by Suze Orman
The truth is, there is no age when a parent stops worrying about the welfare of a child. And the instinct is always there to step in and ease the pain. But it is very important for both parent and adult child to navigate these new family dynamics with care and respect for each other’s financial well-being. To that end, I would encourage you and your children to proceed with a few ground rules:
Every child who moves back home must pay rent. Even if they have yet to find a full-time job, I think it is important that they contribute to the family finances. If you want to give them a six-month grace period while they adjust, that’s fine. But then start charging rent. Look, they need to understand they are no longer your babies; you are helping them start to make the transition to being an independent adult. This is not about whether you can afford to take care of them or not. You will be helping them stand in their truth if you treat them like the adults they are.
One idea for those of you who are squirming at charging your kids is to quietly—without your child’s knowledge—put their rent into a separate savings account. Once they are ready to step out on their own you can return all that money to them.
Make sure they have health insurance. Young people get sick and have accidents. If they do not yet have a job with health insurance coverage you have two options for getting them insured:
Consider adding them to your employer-provided plan. A feature of the 2010 health reform was to allow children to stay on parents’ health plans until they turn 26. (If your child is in fact living in another state, adding them to your policy may not make sense if your company’s health insurer offers the best terms only to in-state providers. You could find yourself paying more out of pocket if your child needs to use an out-of-plan provider.)
Shop for an individual plan. Young adults in good health can often qualify for an inexpensive plan. You can shop for coverage at ehealthinsurance.com.
Get them on schedule with their student loan repayments. After a six-month grace period upon leaving school, all students must start repaying their federal student loans. If they have yet to find a job they will be able to apply for a loan deferment. But they cannot afford to ignore their loans. Fees and penalties will just make matters worse, and they could end up having part of their salary—once they get a job—siphoned off to repay the loan. I also want you to make sure your college graduate understands that even if they were to someday declare bankruptcy, their student loan debt would not be forgiven. Please make sure your child stays on top of this debt. Their school’s financial aid office should have given them a lecture on all of this before they left school. If not, they—and you—can learn more at www.studentaid.ed.gov.
How to Handle Student Loans That Are in Default
If you have existing student loans that have already fallen into default—that is, you have not made your payments, for whatever reason—then I am asking you now to face up to the consequences of these actions with all the courage you can muster. You must do everything you can to get your loans out of default. If you fail to work out a payment plan, you may find your wages garnished up to 15% to settle your debts and your credit score will be such a mess you will find it hard to borrow for a home or car at an affordable rate. That’s right, take a deep breath. I urge you to deal with this problem now, because no matter what you may be thinking, you cannot outrun it.
Some resources to help you figure out your options:
• If you have a federal loan, start at the Department of Education’s website (www.ed.gov), which explains your options for getting back on track with a defaulted loan.
• The FinAid.org website, run by student loan expert Mark Kantrowitz, has a clear explanation of what’s at stake, and how to address a default: www.finaid.org/loans/default.phtml.
• The website for Student Loan Borrower Assistance (www.studentloanborrowerassistance.org) has terrific advice on dealing with defaults and how to deal with loan servicers and collection agencies from a place of strength. Click on the “Default and Delinquency” tab on the left side of the site’s homepage.
HOW AND WHEN TO HELP INDEPENDENT CHILDREN WHO ARE IN FINANCIAL TROUBLE
It is a fact of the times we live in that many young families that might have been doing just fine are now in dire straits because of the recessionary economy. If your grown children come to you asking for financial help I need you first of all to stand in two truths: yours and theirs.
Your truth: Can you afford to offer financial assistance? I am asking you for just one moment to suspend your parental instinct to help without hesitation. I need you to do a financial accounting of what you can honestly afford to give them without putting yourself at risk. I understand how hard this is, but if you end up on shaky financial ground, and they are on shaky financial ground, you haven’t helped anyone but have only increased your family’s financial problems.
Their truth: Is their financial problem short-term or long-term? If they need your help to bridge a short-term problem, then by all means, if you have the ability to give them money, go right ahead. But in many instances I think you will find that your children have a bigger, more persistent issue causing the hardship and that might well require more than just the immediate boost that a gift or loan from you can provide.
For example, if your daughter and son-in-law cannot afford their mortgage and are hoping to get a loan modification, I would tell you to resist giving them money to float them while they go explore this option. As I explain in the Home Class, very few borrowers are able to qualify for a loan modification. It makes no sense to give money when the sooner they can accept the truth, the better: They probably need to walk away from that home. The same is true if your child’s family is coping with a layoff. I understand helping out for a few months, but you need to clearly define how long you will be able to offer help. You—and they—also need to stand in the truth that even once they find a new job, in this economy, it may not necessarily pay as well as their prior job. If that means they can’t afford to maintain their current living costs, the solution should be for them to find ways to reduce their living costs.
