The next bailout: Your adult children?

By Sue Shellenbarger

updated 4:52 p.m. ET Oct. 12, 2008

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 Project's director, and a growing number of recent grads aren't likely to find jobs at all. As a result, "we'll see some rise in defaults" among recent grads, Mr. Shireman says. That means more moms and dads will face tough questions about whether to bail out their kids, and how to structure the aid if they do.

"Similar to questions about the overall economy," 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, says 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, "push came to shove," he says, and 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.

Looking ahead, 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. "Credit is the cornerstone to getting good interest rates and survival as an adult."

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.

But student-debt worries are "going through a lot of people's minds right now," says Robert Allen, a Downington, Pa., father of three young adults in their 20s who have all taken student loans. "Children are coming out into one of the worst job markets God ever made and lugging with them all this debt."

Two of Mr. Allen's three children succumbed to credit-card pitches on campus and took on $700 each in debt very quickly. After scolding the lenders — "Haven't you credit-card people taken enough money from innocent young people already?" — the Allens made the large initial payment demanded by the credit-card vendor. Then, they required their children to step up their work hours and split remaining payments 50-50. "They have to have some skin in the game" to learn responsibility, Mr. Allen says.

MORE FROM PERSONAL FINANCE

Personal finance Section Front

U.S. debt could push interest rates higher Answer Desk: Adding up bank bailout losses Americans getting better at managing credit Therapy tries to achieve life, account balance FDIC: Minorities struggle to access banks Vanguard: 60 percent of 401(k) have recovered Answer Desk: Repairing consumer credit  New $100B safety net for jobless in works Congress scrambles to extend estate tax Auto loan delinquency rate edges higher Personal finance Section Front   Add Personal finance headlines to your news reader: