The problem with the bank of mom and dad

An anonymous poster at AskMetafilter wonders should parents finance grad school?

Should parents help their children pay for grad school if they can afford it? My parents are divorced, but both are in households considered in the top 1% of the US in terms of income and net worth. After limited financial assistance from them during undergrad, I am getting no help at all for grad school. Am I out of line to expect that I should?

The discussion at AskMetafilter features some outstanding comments, most of which note that “no, you shouldn't expect your parents to help”. But what do the financial experts say?

In The Millionaire Next Door (my review), authors Thomas Stanley and William Danko devote two entire chapters — 69 pages! — to “economic outpatient care”, the substantial financial gifts some parents give their adult children (and grandchildren). Their research indicates that “the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more”.

The authors note that some forms of economic outpatient care, including subsidizing an education and funding business ventures, have a strong positive influence on the recipients. (They teach the children “how to fish”.) But most financial assistance simply creates a cycle of dependence:

What is the effect of cash gifts that are knowingly ear-marked for consumption and the propping up of a certain lifestyle? We find that the giving of such gifts is the single most significant factor that explains lack of productivity among the adult children of the affluent.

Stanley and Danko write about four specific ways in which cash gifts to adult children create problems:

  1. Giving encourages more consumption than saving and investing. Stanley and Danko warn about gifts of house down payments, in particular.
  2. Gift receivers in general never fully distinguish between their wealth and the wealth of their gift-giving parents. They believe they are entitled to the things their parents have, and feel resentment if the wealth is given to somebody else.
  3. Gift receivers are significantly more dependent on credit than are non-receivers. They use credit in order to sustain their lifestyle of consumption between gifts.
  4. Receivers of gifts invest much less money than do non-receivers. The authors claim that gift receivers are “hyperconsumers”, only thinking of now. They have come to expect that their financial needs will be met by their parents, so they don't plan for the future.

Obviously, not everyone who receives financial assistance from their parents will fall into this trap. But often accepting such gifts leads to trouble.

What's the Solution?

If your parents are wealthy, whatever your income (and whatever the level of assistance you receive), always live below your means. Don't use financial gifts to fund your lifestyle. If you have considered giving your children economic outpatient care, “teach them to fish” instead.

I've known people who received financial assistance from their parents or grandparents. Most of these people have struggled with money in some way. They spent too much. They didn't feel the need to take a job. They put off making financial decisions because there was no need to do so. Last fall, for example, an affluent friend received a $25,000 gift from his grandparents. Rather than invest the money, he bought himself a new car. (There was nothing wrong with his old car.)

I've never felt comfortable discussing these issues with friends, but I've watched with concern, hoping that they would change course, that they would recognize that their dependence on family money was leading to an unsustainable financial future.

My parents never gave my brothers and me any significant financial assistance, but they did something nearly as damaging. By encouraging the three of us to join the family business when we were young, they prevented us from taking responsibility for our careers. We didn't have to participate in the workaday world because our places were set aside for us. We didn't receive cash gifts, but the effects of nepotism were essentially the same. Only recently have the three of us begun to recover from our slow starts and to take responsibility for our careers.

I'm not saying that you shouldn't take money if a family member offers it to you. But if you do accept such gifts, be smart with the money. Don't use it to fund consumption. And, unlike the poster at AskMetafilter, never feel that you are obligated to your parents' money.

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Melissa A.
Melissa A.
13 years ago

I think paying for tuition is different than receiving a cheque to do whatever with. If your parents can pay and are willing to pay for school, then they can write the cheques out to the university. However, I don’t think anyone should expect their parents to help, no matter their income. If that guy really wants to go to gradschool he can get a job and save up or go part-time. I don’t know how student loans work in the US, but if he’s living independently from his parents can’t he apply for loans? (I know, student loans suck,… Read more »

DC Economist
DC Economist
13 years ago

My parents footed the bill for my undergrad, though I helped out with a ton o scholarships. My grandfather’s inheritance helped out with graduate school, and there was enough left over to allow us to purchase a new car for myself and my fiancee when her car (i do not own a car) broke down after 11 years of use.

