One of the popular debt myths out there goes like this: There’s a difference between “good debt” and “bad debt”. It’s such a pervasive notion that people spend their time arguing over why one “type” is a good thing, while the other isn’t.
(In fact, I’ll be surprised if no one responds to this post explaining why it’s a good idea to borrow money for certain reasons, either because you “can’t get ahead without it” or because “it’s smart to use other people’s money”.)
To which I say, let’s look at student loans — which are often cited as shining examples of “good debt”.
Student loans
Student loans are usually considered an investment in your (or your child’s) future. The idea, of course, is that you can get a better job and get further in life if you have a college degree.
I happen to believe that having a college degree can make the job hunt easier, and there have been studies that show that college graduates earn more over the course of their careers than those who don’t have a college degree. So I’ll buy that getting a college degree can be beneficial.
The thing is, the statement that “a college degree can be beneficial” is not the same thing as the statement that “student loans are good debt”.
Why the type of debt doesn’t matter
Suppose you’ve borrowed $65,000 at 7% interest. Is that good debt?
If you assume that I’m talking still talking about student loans, you might say yes. If I told you that I spent that $65K on a Hyundai, you’ll probably say no.
But no matter what, you’ve still got to repay $65,000 at 7% interest.
And in some respects, having borrowed that for a student loan may actually be worse, because you can’t discharge student loans by declaring bankruptcy.
Debt is debt
No matter what you’ve borrowed the money for, you still owe it. There is no good or bad, only higher interest rates and different things to spend the money on.
All debt is risky, and that’s what so many people forget in their rush to label and categorize.
Risk means there’s a chance for loss — sometimes a very big chance.
There’s a chance that things may not work out the way you’d planned. Instead of borrowing money because it will be “good debt”, think about what could happen if things go wrong. What if you take out $65K in student loans and…don’t graduate? Decide to stay home with the kids? End up working at a used car lot?
Those things happen.
If you’re not willing to accept the worst possible alternative, don’t take the risk.
And remember, you can get ahead without debt. Way ahead.
I'm Jackie Beck, personal finance writer and creator of 
Ok, so to me the only good debt is that which you can pay off within a year without killing yourself. That said, student loans can be kept to a minimum with things like part-time jobs, getting a two-year degree at a Community College first, stretching out the time frame for completion and choosing a field where you can actually enjoy having the degree.
And I like the second part of the post where you say all debt is risky. People assume that student loans, car loans and other “essential loans” seem to guarantee success, when all they do is allow you to take a step forward towards that success. Success is not money driven, its people driven.
I like your point that success is not money driven, it’s people driven. That’s very true. Give two people the same opportunities, and the one with the most drive will go farther.
I’ll bite. :) While I don’t think debt can be “good” in itself, we might look at it as “smart debt”. (Or perhaps, like “safer sex”, it’s only “smarter debt”.)
If you took it on knowingly, for a reason, and you have a plan to pay it back, that’s a smarter way to handle it than just falling into debt, because it’s lower-risk. Using a credit card and paying it off every month, for example, in order to benefit from the rewards program. Saving a large deposit for a house, then taking out a mortgage for the rest is a smarter way to home ownership, especially if you sock away a few months’ minimum payment before you close on the deal. Student loans — as long as you take out only what you need (in my case, only tuition) and don’t take the loan as an excuse to spend unwisely — are in that camp. I don’t WANT them hanging over my head — which is why I discharged my undergraduate debt before entering grad school, and have a plan to graduate debt-free — but I can see balancing the risk of a student loan against savings, future earnings, and the usefulness of a degree.
I think the “safer sex” vs “safe sex” analogy about sums it up :)
I didn’t take out any student loans for undergraduate or my first year of graduate school, but made up for that with the second year. I thought I was being smart about it, and I did enjoy the experience of (for once) just going to school & focusing on that. But…I could have finished up for free.
I have about 20 grand left in student loans. By April 1, we will be completely consumer debt free, and while I do plan on paying off the student loans at an accelerated rate, that plan doesn’t go into effect until next year. All debt is bad, but I really think my degree has opened doors for me, and while $240 a month is still a hefty chunk of change, I know I wouldn’t be making as much as I’m making now without that degree.
That’s good that your degree opened doors for you. My undergrad degree didn’t impact my job prospects at all. My graduate degree did allow me to get a job making nearly double what I had been making, but then 9/11 happened and that degree had no further impact job-wise that I’ve been able to see.
The thing is, people confusing getting a degree (which is a good thing) with the debt itself being a good thing…
No one should ever, EVER spend $65000 on a Hyundia- ever.
I really don’t like the concept of good debt. Debt is owing someone money that you didn’t have. There is nothing good about it.
