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Money Monday: Avoid Becoming the Bank of Mom and Dad

By WTOP Staff

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Editor’s note: Money Money is a new weekly column on personal finance, edited by Arlington Community Federal Credit Union investment advisor Momodou Bojang.

According to the 2011 Retirement Re-Set study by SunAmerica Financial Group, nearly half of Americans 55 and older say they expect to provide support for their adult children while simultaneously saving for their own retirement. While helping your children may seem like the right thing to do, you should avoid letting yourself become the Bank of Mom and Dad.

As more baby boomers reach retirement, they are finding their savings diminished due to unrecognized overspending. For some retirees, they found much of their savings went to helping their adult children in financial difficulty. According to CNN, parents in the U.S. extend about $45 billion in loans to their children each year, for everything from student loans to credit-card debt to buying a home or starting a business. A study by Ameriprise found that 90 percent of boomer-age parents have provided financial assistance to their adult children – including 40 percent who had to use their own savings and 17 percent who had to take a loan to do so.

Even parents who have taken a hard line against bailing their adult kids out of financial trouble have softened their stance in the face of the economy and its fallout. If you decide to provide financial help to your child or grandchild, follow these guidelines to avoid tapping into your own savings.

Loan or a gift? Parents often start out resolved to make their child repay the money but fail to follow through. Keep in mind that you can gift up to $13,000 a year (for 2012) without filing a gift-tax return. Remember though, if you call it a gift, don’t harbor expectations your child will repay it. In general you should aim for a one-time gift. “If you can spare the cash, give your adult children a lump sum for them to budget rather than just paying their expenses or paying off their debt, and make it clear that’s all you are willing to give,” advises Kiplinger’s Kimberly Lankford. This will generally incite them to stretch the funding and cut out nonessential expenses.

Only offer essential assistance. If handing over a chunk of cash is not appealing, offer to help pay for only a few critical bills, such as health insurance or car insurance so coverage is never lost. If you decide you will or can help your children only in an emergency situation, make sure you stick by this. Explain to them in detail what you consider an emergency and avoid granting any assistance unless it constitutes what you both agreed upon originally.

Make this as formal a process as possible. If you decide to lend your child money and have them repay you, consult with a tax advisor to set a reasonable interest rate in accordance with IRS rules. Charging nothing or too little could result in the IRS considering that unclaimed interest as income to you and a gift to your child. Set a repayment schedule. By leaving it open-ended, you will be less likely to be repaid, ultimately creating hard feelings on both sides if you have to press the issue or you begin questioning your child’s spending and why he or she’s not repaying you. Also, write everything down including the purpose of the loan, the amount, interest rate and the payment schedule. It also wouldn’t hurt to have you both sign everything once the agreement is made.

Be in charge of your home. If you allow your children to move back in when they can no longer afford rent on their own, make sure they know what you will expect before they make the move. Create a written agreement that outlines rent or how the child will contribute to the household upkeep in lieu of rent. Set a target end date or a set of conditions that would trigger the child moving back out – such as finding a job at a specific income level. Review the agreement together regularly to determine if any changes are needed. “Some parents let their kids stay at home for a given number of months, then charge rent after that, setting aside the money to build up an emergency fund or savings the kids can use for rent or other expenses when they do move out,” Lankford said.

Look for options to save together. If your children are in college, or under the age of 26 and without jobs, you may be able to add them to your health insurance policy for a lower cost than a stand-alone health insurance policy. The same goes for car insurance. You may also want to consider consolidating your cell phone expenses into a family plan.

Weigh the consequences with other options. If you have to tap into your retirement savings to help your child financially, look at every other available option first. For example, while you may feel it necessary to pay for a child’s college education, you shouldn’t draw from your retirement to do so. Some financial obligations need to remain with the child. Students have access to grants, scholarships, low-interest deferred loans and student employment. Discussing the options available with your child and a financial planner can help you determine if there are alternatives to diminishing your retirement to assist your child financially.

Wanting to help your child or grandchild during times of financial stress can be well intentioned. With planning and guidance, loaning or giving your child money can also be well executed without burdening your own finances. A financial professional can help you determine the impact a gift or loan may have for your own lifestyle or future plans.

Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory Services offered through USAdvisors Wealth Management, LLC, SEC Registered Investment Advisor Firm. Momodou Bojang, Representative. Arlington Community Financial Services, USAdvisors Wealth Management, LLC and the Securities America companies are unaffiliated. Securities America and its advisors do not provide tax advice. Please consult with your tax professional regarding your individual tax situation. Written by Securities America for distribution by Momodou Bojang. * Not NCUA Insured * No Credit Union Guarantee * May Lose Value

The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of ARLnow.com.

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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