How Parents Solve Their Kids' Big Debt Crisis
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By Caren Chesler,
The Fiscal Times
December 21, 2011

After watching her son struggle to make ends meet, an 80-year old Sacramento woman decided to give him an early Christmas present: she will pay his mortgage for a year. She set up an automatic payment each month that will deposit $2,500 into his bank account, enough to cover his monthly mortgage and pay child support payments for his two daughters. His current job as a truck driver at night brings in only $17 an hour, or $2,000-a-month — not enough to cover a $1,500 mortgage and other expenses.

“She’s going to tell him next week, but she wanted to have it set up ahead of time,” said the mother’s financial advisor, Kimberly Foss, who heads up Empyrion Wealth near Sacramento.

This year, a lot of parents are giving their children the gift of debt repayment. After watching their children struggle in these hard economic times, parents are skipping the gift cards and books and opting instead to pay off their children’s mortgages, credit card debts or student loans. A May 2011 survey by the National Endowment for Financial Education found that nearly 60 percent of parents are providing financial support to their adult children when they are no longer in school. Nearly half percent said they are doing so because they are “legitimately concerned” with their children’s financial well being.

Martin Shenkman, a tax attorney in Paramus, New Jersey, says he’s seen dozens and dozens of parents pay off their kids’ mortgages this year. “I don’t think I saw more than a couple in years’ past. But for some reason this year, I’ve seen it done a lot,” he said. In one recent case, the parents paid off the child’s entire $480,000 mortgage, he said.

It’s not just mortgages and credit cards. With recent college graduates having trouble finding jobs and being forced to accept low-wage work, some parents are trying to reduce their children’s expenses by repaying their student loans. Vincent Barbera, a financial advisor with TGS Financial Advisors near Philadelphia, says he had a client whose son graduated from Johns Hopkins University this year with a mountain of student loans that carried a 7.99 percent interest rate. So as a graduation gift, the client paid off his son’s loans.

“Instead of buying him a car or something else, they paid off his debt for him. It really helped him, considering he didn’t have a job lined up yet, and he was going to start paying off the loans right away,” Barbera said.

In the past, sending cash or a check as a gift might have been considered tacky, but monetary presents are becoming more acceptable due the economic climate. To help make financial support seem more like a gift, some parents are now sending checks directly to their children’s credit card or mortgage companies — either making the monthly payments for them or eliminating the debt out altogether.

Paying the company directly also keeps the gift from becoming a handout that’s spent on other things. Some have given money to their children in the past and found the cash didn’t go toward their debts but toward their hobbies. One Pennsylvania man watched his 42-year old daughter in San Francisco struggle to pay her bills since losing her job 18 months ago. He didn’t want to write a check directly to her, for fear the money would never make it to the credit card company, so last Christmas, he sent a check to the company to pay off half of her $6,000 Discover card bill, and he’s likely to do something similar this year.

“She’s a little artsy, and she may have used some of her resources in the past for art because she found that to be more important than paying off any outstanding loans or debt,” said Barbera, the father’s financial advisor. “In the past what he’s done with his other kids is to give them cash. But with her, he wasn’t comfortable doing that. He wasn’t convinced the money would be directed to her debt.”

Barbera said his own parents have taken a similar tack with his brother, who had fallen behind with his rent and student loans. “In the past, they’d given him cash, but they don’t trust where that cash is going. This time, instead of giving it to him, they asked him for the name of his landlord,” Barbera said.

Andrew Szkaradek, a financial planner in Miami, says being in Florida, he sees a lot of grandparents paying off their grandchildren’s student loans -- but he warns them that the gift of debt repayment could turn into the gift of an audit if the gift giver doesn't file the proper paperwork. Whether the grandparents write the check to their grandchild or directly to the third party that extended the student loan, gift tax rules may apply, he said. Paying off an adult child's loan is equivalent to giving a gift of cash, which is taxable if the gift exceeds $13,000 a year from one parent, or $26,000 from both.  The only time the gift tax would not be relevant is if the grandparents paid for their grandchild's actual tuition, and wrote the checks directly to the school.

Shenkman says that gift givers should also take advantage of the $5 million gift tax exemption that one can use over their lifetime this year, as it’s slated to go back to $1 million in 2013, and many don’t believe that exemption will be extended. If parents want to help out their struggling children with a large gift during these difficult economic times, better to do it now, when the gift tax exemption is large, he said.