The Next Bailout: Your Adult Children? Should you or shouldn't you?

The Next Bailout: Your Adult Children?
By Sue Shellenbarger , WSJ.com
10/8/08
Dow Jones & Company, Inc.

As Washington unfurls its financial-market rescue, more families are weighing private bailouts of their own -- of young-adult children burdened by debt.

Many young adults are heavily leveraged. Average student loans among the two-thirds of college undergraduates who have borrowed rose an estimated 5% in the past year alone, to $22,000, says the nonprofit Project on Student Debt; many also have credit-card debt.

As the economy weakens, starting salaries aren't keeping pace, says Robert Shireman, the Project's director, and a growing number of recent grads aren't likely to find jobs at all. As a result, "we'll see some rise in defaults" among recent grads, Mr. Shireman says. That means more moms and dads will face tough questions about whether to bail out their kids, and how to structure the aid if they do.

"Similar to questions about the overall economy," many parents are wondering, "Should I bail my kid out? Or let him claw his own way, let him fail?" says Bruce McClary, a credit counselor for ClearPoint Financial Solutions, a nonprofit Richmond, Va., credit-counseling service. The stakes are high, including the risk of default, ruined credit, lost opportunities to attend graduate school or buy a home, or even wage garnishment. Parents, too, are on the hook if they've co-signed for loans, as lenders increasingly require.

Many parents already are intervening in ways they didn't foresee. Jay Kirschbaum took "a strong line" with his daughter when she chose to attend a private college, promising to pay only the cost of an in-state public university. "Theoretically, I don't think the parent should ever help the child pay" debt he or she chooses to assume, says the St. Louis father. His daughter took loans and a job to pay the difference. But when government-guaranteed loans to students temporarily dried up in 2007, "push came to shove," he says, and he stepped in with $2,000 more than planned.

Other parents are compromising deep-seated beliefs in holding their children accountable. Karen Bean has long required her two sons in college, ages 23 and 22, to stick to a budget, get jobs and make regular payments on small auto loans to establish credit ratings. But when a company that employed her older son laid him off last summer, the Albany, N.Y., mother picked up his car payment to preserve his credit rating.

Looking ahead, if her younger son, who has taken out student loans, can't find a job after graduation, she'll make those payments for him, too, she says. "Credit is the cornerstone to getting good interest rates and survival as an adult."

So far, the credit crisis has struck young borrowers only a glancing blow. The government has shored up access to student loans. And forebearance and deferral rates are up sharply, helping hold down defaults, says Mark Kantrowitz, founder of finaid.org, a student financial-aid Web site.

But student-debt worries are "going through a lot of people's minds right now," says Robert Allen, a Downington, Pa., father of three young adults in their 20s who have all taken student loans. "Children are coming out into one of the worst job markets God ever made and lugging with them all this debt."

Two of Mr. Allen's three children succumbed to credit-card pitches on campus and took on $700 each in debt very quickly. After scolding the lenders -- "Haven't you credit-card people taken enough money from innocent young people already?" -- the Allens made the large initial payment demanded by the credit-card vendor. Then, they required their children to step up their work hours and split remaining payments 50-50. "They have to have some skin in the game" to learn responsibility, Mr. Allen says.

Now, Mr. Allen is worried about his children's college debt. He has co-signed student loans for all three, ages 25, 23 and 22. All have been industrious students, worked during college and hold jobs now. But one has deferred payments on his loan and another is planning to enroll in medical school, likely increasing her debt load.

"You can make speeches and say, 'I'm going to let you handle this yourself and you'll pay the consequences," says Mr. Allen, an ex-Marine who works two jobs. But for parents who have co-signed the loans, "that's stupid ... because the minute they start taking water on their credit, you're coming up in the gunsights" of creditors.

Some parents are taking a deep breath and upping the ante. A Pennsylvania mother says that after her 23-year-old daughter took on $20,000 in loans to help finance a $160,000 undergraduate degree, the best job she could get last year paid less than $40,000, failing to cover rent, expenses and loan payments. In hopes of helping her gain entry to a higher-paying career, her parents picked up her loan payments, paid off $2,000 in credit-card debt and persuaded her to move back home, where she's preparing to apply for law school. The mother asked that her name not be used to avoid embarrassing her daughter.

More families are likely to be in that boat soon. Some 70% of families don't even consider a student's likely post-graduation income when deciding how much to borrow for college, says a study of 1,400 students and parents released last August by Sallie Mae, an educational lender. And 40% said they paid no attention to cost in searching for a college.

For students who can't manage the load, experts recommend parents structure bailouts in a way that fosters accountability. George Merkle, who heads the nonprofit Consumer Credit Counseling Service in San Antonio, Texas, counsels parents to "crack the whip," get kids on a budget, and if necessary, help out only with a loan -- not a gift -- with a written repayment agreement.

When Larry Ronglien, Minnetonka, Minn., started getting calls at home from a credit-card company about his son's $1,350 credit-card debt, he insisted that his son, a college student, negotiate a repayment plan and stick to it. The lesson: "You can't ignore letters or phone messages from collection agencies," says Mr. Ronglien. His son is now "working like a madman" at two jobs, as a health-care aide and a football referee, and making his payments on time.

For grads who soldier on unaided, servicing debt is shaping up as a major lifestyle constraint. After graduating last year with $75,000 in student loans, Krystal Grube, 24, has landed a public-relations job and is sharing an apartment in Boston with her fiancé. But her $800-a-month loan payments, which exceed her share of the rent and will extend until the year 2040, sharply curtail her options for fun, she says. Although "I'm scratching by ... living paycheck to paycheck" now, she says, she's hoping her income will grow in the future.