Hey there, Run The Money fans! Today, we have interesting guest post from Barbara Delinsky on the topic of how parents put children into debt. I hope I’m not guilty of any of these with my son!
Barbara has expertise in personal finance and she loves to share her thoughts with her readers. She’s also written for many blogs. When not writing, she spends most of her time exploring new places, people and their culture. You can get in touch with her on Twitter @DelinskyBarbara.
Now, take it away, Barbara!
How Parents put Children into Debt
Can parents put children into debt?
Yes, they can. More shocking is sometimes the parents put children into debt knowingly.
It might be they have no other way out than doing so and sometimes they do it with the intention of helping their children.
Here are 5 scenarios about how parents put their children into debt.Related to parental debt:
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**This article may contain affiliate links.**
Scenario 1: Parents opening credit accounts in children’s name
Yes, it can happen, though we learn and should believe our parents blindly. This, I hope is a rare phenomenon.
But, it may not be.
As per statistical reports, about 25% of people are falling into credit card debt as compared to 15% before the economic recession. As a result, to manage the financial scenario, many adults are taking out credit cards in their children’s name and maxing them out.
Since you are responsible for the outstanding balance, you can negotiate with the credit card issuer to reduce the interest rate or a repayment plan with which you can repay the annoying balance on your account(s) and live life debt free.
What do you do if you’re having joint account with your parents?
If the issuer allows, you can remove your name from the account and leave it open. It will be in your parent’s name.
Another important tip – The basic thing which every financial expert will tell you to do. Monitor your credit reports regularly. Doing so, everything will come to your notice. You’ll come to know about the charges you’re incurring, and you can take necessary steps without wasting time.
Scenario 2: Parents taking out expensive student loans
Often parents take out student loans to fund their children’s education. Parents push the children to apply to colleges they won’t be able to afford and take out a big student loan to fund the education.
It is better if they can choose college accordingly and first apply for grants and federal student loans. The remaining portion can be funded by taking out a private student loan.
Moreover, there are many other ways by which a student can save money during the college days.
**Dave’s Suggested Resource: Consider picking up a copy of Broke Millennial by Erin Lowry. I think it will help motivate you to get out of debt and start taking control of your money!**
Scenario 3: Parents putting kids into trouble to teach them valuable lesson
To extend the previous point a little further, some parents think that debt is actually good for the children since they learn how to manage it properly. Due to this, the parents put children into debt.
Here are some statistics you need to consider:
A March 2015 survey by T. Rowe Price on Parents, Kids and Money, conducted on 1,000 parents and their 8-14 year old kids, found that 61% parents were of the view that student loans are important for kids so that they learn about debt and financial responsibility. The survey also pointed out that the children of these parents considered themselves more knowledgeable about financial concepts and managing money. According to these kids, their parents did a great job by teaching them money-management principles.
However, about 61% kids and 32% parents didn’t have proper knowledge about student loan debt.
Experts are of the view that instead of taking out expensive student loans, the parents can teach financial concepts to the children in other ways, too. They can ask their children to fund their expensive prom night or to make a repayment plan for the expenses.
The children can also be gifted credit card with modest credit limit and help them to manage it properly.
Scenario 4: Children may have to pay parents’ medical debt
Many states have filial responsibility laws that state adult children are responsible for taking care and financially helping parents, who are not able to pay on their own.
The laws are enforceable in certain states like California, Alaska, Montana, Kentucky, Nevada, Utah, New Jersey, Virginia, and some more states.
However, the law is not enforced much.
But, in 2012, courts have upheld this law in Pennsylvania. A son of a nursing home patient was made responsible to pay a bill of about $93,000 after she moved out of USA.
If the child shares any property or financial accounts with his/her parents, or any estate, state may put a lien on the property. So, the child has to repay the Medicaid benefits if he/she sells the property.
However, if the child doesn’t have enough money in the parents’ estate to settle the debts even after the parents’ death, he/she can file bankruptcy since he/she will be considered as insolvent.
Scenario 5: Children inheriting dead parents’ debt
This is quite an unfortunate scenario. The death of a parent is itself a fraught experience and debt adds to the stress.
If the child is a cosigner on any account or a joint account holder, then he/she is responsible to repay the debt.
Another thing is that the creditors can make a claim against the parents’ estate within 2-6 months. However, if there is not enough money, the debt usually die with the parent. However, if there’s money in the estate, it is used to repay the balance owed before money is distributed to the heirs.
Regarding 401(k) account, if the child’s name is in the beneficiary, then he/she will get the money. Otherwise, it can be used to satisfy creditor claims first.
Did your parents leave you with debt?
If you, the child, have to repay the debt, at first, be calm and think how to be debt free. There are many debt relief options available if it’s unsecured debt, like credit card debt. Apart from DIY options, you can also opt for professional debt relief options. Just you need to stay motivated and save money so that you can get rid of the debt.
In case of a lien placed on a property, like your house, you can plan to sell it and repay the debt with the sale proceeds.
It can be concluded by saying that if you experience such a situation, that is, your parents have put you into debt intentionally or unknowingly, first, you can consult a financial adviser, who can guide you regarding the actions you need to take. If required, you can consult a lawyer to be debt free.
Dave’s take on how parents put children into debt
I must admit something. This topic of “how parents put children into debt” is a rather sore subject between my parents and I. Let me explain and then you can kill me in the comments if you must.
I graduated from college in 2006 with $20,000 in student loans. Sure, not a huge number compared to many out there. But, to a recent college graduate starting his first job, yeah it’s a bit of a shock.
Until I learned more about personal finance (hat tip to my wife who introduced me to it), I had no idea what that bill that kept coming in the mail meant. Paying the minimum meant I was going to pay these things for years to come — and I’d owe more than just $20,000.
I came to loathe debt and blamed my parents. Admittedly, they were trying to do the best they could. They put three boys through a college preparatory high school and college.
However, they were also part of what I call the ‘Die Broke’ generation that used homes like ATMs and student loans as financial literacy education. No, that’s not how many of us millennials think of things now, do we? Perhaps, it’s because of what we experienced with our own parents and our debt education from student loans.
Anyway, to wrap this up, I just want to caution all of us to prepare ourselves. We will soon be those parents who have to make decisions on education and other financial matters that will greatly impact our financial health and that of our children’s.
And I’ll be damned if I put my son into debt.
Did your parents put you into debt? Have you put your children into debt? What are your thoughts on this? Please share with us below.
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