I agree, just blindly handing money over does not set good incentives. But education pays forward, and I think its proper for a parent to pay for, at least, an undergraduate degree at a good public school.

brad
brad
13 years ago

Growing up, my father always told me he would pay for my tuition, room, and board when I went to university. He did that for my siblings. But in my case I got a full scholarship so he paid nothing for tuition, my rent was paid for by social security (my mother died when I was 8, and I received $100/month benefit checks when I turned 18, just enough to cover my rent), and he only gave me $50/month for food. I used to think he was being stingy (I did manage to survive on $50/month for food but I… Read more »

SJean
SJean
13 years ago

Great post. My sister happened to marry someone who’s grandparents are quite generous with money, and they have some undisclosed large sum in the bank. Sometimes it seems unfair to me–they just bought a brand new car (ack, brand new!)–he works an okay job and she stays home with the baby. I worked hard, did well in school, and earned myself a good job, and still have student loan debt to worry about. But overall, I think it’s more of a blessing than an curse. If they can afford a new car, why not? Without that money, she wouldn’t have… Read more »

Scarfish
Scarfish
13 years ago

Parents don’t owe their grown children a graduate education. They don’t owe them an undergrad, either, but that would be hypocritcal of me–my parents paid for my entire college education with one (strict) caveat: I had to go to a university affiliated with their church, in which I was raised. I used to think this was completely unfair, but looking back I see they were just putting their money where their mouths were. I got as good an education as I would have anywhere else, and since it was a smaller environment, I had opportunities I would not have had… Read more »

Seth
Seth
13 years ago

If the situation is such that the parents have and are willing to give, but don’t wish to foster neediness, my parents had a solution. They would match my savings. For example, I had 4k saved for a car when I was 16. They matched me and I could buy an 8k car. By 18 I had saved 10k for college. In this instance my parents paid the rest, citing it as an investment in my future, but all along my understanding was that every dollar I had would be matched for my education. It gave me a strong incentive… Read more »

icup
icup
13 years ago

Personally I don’t think a parent should pay for grad or undergrad. that’s easy for me to say because I don’t have kids yet and my parents didn’t help that much with college.

However, that being said, my mother *did* help out here and there. She did her best, and even though I am still paying student loans, I feel like I am better for it.

there’s nothing wrong with a parent giving financial gifts to their adult child, but I think it should be done inconsistently, so as to avoid becoming a line item in the child’s budget.

echris
echris
13 years ago

Interesting post. With two kids in elementary and middle school, I’m constantly bombarded by advertisements telling me how much I should set aside for my kid’s education, 529s, etc. My parents struggled to make ends meet and I paid for my own college and (I think) turned out all right.

Am I being brainwashed into thinking I need to fund 100% of my kid’s college and, yikes, graduate school?

Nathan
Nathan
13 years ago

If they have the money and are willing to pay, by all means, they should. If I had millionaire parents, I’d probably expect them to pay for my college education. Let them throw some caveats in, some stipulations, etc, but when it came down to it, I’d expect them to pay for the parts I couldn’t come up with through scholarships and reasonable effort toward putting some money into it myself. Working 30+ hours a week and going to school full time isn’t fun, and for some it’s the only way. I worked my entire way through school, and with… Read more »

English Major
English Major
13 years ago

Just as a quick counterpoint to the “the children of the rich are indolent and irresponsible” trope, I was given $6,000 by my parents in January (they basically think my entry level-salary means I’m living in penury). I slapped $5,000 of it into my Roth (finished my 2006 contribution and maxed out 2007) and put the other $1,000 in a high-yield online savings account for future travel. I haven’t spent a penny of it. I live scrupulously below my own means–I save nearly 20% of my salary in addition to saving 100% of gift money. Here’s the thing about expectations,… Read more »

RJ
RJ
13 years ago

With regard to undergrad, I see advantages and disadvantages to parents footing the bill or helping out substantially. On the one hand, it’s good for kids to develop a sense of financial independence, and work to pay their own expenses. But if a student is taking 3-5 classes and works 20-35 hours per week, s/he doesn’t have much time to study appropriately, read widely, and develop culturally. I see this where I teach now: many students are merely taking classes; education is not (and cannot be) their focus because they’re too busy working, etc. When parents foot the bill, this… Read more »

J.D.
J.D.
13 years ago

Some great comments so far. I don’t have much time, but I wanted to offer a quick reply to echris, who wrote: Am I being brainwashed into thinking I need to fund 100% of my kid’s college and, yikes, graduate school? I think a tax-advantaged college savings program is awesome, and if I had kids I would use one to save for their college education. However, I might not let them know the extent to which I was able and willing to contribute to their cause. I’ve read many places — including The Millionaire Next Door — that it’s best… Read more »

Canadian Dream
Canadian Dream
13 years ago

Excellent comments everyone. I’m enjoying this debate. I personally got 1.5 years of university paid for and cutting me off was a good idea. I dropped my spending by $1000/year (or 10%) when it happened. The other side of the coin is that paying off student loans while getting started in life is a huge drain on your limited resources. So I feel I want to provide something to my own kid’s education to ease this pain. So what’s the solution? I’ve been using any government benefits I receive for the kid and any gift money for the kid and… Read more »

