As a parent, you know that it doesn’t matter how old your children get, you’re always going to worry about their health and well-being. But as they become adults and take on more of the responsibilities that come with age, helping them out can become much more complicated, especially when it comes to their finances.
With millennials entering their late twenties and thirties, and members of Generation Z beginning to graduate from post-secondary with high levels of student debt, many parents of adult children are asking themselves how they can help with their children’s debts.
The Financial Realities Faced by Millennials and Generation Z
The cost of living for young Canadians has skyrocketed in recent years compared to the costs that their parents faced. They have to go to school for longer, take on more student debt, and face record-breaking housing costs. On top of higher costs, they’re dealing with the millennial wage gap, where millennials earn on average less than previous generations did at the same age.
For young Canadians who have seen their employment options disrupted by the pandemic, the situation has become even tighter in the last couple of years.
All of this means that millennials are filing for bankruptcy and struggling to pay their debts when their bills become too much, and Generation Z likely won’t be far behind.
Whether they’re starting their careers, recently entering the property market, or beginning their own families, millennials (who now make up ages 25 to 40) have more than twice the debt of other generations.
It’s natural for parents to want to help their children with their debt. While financial assistance is a direct way to help, you not only need to take your own financial health and retirement plans into account but there may also be alternatives your children can explore.
How Can You Help with Mortgage Debt?
Many millennial and Gen Z Canadians rely on large financial gifts from family to buy homes today. Help with a down payment is already a considerable expense for parents who are likely in a position where they need to focus on their own retirements. The high costs of housing have made saving a down payment an uphill battle.
Whether you provided a gift to help with the down payment or not, getting involved in the mortgage can be a significant financial burden.
Rather than offer direct financial help, you can provide moral and administrative support. You can encourage them to work with their lender on a payment plan or a loan modification. You can help reach out to the lender and assist with organizing their mortgage paperwork.
Help doesn’t have to be financial. If you have owned your home for a long period of time, you may have insights that can help.
Alternative Ways to Handle Student Loan Payments
Student loans can take years to pay off and may delay plans to enter the housing market or start a family. However, if you weren’t in a position to provide your kids with more support to pay for tuition or living expenses when they were in school, you may not be in a position to help with student loan payments down the road.
Fortunately, there are alternatives worth pursuing before turning to parents for financial help. The first option to explore is the Repayment Assistance Plan. This is available to anyone with government-sponsored student loans who is struggling to make payments. Graduates may not be required to make payments that are higher than 20% of their income and may qualify for a reprieve from making any payment at all.
The Government of Canada will pay interest owing that the applicant’s revised payment plan does not cover. After 60 months of being on the Repayment Assistance Plan or ten years after they finish school, the government will cover both interest and principal as long as they continue to qualify.
The Repayment Assistance Plan means that those with student loans should not have to commit an unfair portion of their income to loan repayments. However, if they are also struggling with other sources of debt, they can also talk to certified Licensed Insolvency Trustees about a broader debt repayment plan.
As their parent, you can encourage them to book a consultation with a Licensed Insolvency Trustee to find a way to handle multiple sources of debt.
Should You Help with Your Child’s Credit Card Debt?
If your child is struggling with credit card debt, you may want to think twice before helping them financially. By intervening and paying off their balance, they could come to expect your help with the bill next time and wind up borrowing more than they can afford again. Paying back a large amount of credit card debt is not an easy task, and going through it on their own will make them think twice about reaching for their credit card when money is tight. It can be very tempting to overspend when credit cards provide the option, but avoiding the repayment process altogether means they may continue to see it as “free money.”
There are several alternative solutions when it comes to unsecured debt, such as credit cards, payday loans, and unsecured lines of credit. One way you could help an adult child deal with debt is by encouraging them to explore their insolvency options. People are often reluctant to consider options such as a consumer proposal or bankruptcy because of the stigma around them, but they can be effective ways of starting over when you can’t afford to repay the debt that you owe.
A Licensed Insolvency Trustee will help you file a consumer proposal or bankruptcy in Ontario. Both of these processes make it easier to settle unsecured debts. In a consumer proposal, the debtor proposes a fixed payment plan that fits within their budget. With bankruptcy, the debtor’s non-exempt assets may be sold to repay part of what they owe. There are consequences such as an impact on the debtor’s credit score, but these may be better options than relying on a family member to pay off an overwhelming balance.
Helping your adult child get out of credit debt by writing them a cheque may do more harm than good. But there are other ways that you can lend real support. Many millennials have chosen to move back into their parents’ homes in order to pay back debt, even in their thirties. This could be an alternative that doesn’t include insolvency if it’s a situation that both of you are willing to try.
What About Debts Where You Are a Co-Signer?
Adult children may come to you for help when they’re trying to qualify for credit by asking you to co-sign a loan or credit card. Parents may co-sign on a credit card for their teenager to give them an emergency card or before they go to university or college. The request for help may come later in life if they look for a co-signer on their mortgage. Co-signing on any loan is a substantial risk, whether it’s a mortgage or a credit card.
What happens to co-signers with a bankruptcy is that they become fully responsible for the money that’s owed when the other party files bankruptcy. It’s the same as if they stopped paying; you remain fully responsible for paying that debt if they can’t or won’t. If the debt is more than you can afford to pay on your own, you may also have to consider bankruptcy or a consumer proposal.
It’s generally a good idea not to co-sign for loans that you’re not comfortable paying for in their entirety if it comes to it. Even if you trust your child to be financially responsible, a period of unemployment or a health emergency could change their ability to keep up with their debt obligations.
Instead, you can help them look for low-limit student credit cards or encourage them to adjust their expectations when it comes to buying property.
Review Your Personal Finances Before You Get Involved
Most importantly, you should review your personal finances before you offer any help. This may mean talking to your financial advisor about the state of your investments and your retirement plan. If helping your adult child financially would mean jeopardizing your own financial security, you may have to stick to offering other kinds of support. There are other ways to deal with debt. However, that doesn’t mean that your support can’t be critical in a time when they need it the most.