A college graduate moving back home can have a huge financial impact on the whole family if nobody communicates their expectations.
A whole lot of college students are graduating this month, which means a big chunk of those graduates are heading back home. While it's a different circumstance than moving home because you lost a job, got divorced or encountered some other hardship, financial advisors warn that it can have similar repercussions for both parents and their adult children -- or “boomerang kids” -- alike.
“Boomerang kids typically raise a host of financial and family issues,” says Shomari Hearn, a certified financial planner with Palisades Hudson Financial Group’s Fort Lauderdale office. “That’s why open communication and setting some basic ground rules are important.”
If the history between Baby Boomer parents and their Millennial children is any indication, those rules won't have to be incredibly authoritarian. According to a survey by UBS, nearly three-quarters (74%) of Millennials receive some form of financial assistance from their parents. However, Baby Boomer parents have been more than happy to provide that help. Roughly 80% feel good about providing financial support, while only 10% withhold it to teach a lesson about financial responsibility.
That lesson is hitting home regardless of whether a parent provides support or not. Boomer parents are helping out with health insurance (29%), home buying/renting (28%), auto insurance (26%) and utilities (23%). They're also doling out for Millennials' vacations (19%) and spending money (21%). In an effort to save money, Millennials have been twice as likely to move home after college as their parents were -- with 24% preferring the option and 22% being asked by their parents to stay. However, 52% of Millennials feel shame, frustration or guilt about accepting assistance from their parents.
"Boomers and Millennials are as much friends as they are parents and children," says Paula Polito, client strategy officer of UBS Wealth Management Americas. "Their unique relationship deepens their bond, and they maintain both close emotional and financial ties."
According to UBS, a majority of Millennials see their parents as peers, mentors and friends, where Boomers saw their parents as authorities. Nearly three-quarters (73%) of Millennials say they spoke, texted or video chatted with their parents more than once a week during college, compared to 34% of Boomers who called or wrote their parents. However, Millennials are putting off marriage and children later than Boomers did, with 28% saying they have traveled the world for six months or more, compared to 12% of Baby Boomers.
Though a survey by The Principal Financial Group last year found that, 84% of Millennials believe that they should be independent by age 25, they acknowledge that expenses such as their phone bill (12%), car insurance (8%), health insurance (7%) and rent (7% are still being covered by parents.
“Depending on your relationship with your child, how long they’ve been away, and the reason for the move, your child’s return to your home may be more or less bumpy,” Hearn says. “You and your child have both gotten used to some level of independence. You may be torn between feeling supportive and worrying about enabling bad behavior.”
Or you might be torn because you encouraged your child to go to college, only to see them graduate in crushing debt. The Principal discovered that 68% of Millennials who attended college took out student loans, with 20% of respondents listed student debt as their largest budget item. Though 73% of those who took out student loans said it was the right move, they're still in considerable debt as a result.
According to the Federal Reserve Bank of New York, U.S. student loan debt hit a combined $1.2 trillion in 2015 (up $77 billion from a year earlier). Student loan and financial advice site Edvisors.com reminds us, notes that when Generation X left college 20 years ago, average student loan debt was $12,759 and just 54% of students graduated in debt. Last year year, the average student loan debt for a graduate who just received a bachelor's degree was $35,051. That debt was carried by 70.9% of all graduates.
DealNews notes that 37% of the Millennials they surveyed were carrying student loans. While 34% owed less than $10,000 and only 6% owed $40,000 to $50,000, there's a whole lot of debt in the middle. Just 33% pay more than the monthly amount due, while 20% do the same when they can. According to the FRBNY, more than one in ten (11.3%) student loans are past due. Compare that to credit card bills, which are the second-most delinquent loans with 7.3% past due.
Millennials still haven't had it all that easy in the job market since the recession ended. The Bureau of Labor Statistics puts the current unemployment rate at 4.9%, but that jumps to 8.6% for people ages 20 to 24 -- the age of most recent college graduates. Only 63.5% of people that age are an active part of the workforce, compared to nearly 78% of those between 25 and 54.
Advisors note that a parent looking to lend a hand to their indebted graduate can end up in similar trouble themselves if they don't reassess their cost of living when their adult child moves back home.
“Don’t let yourself get into financial trouble because you failed to reassess your own budget while helping your child,” Hearn says. “This holds true for all sorts of gifts, but it can be harder to say no when you share a living space and witness your child’s struggles firsthand.”
While it may help to ask your child how long they intend on staying, it may make more sense to ensure that they are financially savvy enough to stand on their own once they leave. UBS notes that more than half of Millennials with retirement accounts have or would consider dipping into them to make a large purchase, with 25% having done so. They're also more averse to investing their money, with cash representing 47% of their assets compared to just 29% for their parents.
Asking for rent and having them pay for groceries, utilities and transportation is a step in the right direction, but having them save that money instead may be more helpful.
“This will give them an emergency fund, a nest egg for when they eventually do move out, or a resource for paying down student debt sooner,” Hearn says.
Last year around this time, Joe O'Boyle, an advisor with Voya Financial in Beverly Hills working with Millennial clients, shared a few examples of clients who moved back in with their parents and left on firmer financial footing. A young Los Angeles doctor returned to her parents' home after finishing medical school, saved the $4,000 a month she would have used on rent and other housing costs and used the money to pay down her student loans, build up her emergency reserves and create a wedding fund. Her two years at home left her with $96,000 in savings just before she got married.
Another of O'Boyle's clients, a young attorney, lived at home for three years after she finished law school and saved up over $200,000 to make a 20% down payment on a home in a neighborhood near her office. She made “small sacrifices” to her social life by living with her folks, but O'Boyle notes that “the trade-off for many Millennials living at home is giving up some of their independence today for greater financial freedom tomorrow.”
While it takes a willing parent or parents to make all of the above possible, it also requires everybody involved to make sacrifices and recognize how their relationship has changed. Ground rules are to be expected, but active parenting isn't going to help secure future financial stability or make sure your grown child remains independent once he finally leaves the house.
“You will need to respect their independence and their choices, but they also need to respect your home," Hearn says. "It will be easier for you both to have a conversation up front, calmly and in the abstract, rather than in a heated confrontation later, when competing expectations collide. Your child has changed since he or she moved out and so have you. It is a relationship you will both need to actively navigate.”
“Whatever rules you and your child agree on, be sure to treat him or her as an adult,” Hearn added.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.