If you have a child, you are familiar with how expensive it can be to raise a son or daughter from birth to adulthood. However, your son or daughter may incur debt related to going to school, using a credit card to pay for living expenses or buying a home. If your child has significant debt, should you feel obligated to pay off that debt?
Can You Afford It?
The first question that you need to ask is whether or not you can afford to pay off your son or daughter’s outstanding debt. Unless you have maxed out your 401k or other retirement accounts, it may be more beneficial to put your money to work for you. You should also avoid paying your child’s debts if you do not have an emergency fund in case you lost your job or incurred a large debt.
What Will Your Child Do After the Debt Is Repaid?
Another important question that you need to ask yourself is whether or not your child is going to incur more debt after he or she has existing debt paid off. The last thing that you want to do is pay off your child’s credit card debt only to find out that he or she has gone out and charged another $10,000. Therefore, you should limit the type of debt that you are willing to pay off if you are able to do so at all. Paying off a secured debt such as a car or mortgage leaves your child with an asset that at least can be leveraged in the future if your child runs into future financial difficulty.
What Options Do Your Children Have to Repay Their Own Debts?
There are many different options that your children will have when it comes to repaying loans or keeping up with debt during times of financial issues. For instance, your son could ask for a student loan forbearance or for a modified repayment plan on his mortgage. Your daughter could refinance her credit card debt or transfer the balance to a 0 percent interest credit card. Doing so may allow your child to take care of his or her own problems and learn what it means to be financially independent.
Did You Cosign for Your Child’s Loans?
If you decided to cosign on your child’s loan, you may be on the hook if he or she stops making payments. For example, if you cosigned for your son’s student loans, you essentially agree to pay that money back if your son doesn’t. That also means that your credit could be damaged or other actions taken against you if you don’t make the payments even though it isn’t your loan. For some, it may be easier to simply pay the debt off now if possible instead of worrying that a $10,000 auto debt or credit card debt could impact how you spend your retirement years.
What Do You Get From Paying the Loan?
It may be a good idea to repay your child’s loans if you are going to get something out of it. For instance, your daughter may decide to have you pay off the original loan and then pay you back over a period of several years. The benefit to your daughter is that she may not have to pay as much interest over the repayment period. To ensure that payments are made, you may wish to sign a contract that provide consequences for failure to repay on time. For instance, you could place a lien on certain property or give yourself the right to go to court just like any other creditor.
Take Equity In Your Child’s Business
If you are asked to pay off a business related debt or loan, you may wish to ask for an equity stake in the company. What this does is makes you a part owner of the company in exchange for the funds. This could turn into a long-term arrangement that helps your child now and helps you out as the company becomes more successful.
Are Your Children Entitled to an Inheritance?
Instead of waiting until you pass on to give your child his or her inheritance, it may be better to give your child his or her inheritance now. Doing so may help your child get out of debt and move on with his or her life. If your children are working and otherwise financially stable, eliminating a student loan or mortgage debt could help provide for your grandchildren. Money that would go toward a mortgage payment can now go toward paying for braces or saving for their college funds. In the event that money is being taken out of an inheritance, make sure to communicate this to your children. Otherwise, it could create tension later on.
Have Your Children Done the Same for You in the Past?
Paying off a credit card debt or making a student loan payment may be a nice thank you for financial assistance that you have received in the past. While you should still only do so if you can afford it, there is nothing wrong with helping those who have helped you when you needed it. If this money is meant as a gift and a thank you, make sure to stress that you are not expecting the money to be repaid.
There is nothing worse than being saddled with debt at a young age. However, it doesn’t mean that you are obligated to help your children overcome their own mistakes or circumstances in life. While it may be difficult to tell your kids no, only spend as much as you can afford as you don’t want to become financially vulnerable yourself helping your kids.
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