Liz
Liz
13 years ago

Very interesting post. If I’m not mistaken, the parents would feel obligated and the child would feel entitled. I enjoyed trying to see this from the point of view of the parents. It is interesting to hear different strategies that parents have used with commenters. My basic question is what is the point of being so wealthy if you don’t plan on sharing the wealth with your children? Everyone will make their own decisions, but take Bill Gates, he may be giving to charity but he is able to wield immense power with his gifts. There is a benefit directly… Read more »

plonkee
plonkee
13 years ago

The original questioner to the metafilter asked whether they were out of line to expect help. On the basis of the information that they provided, I would say probably. If parents gave limited help for undergraduate, they are unlikely to give more and likely to give less for graduate school. Any expectation of help is probably misplaced. I think the parents should help if they have led the child to believe that they will and they can afford to. If they truly value education then they probably should help – not necessarily in financial ways – as an expression of… Read more »

Marsh
Marsh
13 years ago

I find these comments hard to believe….how many doctors, lawyers, and chiefs pay for their own education? I’m sure that they (those who pay on their own) are out there….but it’s amazing how many of these professionals come from wealthy families….wake up guys. The money just doesn’t arrive out of nowhere.
Unfair, sure is. But it’s real, and to keep the Horatio myth going is misleading everyone.

DC Economist
DC Economist
13 years ago

I view obtaining an undergraduate education as a necessary prerequisite for the vast majority of young adults graduating high school today. Thusly, I think there is some parental responsibility in ensuring that your offspring are able to fly away on their own. So, I have the view that if a parent has the financial ability to support their child going to a good public instiution (in-state), they should. If the child wants to go elsewhere that doesn’t meet that criteria, he/she can pay the difference, either by working or with loans. I left graduate school without 1 cent of debt.… Read more »

60 in 3
60 in 3
13 years ago

My parents did something I thought was great. When I went away to college I was responsible for all my living expenses. That included apt or dorm room, car, food, clothes and so on. I was also supposed to try and get scholarships/loans that would cover my tuition. However, they would cover any part of the tuition that financial aid did not. This taught me to be financially responsible, but it also made sure I didn’t drop out due to lack of funds. With the high price of most schools, I think this was a great way for them to… Read more »

brad
brad
13 years ago

Marsh wrote “how many doctors, lawyers, and chiefs pay for their own education?”

It would be interesting to see statistics on that; my impression is that a lot of them do. My girlfriend put herself through law school with no help from her family, and I have friends who are doctors who did the same. A lot of MBAs got their degrees with loans or savings. Sure, there are a lot of doctors and lawyers from wealthy families, but I don’t think it’s as prevalent as it used to be.

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

The Ask Metafilter thread already includes my personal situation. I feel parents should help to offset the costs of their children’s education. This doesn’t have to mean a free ride. But most families can afford to contribute something. I don’t agree with this sink or swim attitude. The problem is that most of society continues to support children. Not only are you forcing your children to live in poverty, but you’re also forcing them to go without valuable social connections. My parents made just over the cut-off for student loans in Canada. They refused to offer financial support. Even though… Read more »

hrm
hrm
13 years ago

No. After 18 years I don’t think parents owe children financial help. And I agree that if they didn’t help with ugrad it’s unlikely they are expecting to be tapped for grad school. I got enough scholarship money for ugrad to not work, but I don’t think that did me any favors in terms of work ethic. I spent the first part of grad school just learning to work hard. PhD programs can be a lot like an extended childhood with profs training and socializing students. The more one is responsible for thier own money the better able one will… Read more »

J.D.
J.D.
13 years ago

Great comment, Andrea. I don’t have much to add to this discussion because other than watching friends, and other than taking a job at the family business, I have little first-hand experience with this. Kris and I do not have children. My family was too poor to give me direct financial assitance. True, my parents gave me a few hundred dollars over my four years at college, but that was it. I knew at an early age that my parents would not be able to help me with college. I also knew that I was going to go to college,… Read more »

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

Did you need to move away from home to go to school, JD? That’s the problem I had. I don’t think most (non-private) universities have unbearable tuition costs. But, if you have to fend for your own living expenses, it’s pretty hard. And young women rarely have the job opportunities young men do — I couldn’t get general labourer jobs or even sales jobs.

