Should I bail my kid out of debt?

Questions about kids and money keeping you up at night? This series answers them so you can get some sleep

This is a tough one, because when your kid is in trouble, your overwhelming instinct is to rush to his aid. But I’m putting up a yellow light. Simply giving your kid the money to pay off her debts, with no road map for how she can keep herself from getting into the same jam a few months or years down the road, could enable continued bad financial behavior. Of course, there are exceptions—circumstances beyond your kid’s control, for example. And every family is different, so you’ll have to follow your gut (and your bank account). Also, paying off some of your kid’s student loans is much different from paying off the credit card bill from a beach vacation.

However, there are practical ways you can help. Here are a few ideas:

  1. If you’ve got the room, let your kid live at home. The money she saves on rent may be just what’s needed to pay down her bills.
  2. Before the bailout, make sure your kid has a plan. If your kid has, say, a high credit card balance that you want to help her pay off, ask what specific strategies she will use to avoid running up another balance.
  3. Don’t hand over cash. Instead, ask your kid to give you the bill so you can pay her creditor directly. If you want to help out with a basic expense, like groceries, give your kid a supermarket gift card. You get my drift.
  4. Never compromise your own financial security. This includes making withdrawals from retirement accounts. You may incur steep penalties. Plus, you’re jeopardizing your golden years. The last thing your financially strapped kid will be able to do is help you out if you plead poverty. You also shouldn’t co-sign a credit card or a loan for your kid. If you do, you’re putting your credit score in your kid’s hands—which might be a recipe for disaster. Taking on some of your kid’s debts in your name will also hurt your score.
  5. If you decide to loan your kid money, get an agreement in writing. Might feel weird now, but it will help avoid confusion and hurt feelings later, and it’ll make the arrangement feel more “official” to both of you. Also, there are some IRS rules you’ll need to follow. For more details, see p. 96 of my book, Make Your Kid a Money Genius (Even If You’re Not).