When the bills first start rolling in, young adults often turn to Mom and Dad for financial support. But an increasing number of parents, especially wealthy ones, are no longer willing to just fork over the cash—they’re asking their children to apply for a loan from them instead.
The trend echoes changing expectations from both children and parents about the age of financial independence. Whereas in 2011, 75% of high schoolers said they expected to support themselves financially between the ages of 18 and 24, only 59% said so in 2013, according to a study by Junior Achievement and the Allstate Foundation.
Parents sympathize with children struggling in a tough economy, the report showed, but aren’t willing to pay for anything and everything. Many have taken to setting up more formalized agreements, involving third parties to help restrict conditions for lending and lay out specific terms for repayment.
But this literal Mom-and-Pop banking system isn’t without its drawbacks: lending can rock an already unstable family, stir resentment between siblings and even get families in trouble with the Internal Revenue Service.
Bank of Mom and Dad
Parental lenders must be careful to obey the I.R.S.’s requirements for interest rate levels, and for when they need to collect. If the proper paperwork isn’t in order, the I.R.S. may consider a family loan a gift. That means claiming taxes, interest and penalties or to count the forgiven loan as income for the child.
But there are benefits to holding cash-strapped kids to stricter standards. For a group that has been referred to as the “Me Me Me Generation,” offering a loan instead of a handout can curb a sense of entitlement and teach important lessons about the value of money, Richard Orlando, president and chief executive of the family consultancy Legacy Capitals, told The New York Times. The hope is to create a more fiscally responsible generation.