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by Next Avenue
June 06, 2019
by Next Avenue
June 06, 2019
Now that college graduation season is here, parents and their young adult kids are coming face-to-face with the key post-graduation financial question that will impact them for years: Who pays for what after the college degree?
That’s really a bunch of questions all rolled into one:
Next Avenue reached out to four financial gurus for their insights.
The questions are hardly rhetorical. In a recent Merrill Lynch/Age Wave survey of over 2,700 18-to-34 year olds, 70% said they’ve received financial support from their parents in the past year. And 58% said they couldn’t afford their current lifestyles without it.
Financial experts suggest there are several things worth continuing to fund for new grads, particularly when they help the job hunt. Then, they say, there are some things that might be worth it, depending on the financial situation of the parents. And there are a number of things definitely not worth parents paying for — especially when they enable poor financial habits.
In all cases, the money pros say, the funding should be temporary — typically until the college grad finds that first gig.
“You don’t use money to enable them. You only use it to empower them,” says Susan Beacham, CEO of Money Savvy Generation, a financial literacy education company. None of the financial gifts should be for items to keep at home. Instead, Beacham says, they ought to be for actions “that move them forward.”
And any financial arrangement between parent and child should be crystal clear, perhaps even put into writing.
But before offering one penny to your college grad, there’s one critical question that must be addressed: What can you actually afford to spend without endangering your retirement?
“Don’t rob from your retirement to help your kids after college,” warns Joe Heider, president of Cleveland-based Cirrus Wealth Management.
With that said, here’s the expert’s guide to what is and isn’t okay to pay for:
Things That Are Usually Okay to Fund
Cell phone. This is a critical expense and its reasonable for parents to continue paying for it when the child is looking for work. That’s because potential employers need to be able to get back in touch, by calling, emailing or texting. Once the graduate lands a job, says Heider, it’s time for him or her to start paying footing the bill for the phone.
Incidentally, in the Merrill Lynch/Age Wave survey, cell phone plans were the most common type of financial support parents offered their grown kids.
Transportation. This might be a used car purchase. Or the temporary use of a family car. Or Uber rides to job interviews. Or public transportation costs.
In any case, even in today’s digital age when most job applications are completed online, virtually all job interviews are in person. Picking up all needed transportation costs lets the adult child continue to transition to the job, says Rand Spero, president of Street Smart Financial, a financial planning firm Lexington, Mass.
Housing. This can take on many meanings, but probably the best option to temporarily underwrite housing costs for college grads to let your son or daughter live at home — with a clock ticking.
The time limit on this option should be crystal clear from the get-go, says Dennis Miller, a retirement consultant and author of Retirement Reboot. He suggests the graduate’s return to the home front should last no longer than six months. In today’s hot job market, that’s a reasonable assessment.
Health insurance. It’s a tragic mistake not to have health insurance, and it’s very helpful for adult children to either remain on your policy until they turn 26 or until they get a job and can pay for their own health care, says Beacham.
If neither is an option, she says, you may need to introduce your son or daughter to the Affordable Care Act and help fund those costs until he or she is employed.
Outfits for job interviews. Not every kid comes home from college with suitable clothes to wear to job interviews. So this is an item worthy of parental funding since the payback can be huge, says Spero. “It can be the difference that allows the adult child to move to the next stage of life.”
Food. Good nutrition is a critical ingredient to good job-hunting. It’s okay for family meals to be on the house, so to speak, or to even pick up reasonable grocery costs until your child lands a job with regular paychecks.
Things That Are Sometimes Okay to Fund
Out-of-state travel for job interviews. These interviews can be critical for first-timers and sometimes make the difference between landing a job or not, says Spero. He suggests at least offering to help pay for out-of-state job interviews that show genuine prospects.
Moving expenses. If your graduate lands an out-of-the-area job, but the employer won’t pay for the move (and your child doesn’t have the money), it’s reasonable to pick up those costs. Or, at least, provide a loan to get the move in motion.
Security deposits. Many apartment landlords require the first and last month’s rent — and sometimes, an additional security deposit — before a tenant can move in. It’s not always reasonable to expect a young, college grad to have this kind of money on hand.
Parents who have the means might want to consider helping here — particularly for a new job in a new city, says Heider.
Down payment on a home. This one varies widely depending on the financial status of the parents and the needs of the child. But there are times (and housing markets) where buying a home is a much savvier option than renting.
As long as the child is working hard, offering the gift of some or all of a down payment can be huge. “The key is to tell your kid that you’re making this investment in them because you want to help get them started,” says Beacham.
Things That Are Never Okay to Fund
Unsustainable lifestyles. You never want to set your children up to fail by financially providing a lifestyle they won’t be able to maintain after you stop funding them, says Spero.
He knows one couple who temporarily paid rent on a Georgetown apartment in Washington, D.C., for their child, but the child’s income couldn’t cover the costs once the payments stopped.
Entertainment expenses. Going to rock concerts and sporting events is nice, but those types of optional expenses are not for parents of college graduates to front, says Spero.
Recurring expenses that go to infinity and beyond. Don’t pick up costs that don’t come with a clear end date, says Heider.
He has retired clients in their 70s who continue to underwrite the extravagant lifestyles of their children who are now in their 40s. “They [the parents] got used to it and never figured out how to stop,” says Heider.
Credit cards. One of worst things a parent can do is to give their adult child a credit card for emergencies, says Miller. Reason? What’s an “emergency” anyway? “Running out of beer money on Saturday night can be an emergency,” Miller says.
Generally, says Beacham, it’s best to give the young graduate lots of encouragement, but not lots of money. “The hardest thing for a parent to say is ‘no.’ Yet it can be the best gift,” she says. By saying no, she says, what you’re really saying is the one thing that every college graduate most needs to hear: “I think you’ve got this.”