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 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.