Lending Money to Grown Children: Good Idea?

Studies have shown that two out of five parents with adult children have paid off debts for their grown-up kids. Mostly, Mom and Dad pay for car loans and medical bills, according to a CreditCards.com poll. The Pew Research Center has found that among parents with at least one adult child, 61 percent had helped support Junior in the prior year. 

And we’re not talking about $100 here and there. We’re talking about thousands. A TD Ameritrade survey released in 2015 found that parents supporting adult children forked over an average of $10,000 in the prior 12 months.

The statistics show that drawing from the Bank of Mom and Dad is common among newly minted-adults. But is lending money to adult children a good idea?

It depends. If your relationship with your kids is already strained or if they’re disrespectful and unreliable, then making a loan and expecting repayment likely won’t end well. But if you and your children are on good terms, if they are responsible and need only some short-term help, then pitching in financially likely will be a gratifying experience for both of you.

Couple discussing finances. Wife standing at table while husband sits and motions towards papers in his hand.

Family dynamics and emotions are hard to quantify, and the emotional results of lending money to adult children are hard to predict. But we can provide tips on how to loan money to your kids so that Thanksgiving isn’t any more stressful than it usually is.

  1. Don’t lend money you can’t do without. This is a good idea whether you’re lending money to kids, friends, or even your parents. Lending money when you’re close to retirement and need your nest egg to support your golden years is not a good idea. But if you’re still earning and have money to spare, then helping your child get a master’s degree or raise a down payment on a house won’t derail your financial life if things don’t work out as planned.
  2. Lend with strings attached. We know “strings” are an emotional hot button. But when you’re functioning as a bank, you have the right to require information that banks would insist upon. What, exactly, is the money for? Does that mean tuition or room and board if it’s for school? If it’s for a home down payment, insist on seeing the house and investigating the neighborhood to confirm your investment is safe.
  3. Write everything down. Create a loan document that states the amount, interest (if any), agreed-upon use for the money, and what happens if your child defaults. Both parties should sign and have a copy of it. This is not a document that you’ll necessarily take to court. It’s a concrete reference to terms, so there’s no confusion later.
  4. Make sure you and your spouse agree. Loaning money to kids can strain a marital relationship if you and your spouse don’t agree. Make sure Mom and Dad (or stepparents) agree to the loan arrangement because it probably will be around for years. Work out discord before committing money to your kid. Consult your financial adviser or family counselor if you need a referee. The last thing you want is for a loan to your child to wreck your marriage.

We welcome the opportunity to put our tax expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.


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