Cosigning Loans: Be Very Careful
When your adult child asks you to cosign a loan I need you to promise me—and yourself—that you will make your decision once you are firmly standing in some very crucial truths. Begin by considering the following matters:
• Why is your child asking for your help? If it is because a lender doesn’t think your child is qualified to handle this loan, then you should be cautious as well. Is the issue that your child is trying to spend too much money? If he were to lower the price tag of the car or home he has his eye on, would he be able to qualify on his own? If so, that is the far better move. I know you only want to help; but encouraging self-sufficiency is incredibly helpful. And if the lender is hesitant because your child has a low FICO credit score, well, that should be a big warning signal. Look, if your child has a bad score because of one inadvertent slipup, that’s okay; maybe they were slow to grasp how important it was to be on schedule with their student loan repayments, but are now doing great, making timely payments. But if your child has a low credit score because of poor credit card management that’s a different story. That tells me she hasn’t yet learned how to be financially responsible. By cosigning the loan you are not just potentially walking into a money pit of a deal, but you are enabling your child to continue her irresponsible behavior. I am not saying you can never cosign for her. But how about waiting a year and in the interim, you work with your child to help her get a firm grasp of what it takes to be financially responsible?
• Can you truthfully afford to cosign? Mom and Dad, the minute you cosign you are committing to making good on the entire amount of the loan if your child falls behind in the payments. I know your child is wonderful. I know how much you love her. And I am not even suggesting she is actually irresponsible. But what if she is laid off? And the next job doesn’t pay as well? Or an illness prevents her from continuing at the same job? Life happens.
To all of us. I am asking you to consider how prepared you would be to take over the loan if your child were not able to handle it on her own, for reasons completely beyond her control.
I want you to ask yourself: If I had to make the monthly payments—for the life of the loan—would it in any way impact my financial goals? If making those payments would eat into your emergency savings, or cause you to scale back or stop saving for retirement, then you must stand in your financial truth first. That is not selfish. Putting your own financial stability at risk is never a good idea, for all parties. I also want you to think this through for the life of the loan. If you are 50 years old and your child asks you to cosign a 30-year mortgage, could you in fact handle the payments once you retire?
• Rules for cosigning: If you can in fact afford to cosign, go right ahead. But I hope you will also require that you receive formal confirmation each month that the payment was made on time. Your child can arrange for you to receive a duplicate statement or email alert that confirms the payment. Think that’s invasive and infantilizes your adult child? I don’t. If your child is standing in his truth he would volunteer to do this without your even having to ask. You have just taken on a huge financial responsibility. I think the least your child can do is show you he respects that gift and wants to give you peace of mind that he is on top of the payments.
And if you are cosigning a loan for a child who has struggled with on-time bill payments, I would go as far as having your child pay you the amount of the monthly payment—at least 10 business days before the payment is due—and then you can be the one to make the payment to the lender. This isn’t just about your kid; this is about protecting your FICO credit score.
LESSON 5. THE CONVERSATION EVERY ADULT CHILD SHOULD HAVE WITH HIS OR HER PARENTS
If your parents are in their 50s, you probably planned on skipping the Retirement Class aimed at people in their 40s and 50s, not to mention the class on living in retirement. But guess what: I am going to ask you to read those classes too because they contain a few important lessons. There are some defining conversations you should have with your parents while they are still young (yes, parents in their 50s and even early 60s are young by my standards). As I explain in that class, there are some critical measures to be considered and acted on in your 50s to help ensure your financial security in your 70s, 80s, and beyond.
Too often, families avoid these conversations about the inevitable road ahead. Then when the parents are in their 70s and not in great financial shape, they turn to their child for help, and at that point there is less time and opportunity for either the parents or the child to deal with things effectively. If you have this conversation sooner rather than later, you will both be better off. This isn’t an attempt to accelerate a type of role reversal; this is about adults—children and parents—coming together to work out a plan for the future.
So go to the Retirement Class and “audit” that class; know what your parents are facing. And when you’re ready to have the talk, here is a short list of topics you will want to cover:
Will they be able to retire mortgage-free? Whether they plan on staying in their current home or relocating, their goal should be to have no mortgage costs in retirement.
