When Grown-Up Kids Flock Back to the Nest

June 21, 2007 — -- Through all the pomp and circumstance of college graduation, you were thinking about what to do with your now-adult child's old bedroom. Turn it into a study? A gym? A celebrity home-worthy walk-in closet?

But your graduate just told you she (or he) is coming home to stay — not just for the summer, but for the near future.

You're not alone. According to the U.S. Census Bureau, about 18 million young adults between the ages of 18 and 34 live with their parents — that's a 42 percent increase since 1970.

On "Good Morning America," financial contributor Mellody Hobson said the enormous price tag of a college education, not to mention the skyrocketing cost of home ownership, was to blame. The average college student graduates with more than $19,000 in debt from student loans, according to FinAid, and that does not include credit card debt, which is roughly $3,000 per grad, according to Nellie Mae.

In addition to the amount of debt burdening graduates' bank accounts, America's median home prices have soared 48 percent in the last five years, making it more and more difficult for many young people to purchase a home. So living at home with the folks starts to sound like a really good idea for a lot of graduates.

Make Sure Kids Don't Stay Forever

Most parents do not plan on having their children return home after graduation. Hobson said that giving adult kids responsibility was key to them eventually leaving the nest.

"The most important thing for parents to remember is that while your recent graduate may be sleeping under the same Superman sheets he did when he was 8 years old, he is no longer a child," she said. "My advice is fairly straightforward: Like a landlord, make your adult child sign a lease. It should include parameters on living conditions, their contributions to the household, their goals and a move-out date."

"Every three months, review the lease to evaluate progress and make any necessary adjustments," she said. "This contract helps the graduate become more accountable for their own expenses as well as the responsibilities of adulthood."

In addition to spelling out living conditions, Hobson said grads should pay their parents rent for living at home.

"Even if it is just $100 a month, agree to some amount so that your child becomes accustomed to the habit of budgeting their earnings for various living expenses," she said.

If parents can afford to, consider investing the graduate's "rent" money in a money market or mutual fund account that could cover the eventual security deposit for a rental apartment or even help with a down payment for a future home.

Hobson suggested that grads use the financial savings they received from living at home to reduce any existing debt and save for the future.

"If you received any cash graduation gifts, rather than buying the newest iPod, put that money to work by using it for debt reduction. If you do not have much debt, but you do have earned income, open a Roth IRA to start saving for your retirement," she said. "As I have said before, you are never too young to start saving for retirement. By saving now, your finances will be in much better shape in the future."

Shop Around for Health Insurance

Beyond living arrangements, health insurance is an issue for college graduates living with their parents. Upon graduation, most young people can no longer be claimed as a dependent on their parents' plans. Hobson advised against going without health insurance for any period of time.

"Whatever you do, do not go uninsured for any period of time. Consider purchasing COBRA coverage through your parent's plan. COBRA may provide you with affordable coverage for 12 to 18 months following graduation," she said. "The monthly premiums are well worth it because being stuck with no coverage during an illness or injury can be incredibly costly, and often financially crippling."

If COBRA is not an option, Hobson said grads can look into short-term insurance that can be purchased for durations of three, six or 12 months. Parents and grads should check out www.ehealthinsurance.com, which provides a simple way to shop around for the best deals on insurance.