Posted: 11/09/2009
Read Published Article in USAA

It's normal for kids to borrow money from Mom and Dad when they're in a pinch. And for most parents, it's hard to just say no, even after they've left the nest.

Just ask Dad. A recent poll from CreditCards.com, an online educator and credit card comparison site, suggests that fathers are more likely to help their children repay large debts than mothers. The survey, conducted by GfK Roper Public Affairs & Media of 1,004 people over the age of 18, found that 21% of men said they would give their adult children more than $20,000 to pay off debts. Only 12% of mothers said they would shell out that kind of cash.

Why is mom the tough one?

One possible explanation: According to the most recent data by the U.S. Census Bureau, in 83% of married couples, the husband earns more than the wife. The upshot: Fathers tend to wield more financial power and discretion over sizeable cash handouts.

When kids asked for less than $1,000, mothers were more likely to offer help. And between $1,000 and $5,000, the willingness to pay was about equal — roughly one in four parents said they would pony up rescue funds, even knowing they would never be repaid.

Not all debts are created equal.

A majority of parents surveyed say they would never repay a gambling debt (66% of mothers, 61% of fathers); about one in four say they would not help repay a credit card debt (29% of mothers, nearly 26% of fathers). "Those debts smack of irresponsibility in a child," says CreditCards.com spokesman Ben Woolsey. More palatable to pay: medical bills, student loans, mortgage or rent payments and auto loans.

Bailing a grown child out is thorny. You don't want your kid to have the car he needs to get to work repossessed, or for the home he lives in to go into foreclosure. Yet, doling out cash to one child can cause strains with siblings. And depending on how much is needed, you might end up threatening your own retirement savings and long-term financial security.

Nonetheless, it's hard to ignore a sense of accountability for your child's well-being, regardless of age. A new survey of 553 parents by the Consumer Federation of America showed that the lion's share of parents polled said they felt very responsible for teaching their children how to manage money, credit and debt. But little more than half are confident their kids are prepared when they leave home, according to Steven Brobeck, CFA executive director.

6 Ways to Get Them Back on Track

When you combine a tough economy with a lack of financial readiness and sometimes, just bad luck, many young adults are struggling. Here are some strategies to help your kids get creditors off their back and teach them about smart money management.

1. Help with necessary debts first. Top priority: a mortgage or car payment, followed by high-interest credit card debt. Bottom of the list: low-interest, tax-deductible student loans. Servicers are usually willing to extend the repayment period and reduce the monthly payment.

2. Attach strings. If the debt trouble was a result of living beyond his or her means, it's time for tough love, says USAA financial planner Joseph Montanaro. The objective is to help them gain self-reliance, not to encourage greater dependence and cause more troubles later on.

You want them to learn to take responsibility for actions. For example, agree to help, but in return ask to see a budget on a regular basis — use this worksheet to get started. Then too, you might offer to let your child move back home until he's back on his feet. If accepted, charge at least a token rent, he advises. You can return the funds at a later date if you want.

3. Make an official loan. With a promissory note — find one at www.nolo.com — you put in writing that the money will be repaid in agreed-upon amounts, at certain intervals. If it's a large sum, the IRS expects you to charge at least a nominal amount, now 2.96% on long-term loans over $10,000, and pay taxes on the interest. "The idea is to teach the right habits, encourage a change in money behavior, as well as help them in the immediate situation," Montanaro says.

4. Avoid gift taxes. If you can afford to help, but aren't making it a loan, keep it under $13,000 per kid this year ($26,000 with your spouse) to avoid gift taxes.

5. Pay the creditor directly. This removes any temptation to spend the funds on something other than the debt at hand.

6. Offer practical tips. To avoid financial pitfalls down the road, discuss credit literacy and ways to manage money that have worked for you. Some fundamental ones:

• Establish an emergency fund with three to six months living expenses by setting even $25 aside each month.
• Build a positive credit history by paying bills in full and on time.
• For college-age kids, encourage them not to use credit cards for things like tuition, rent, or groceries, but rather for emergencies, like to pay for an unexpected car repair bill.
• Request free credit reports at www.annualcreditreport.com, and correct any errors that might appear.
• Set up online alerts for payment due dates, reducing the likelihood of late fees and unforeseen interest charges.
• Tap into educational websites such as www.foolproofme.com.

Finally, keep your own finances in good shape. "Our kids are often a product of what we do as opposed to what we say, so set the right example," Montanaro counsels.