this reduces how much they owe, which helps increase their credit score.

4. Protect Your Relationship With Your Children

It’s not your obligation to pay off your children’s debts. However, refusing to help can potentially strain your relationship, especially if they feel hurt or abandoned.

On the other hand, offering assistance demonstrates your support. Even if you’re financially unable to write a check, you can provide reassurance and perhaps work with your kids to create a debt strategy.


Disadvantages of Paying Off the Debt

1. They Don’t Have to Accept Responsibility

Paying off your children’s debts can potentially stop collection calls and prevent credit damage. However, unless you require your kids to pay the money back, they don’t accept full responsibility for their actions, nor do they experience the full consequences of their poor choices. Understandably, you want to shield your children from these consequences – but if they’re not accountable for their bad decisions, or required to deal with the repercussions, they may repeat past mistakes.

By dealing with debt themselves, your children are forced to put on their “problem-solving” hats and come up with a realistic debt elimination strategy. This may involve doing research online or speaking with a credit or debt counselor. If you choose not to pay their debt, your kids may learn useful techniques, such as budgeting, reducing expenditures, negotiating a lower interest rate, and transferring balances. Additionally, stepping back can teach your children financial patience. In other words, they can learn that every money-related goal takes time, and they can’t always run to mom and dad for help.

2. It Can Compromise Your Finances

In your crusade to protect your children’s finances, you could end up damaging your own. Taking money out of your personal savings account or emergency fund might significantly reduce your cushion, which can make it harder to get through your own financial hardships that may arise in the future, such as a sudden job loss, a major home repair, or an illness.

If you have a 401k, an IRA, or another retirement savings account, you might be thinking about making an early withdrawal to help pay off the debt. Under no circumstances should you take money out of these accounts – taxes and penalties are applied to early withdrawals. Plus, you reduce your growth potential, which can impact your financial security after retiring.

Helping your children pay off a debt can also take money out of your household each month. This may not be a big issue if you have a good amount of disposable income. However, if you’re barely making ends meet, you might have trouble paying your own bills (mortgage, utilities, credit cards, and loans). This can result in late payments and a damaged credit score, and even possible resentment toward your children or other relationship issues.

3. It Can Trigger Problems With Your Spouse

Don’t agree to pay your children’s debt without first discussing it with your spouse. The two of you may have different opinions regarding the best way to handle the situation. You may be eager and ready to help, yet your spouse may feel that it’s your kids’ sole responsibility to deal with balances.

To maintain the peace, it’s important that you’re both on the same page. Consider the aforementioned pros and cons, and then decide on the right move. And whatever you do, be honest and don’t let the debt divide your relationship. If you go behind your spouse’s back and make a decision on your own, it can create tension in your household.

Final Word

In the end, only you can decide whether to pay off your children’s debt. If they are remorseful and fully comprehend the seriousness of the situation, or if circumstances beyond their control played a role in accumulating the balances, such as a job loss, illness, or divorce, then lending a hand can help get their finances back on track. However, if your children have a pattern of irresponsible behavior, or don’t show any regret over this experience, it’s probably best to step aside and let them figure it out on their own.

Do you think parents should help pay their children’s debt?

Valencia Higuera

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  • super

    My parents gave me and all of my siblings early inheritance, which I used to pay down some of my student loan debts. That was really helpful, as part of a larger debt reduction strategy. I worked really hard at getting the rest of my debt paid off, and I’m currently living debt free, and proud of myself.

    I would probably not have appreciated them giving me the kind of step by step adviced in this article, even though they were many of the techniques that I found in personal finance blogs, and followed. I think it’s a very tricky situation to negotiate money between parents and adult children. it would have felt patronizing for them to tell me those things, and to be standing over my shoulder. I would have walked and not taken their money.

    that said, are plenty of people food simply do not have those tools, or who have trouble buckling down and being responsible on finances. Many of those of us to read these personal finance plugs used to be in that category. So one option might be that you as a parent offer to pay for something like Dave Ramsey’s financial peace university course, and then offer the bigger money once they hit a certain goal. that way there invest in the process, and along the way and some good skills that should make it less likely for them to need help in the future… teaching your kids how to fish, basically.

  • 2-copper-coins.com

    My parents were up front with me that they wouldn’t pay back my student loans, and it taught me responsibility. We plan on helping our future kids as much as we can with college, but if they need to take on student loans they will be fully in their name and their responsibility. Taking care of other’s financial responsibilities doesn’t teach them that you have to get out of the situations you create. Consequences are one of our greatest teachers.

  • michael r lewis

    I’m old school and believe I raised each of my four children to be mature adults who understand responsibility. As a parent, my pocket book is always open to my kids or my grandkids when I can help make life easier. After all, that is what I worked all of those years to be able to provide. I understand your point and it is well taken, but I suspect the decision as which approach (get help or do it on your own) depends upon the particular people involved. Good article.

  • Smath56

    My daughter was taking an online school course and doing very well. Her computer tore up and she had to withdraw because she couldn’t afford another computer right away. Now she owes for a school loan that she didn’t get to take advantage of. I tried to tell her to start making payments on the loan right away, even if it was just a little every month, but she did not do that. She said she couldn’t afford too. So now her credit has gone awry. Now she has more to pay than to start with and truly cannot afford it. I am thinking about making payments on it for her, but I know she will probably not be able to pay me back. If she sets payments up, she can go back to school and continue to better herself for a better career and future, but if payments don’t get set up, she can’t think about continuing on any career. She drives a school bus and delivers pizza at night, this is not something she needs to be working at, she is way too smart for something so drudging. She needs to be thinking about how she is going to pay for any future by herself and she doesn’t. She is walking through life right now, living by the day and God knows, you cannot survive or get ahead in such a way. I know, I am living proof of that, and I want only better for her than to struggle daily just to hang on by the skin of her teeth. She is such a wonderful person and has always been a model child and still is, and I quite frankly have no desire to see her struggle that way, she deserves only the best life has to offer and no less. So, I really don’t care if she pays me back or not, if it helps her get ahead where she needs to be right now, that would be wonderful.

  • I Love My Husband

    Our son had a large student loan and some credit card debt that accumulated while he was in college even though he managed to work part time (He went to a different province for school). After finishing school and moving back, we painfully watched our son struggle for two years with anxiety, many sleepless nights and an overall loss of joy. My heart was just breaking for him. One morning I asked him, “What would it take for you start feeling better?” He said, “It will happen the day I make my last loan payment. I will never get myself in debt again.” I wanted so desperately to put an end to his suffering, so I spoke with my husband that night and he agreed, saying that he had also been thinking about it. Our son never wanted or asked for our help with this so we knew it would be hard for him to accept. Sure enough, he was reluctant when we first mentioned it, but we insisted. We told him it was a gift; no payback plan, no strings attached, he would be completely debt free. A couple of days later, his dad went to the bank with him and paid everything off. To watch our son’s countenance improve daily over the following months was a joy for us to see. A huge weight had been lifted off of all three of us. Our son moved into his own place two months later. It’s been 15 months now and he is still debt free and living comfortably on his own. In this situation, it was the right thing to do. We have no regrets.

