As Washington unfurls its financial-market rescue, more families are weighing private bailouts of their own – of young-adult children burdened by debt.
Many young adults are heavily leveraged. Average student loans among the two-thirds of college undergraduates who have borrowed rose an estimated 5 percent in the past year alone, to $22,000, says the nonprofit Project on Student Debt; many also have credit-card debt.
As the economy weakens, starting salaries aren't keeping pace, says Robert Shireman, the group's director, and a growing number of recent grads aren't likely to find jobs at all.
Many parents are wondering: “Should I bail my kid out? Or let him claw his own way, let him fail?” says Bruce McClary, a credit counselor for ClearPoint Financial Solutions, a nonprofit Richmond, Va., credit-counseling service. The stakes are high, including the risk of default, ruined credit, lost opportunities to attend graduate school or buy a home, or even wage garnishment. Parents, too, are on the hook if they've co-signed for loans, as lenders increasingly require.
Many parents already are intervening in ways they didn't foresee. Jay Kirschbaum took “a strong line” with his daughter when she chose to attend a private college, promising to pay only the cost of an in-state public university. “Theoretically, I don't think the parent should ever help the child pay” debt he or she chooses to assume, said the St. Louis father. His daughter took loans and a job to pay the difference. But when government-guaranteed loans to students temporarily dried up in 2007, he stepped in with $2,000 more than planned.
Other parents are compromising deep-seated beliefs in holding their children accountable. Karen Bean has long required her two sons in college, ages 23 and 22, to stick to a budget, get jobs and make regular payments on small auto loans to establish credit ratings. But when a company that employed her older son laid him off last summer, the Albany, N.Y., mother picked up his car payment to preserve his credit rating.
If her younger son, who has taken out student loans, can't find a job after graduation, she'll make those payments for him, too, she says.
So far, the credit crisis has struck young borrowers only a glancing blow. The government has shored up access to student loans. And forbearance and deferral rates are up sharply, helping hold down defaults, says Mark Kantrowitz, founder of finaid.org, a student financial-aid Web site.
Some 70 percent of families don't even consider a student's likely post-graduation income when deciding how much to borrow for college, says a study of 1,400 students and parents released last August by Sallie Mae, an educational lender. And 40 percent said they paid no attention to cost in searching for a college.
For students who can't manage the load, experts recommend parents structure bailouts in a way that fosters accountability. George Merkle, who heads the nonprofit Consumer Credit Counseling Service in San Antonio, Texas, counsels parents to get kids on a budget and, if necessary, help out only with a loan – not a gift – with a written repayment agreement.
For grads who soldier on unaided, servicing debt is shaping up as a major lifestyle constraint. After graduating last year with $75,000 in student loans, Krystal Grube, 24, has landed a public-relations job and is sharing an apartment in Boston with her fiance. But her $800-a-month loan payments, which exceed her share of the rent and will extend until the year 2040, sharply curtail her options for fun, she says. Although “I'm scratching by … living paycheck to paycheck” now, she says, she's hoping her income will grow in the future.