Should parents put their children into debt?
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Have you heard the one about the fifth-grade loan shark?Ron Lieber introduced us to one – Joseph Greene Brooks, "who was lending dollar bills to candy-hungry children at an overnight interest rate of 25 percent." Wow. Joseph isn’t messing around. He’s hitting his peers where it hurts: "Oh, you want candy? Do you want candy so bad that you’d be willing to pay me $1.25 tomorrow for $1.00 today?"
Brooks isn’t the star of Lieber’s story, however. Instead, it’s Amy McCready, author of the book The "Me, Me, Me" Epidemic: A Step-by-Step Guide to Raising Capable, Grateful Kids in an Over-Entitled World. Typically, whenever someone starts talking about how "kids these days" are entitled and self-obsessed, my ears start bleeding and I slowly lose consciousness. But McCready actually has a pretty interesting idea: teach your kids about debt by putting them into debt.And I don’t mean the typical way we get kids into debt: push them to apply to colleges they can’t afford and then shackle then with tens of thousands of dollars in student loans. This is fun debt.Here are the basics: starting at around 11-years-old, make your kids take out loans from you when they want to make big purchases – her kids’ case, a guitar and an iPhone. She charges them 10% interest, which, as you probably know, is high enough to hurt, but not high enough to hurt bad. She has her kids write out contracts with a repayment plan and "clear consequences" for not meeting the terms of that plan (a.k.a. extra chores). She limits her children to one loan at a time.
All in all, it sounds pretty reasonable, especially compared to the fifth-grade loan shark. Even if you’re giving your kids the allowance (or payment for chores) that allows them to pay for the iPhone (plus 10%), you’re teaching them a better financial lesson than if you just bought it for them outright and didn’t expect any contribution. Kids have to learn about debt eventually – might as well make it happen in a safe space where the only consequence of defaulting is a few more hours of chores.Here’s where things get a little weird: McCready also suggests that siblings lend money to each other, at rates they set (and are approved by the parents). Unless your kids are supernaturally disciplined and have remarkable foresight, I can’t imagine that situation passing without incident. I can hear the cries echo now: "But Mommy, I know Bobby has $600 in his sock drawer and I really want that new iPhone!" It reminds me of a This American Life episode where an older, vegetarian brother tries to convince his younger brother not to eat pepperoni pizza. It’s dramatic, to say the least.Don’t let that stop you from implementing this plan in your household: childhood, especially when you have siblings, is nothing but a series of dramatic conflicts that exist without a sense of scale or context.What do you think? Is this the smartest way to teach kids about debt? Do you think kids with a better understanding of debt would make different choices when it comes to student loans and colleges later in life? What about credit cards and auto loans? Let us know your thoughts and parenting experiences in the comments.
Image: Freddie Brown
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