Have they considered long-term care insurance? If your parents cannot afford a policy on their own, you (and your siblings) should consider whether you can help with the premium cost for a policy. Spending a hundred dollars or so a month now to help with LTC premium payments could save you tens of thousands of dollars decades from now if your parents will require nursing care or assistance with daily activities when they are elderly.
Have they carefully run the numbers on their retirement income? If your parents are considering retiring before age 66 or so, do they feel confident that they will have enough retirement income to support themselves for 20 or so years? In the Retirement Classes, I discuss strategies that can deliver more income in retirement, from delaying retirement, to waiting until at least age 66 or 67 to begin receiving Social Security, to choosing the right payout option if they are entitled to an old-fashioned pension.
Building Family Financial Security Under One Roof
For most households, the monthly expense of the mortgage or rent, and all the other costs that come with maintaining a home, are the biggest line item in the budget. If you look down the road and find that your dreams require a dramatic reduction in living costs, then quite possibly your next conversation should be about whether it makes sense to combine households. Yes, I am talking about multiple generations living under one roof.
Of course, you know best whether family dynamics would doom this to fail or could make it a brilliant move. But if you are a close-knit family and the thought of moving in with your parents, or having them move in with you, doesn’t set off your stress receptors, then I am here to tell you that combining households is a phenomenal idea. Interestingly, even before the recent recession took hold, a survey by the Pew Research Center found 16% of households—accounting for 49 million Americans—had at least two adult generations present. That’s up from 12% in the 1980s. I fully expect that that percentage is higher today, simply because of the vast number of families that have lost their homes or are struggling with long-term unemployment.
But I don’t think extreme financial hardship is all that is at play here either. Part of the New American Dream is a shift in emphasis. Overextending ourselves to buy more or own more has lost some of its cachet. Sure, we still want to live well and have our creature comforts. But I sense we are also rethinking the extent to which our material possessions matter, and recognizing—or remembering—that it is relationships that matter most.
Now, of course, not every family can pull this off. Personalities will dictate what is possible for your family. But I ask those of you who can envision combining households not to be shy about raising this possibility and starting the conversation. I think for many families—across generations—it could be the path toward ensuring everyone’s new dreams are realized, together.
Do your parents have their essential legal documents updated? It’s not enough that they drew up a will or revocable living trust 10 or 20 years ago. They—and you—need to make sure that those documents are up to date. If there has been a death, divorce, or remarriage, they might inadvertently be disinheriting you.
Go to The Classroom at www.suzeorman.com:
I have written extensively in the past on the essential documents every adult must have. On my website you can find articles on why a simple will is often not nearly enough protection for you and your loved ones, and on how to put together the key essential documents: a will, a revocable living trust, and an advance directive.
Make sure, too, that your parents have an advance directive that spells out what level of medical intervention they want if they ever become too incapacitated to speak for themselves—and that they give you a copy. Without that document, adult children are exposed to unnecessary heartache, and often irreparable sibling arguments, about how to handle end-of-life decisions. The parent can make sure it never comes to that, by having this document in place.
When a Parent Remarries
We tend to think of the impact of blended families mainly in terms of small children, but the truth is, adult children need to pay attention here too. Very often when a parent remarries, he or she moves into a new home and takes ownership as joint tenant with right of survivorship (JTWROS). That means that when one co-owner dies the other inherits full control of the home. So let’s say your mom remarries and puts money down for a new home she moves into with your stepfather. He is a great guy, don’t get me wrong. But if Mom and Stepdad own the home as JTWROS, and she dies first, your stepdad has full ownership of the home, with no legal obligation to leave you any portion of the home when he passes. Mom didn’t mean to disinherit you, but it can happen nonetheless. Please understand that even if Mom’s will or trust says you are to inherit her stake, it doesn’t matter. How the home is owned—the title—overrid
es what is in a will or trust. What your mom and stepdad should have done is take title as Tenants-in-Common; at either’s death, their portion of the home would pass to their heirs, not the surviving spouse. (At that point the heirs could then make arrangements, if they chose, to allow the surviving spouse to remain in the home until his/her death.) In The Classroom on my website I review the various ways you can take title to property.
So while you’re having those very adult conversations with your parents, you might want to touch on the matter of how their house is owned and what they would like to happen to it in the event of their passing. And then make sure their will and trust reflect their wishes.
I recognize that these may not be the easiest of conversations to initiate, but bring the right energy to the task and I think you may be surprised by how cathartic this could be for everyone. The goal here is to establish that your parents have what they need for a comfortable and secure retirement. In my opinion, it is a great way to honor your parents—to show them they have raised responsible, thoughtful, farsighted children with their best interests at heart. What a powerful legacy that is.