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

Er, move away to go to school and to get summer/part-time jobs…

Brenna
Brenna
13 years ago

I grew up with the Bank of Mom and Dad, or rather the Bank of Dad’s approval. My parents and grandparents contributed money towards both my undergrad and grad schools. I did receive help from the state for tuition, books, and transportation for both schools. My parents wanted me to focus on school only and therefore felt the need to pay for my schooling, boarding, food and bills. I had a year gap before I went to grad school and during that time I held a job (that helped me get into my field). My father told me that half… Read more »

PoscoGrubb
PoscoGrubb
13 years ago

Really good comments going on here. I was brought up with the expectation of my parents’ full support for my undergraduate degree, which I received. My parents paid the full out-of-state tuition so that I would not have to worry about working a job to gain residency. However, I was also raised with a sense of self-worth and discipline, so I did work summers (excluding summer after freshman year), and what I earned went towards living expenses the following year (and a select few “luxury” expenses). My parents also encouraged me and my siblings to pursue further education (i.e. medical… Read more »

jokermage
jokermage
13 years ago

I swear you must have been spying on my father when you wrote this. I wish he would get his act together.

Greg C.
Greg C.
13 years ago

I had no financial assistance from parents but financial aid and scholarships (came to me “too easy” probably) probably contributed to my early departure from college. I had health issues- so I may have dropped out anyway. I don’t know. I worked ( legally) from the time I was 14 and had a full-time summer job, but I spent my first year in college living off financial aid and scholarships- renting an apartment, getting a lot of take-out,etc. My best year in school I had to pay out of pocket because I was ineligble for aid ( too many WDs… Read more »

MoneyChangesThings
MoneyChangesThings
13 years ago

Most of the commentary is from the perspective of adult children, probably reflecting the age of people in the blogosphere. I come at this from the perspective of the parent running the bank. How do you share your resources with your adult children, reinforcing responsible financial decisions, without undermining them? I consider (a lesson learned from the Millionaire Next Door) over-funding to be undermining for all the reasons JD outlined. On the other hand, what is the point of having money, not giving any to your kids when they are young and working hard, and then leaving it to them… Read more »

Jillian
Jillian
13 years ago

I grew up in a single-parent middle-class household in an otherwise extremely wealthy suburban neighborhood. All of my friends had their college educations paid for, and most of them had their living expenses covered as well. I knew from age 13 or so that my mom couldn’t afford any of that, so I did what I had to do – flipped burgers, drove a 20-year-old car inherited from my grandma, and graduated with good enough grades to get most of my undergrad expenses covered by scholarships. I graduated college with $0 debt and $15K for a down payment on a… Read more »

Andrea >> Become a Consultant
Andrea >> Become a Consultant
13 years ago

One thing that hasn’t really come up in this thread is college savings plans. In Canada, there are huge incentives to save for education. As a parent, I could not help but leap at the 20% grant the government contributes for the first $2500 (was $2000) every year. If your income is lower, you can receive up to a 40% grant. And, if you’re fairly low income, your children can each get a $500 bond to kick off the plan. All the funds grow tax-free, until redemption. And then they’re taxed in the hands of your child, who probably isn’t… Read more »

Liz
Liz
13 years ago

I remember watching a Suze Orman show about money, and funding your retirement in specific reference to your children’s education. Her point was this – if you fund your child’s education, at the expense of your own retirement, you aren’t doing either yourself, or your children, any good. Your kids may have to take a different path anyhow if you can’t afford to look after yourself say if something horrible happens to you and you aren’t covered. How useful will that education be, if they are in 3rd year, and you can’t pay your medical bills? I thought it was… Read more »

Sam
Sam
13 years ago

Of course, every family is different and every situation is different, no correct answer for all. My parents, both college professors, always made the assumption that both my brother and I would go to college. As a result, I always made the assumption (actually I never thought about it much at all) that my parents would pay for college and they did. My brother didn’t go to college and my parents after a couple of years gave him the money they had saved up for him to go to college. He invested that money in his own business which eventually… Read more »

James Aslinger
James Aslinger
13 years ago

I believe that children should first graduate from the school of common-sense and self-reliance (taught and demonstrated by their parents). Self-reliance is an essential part of a homesteading lifestyle and I feel that it encourages individuality. In the case of parents footing the tuition, I believe that this encourages laziness and does not promote the competitive spirit that is required to live (not just exist). Like it or not, life is competitive on just about all accounts. If person does not understand hardship and has not had to deal with it at an early age, they are less likely to… Read more »

Portlander
Portlander
12 years ago

My parents paid for my undergrad degree 100%. Now that my youngest brother is in college, my parents cannot afford to help him. They are “pressuring” me to help him out. I can’t exactly afford it but it makes me feel guilty. I don’t think he cares either. He has a small scholarship and part-time job. What should I tell my parents?

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