Haha, I like the Hyundai comment. I was shocked when I googled “$65K car” and a Hyundai came up ;)
Haha, ok, then I’ll be the guy arguing in favor of some form of “good” debt.
I have 3 rental properties, all of which have mortgages. My loan to value ratio is less than 75% for each of them. By using a mortgage, I literally tripled my return on investment and was able to buy more property than I would have been able to if I had paid cash. At this point, if one of my properties goes vacant, the income from the other 2 can cover the payment of the vacant one.
Is taking on debt risky? Yes it is. But this debt I took on was a calculated risk.
Maybe the problem is the word “good”? It’s not really “good” to be in debt, but it in this example, it is more profitable.
Yes, the problem is the word good. People hear that and think that…well, it’s good — as opposed to thinking through the risk they would be taking and evaluating what would happen if things go wrong.
For example, what would happen if all of your rental properties became vacant, and you couldn’t sell them?
(And I too borrowed money for rental properties. It’s not something I’d be comfortable doing again though, after seeing what a close call I had with things going wrong.)
Well, we do reserve some rent money for vacancies so if all of them went vacant, we’d be able to cover for a month or so without dipping into other cash reserves.
But while it’s possible for all of them to go vacant, it’s also unlikely. And the more you have, the more unlikely it is that all of them will go vacant at once.
Once people know you have rental property, it has been my experience that there is more interest than vacancies. We are often approached to ask if we have something and the answer is often “no”. There have been several times I didn’t have to take out an ad because we already had a prospective tenant. I had one time when someone moved out in the morning and the new tenant moved in that same afternoon. Had to scramble to clean up, but no damage needed repaired.
Nice!
Thank you for making it a point to say that “debt is DEBT.” It’s a pain no matter what it’s for. Going to school is GOOD, but having $50k in student debt is not good. There’s a smart way to go about the ‘good’ things in life like school, homes, cars, or anything that might require financing. I wish I was more aware of that before I signed the line for a few giant school loans – you live and learn!
THAT is exactly what I was trying to say :)
Okay, here is the deal. I have a student loan at an interest rate of 0.22%. I get to write off about $70 on my taxes, my payment is decent, and I got a good carrier going because of that loan. It let me finish my grad degree. I did not take an outrageous amount of money. I do consider it a good debt just because it gave me a chance to advance in life.
That’s a very low interest rate! I would argue with you though that it’s not the debt itself that was good, but rather your degree and the career that having that degree led to. In your case I would say the debt was a risk that paid off, but it was still a risk. (For example, what if your degree hadn’t led to the career for some reason?)
Well, I figured that my degree would land me a good job eventually. I do accounting which means I offer a specific set of skills. I figured my risk was really low. Plus the loan amount was low, and I felt comfortable with a payment amount. :)
You are right to call out the good debt myth. I’ve often heard the argument made that mortgages are good debt. It doesn’t matter the tax benefits or low interest rates. Some debt is cheaper than other debt, but good? That’s a bit of a stretch.
Exactly. Cheaper or less risky I would buy. But good? No.
To me a good loan is the money taken for growth. When a business issues papers, its a good loan. When we take mortgage its good loan. When we take on loan where alternative is available it becomes bad loan, example credit card debt.
Well said SB. I would agree. Good debt is something you can build on and that contributes positively like building equity with mortgage on a house.
Clearly I don’t agree :)
Suppose I took out a mortgage in 2006 for a beautiful new house worth $425,000. And today, I could sell it for $120K. Based on your definitions, everyone would have agreed back in 2006 that that was “good debt”. Real estate always goes up! It’s an investment! It’ll help me build equity and I can cash out in a few years!
Well, no.
It’s a risk.
AMEN! My husband and I are in the process of applying for a mortgage loan, and the bank makes no differentiation between my “good” student loan debt and my “bad” car loan debt. It’s all the same to them!
Yup, debt is debt.
Yes debt is debt. In the end of the day everyone is trying to make money even the people that loan said money. It’s a gamble or a risk to borrow money and if thought about thoroughly can help significantly.
It is a risk, and that’s what people need to realize instead of blindly assuming that something is good or bad depending on their intentions.
Debt used to acquire something like a business or real estate that will generate cash flow and appreciate is good debt. Debt used to acquire something like a car that depreciates the minute you drive it of the lot is bad debt.
That’s the traditional explanation of what makes something “good debt” vs “bad”. But both are still risky. I don’ t think folks who used debt to buy real estate before the crash are likely to agree that it was good…
Timing is everything isn’t it? Buy a business at the top of a business cycle and you will be in for a long ride down. As with any investment you need to do your due diligence. By real estate I did not mean primary residential, that should never be considered an investment.
With the economy the way it is at the moment there are so many people starting up their own business. This is why it’s more important than ever to have your finance in order so you can hit the ground running on your new business venture.
Your business will sure have a much greater chance of success then :)