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hushnow

M$1.00 Funded By Mahalo ? | May 11, 2009 07:21 PM

Good debt vs Bad debt

Is there really such thing as "good" debt? What makes a debt good?

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dcanswerer

May 11, 2009 07:28 PM

Good debt is money you borrow as an investment. For example, if you borrow $150,000 in student loans to become a lawyer that makes a starting salary of $165,000 and going up to potentially $500,000 a year within a decade or so, that is very good debt. You are borrowing some, but it will allow you to earn a lot more in the future.

The same thing goes with a mortgage. You hope that if you borrow $300,000 to buy a house, that home will appreciate in value so it becomes worth much more than $300,000 in the future. That appreciation in value, along with the tax deduction for the mortgage interest, is good debt.

Bad debt is consumer debt. If you go in debt to buy clothes, shoes, electronics, etc, that does not pay you anything. In fact, you are paying more interest than you will ever get back. Instead of buying a pair of $100 shoes in cash, you are stretching that payment out months or years, causing you to eventually pay well over $100 for an item that will be worthless in a year or two.

So basically, debt that allows you to potentially make more money is good debt. Debt that you incur when buying a consumer item, or debt with high interest rates is generally bad debt.

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• I don't agree with you- but that's of course just my opinion. You did an EXCELLENT job answering this question. Thank you :D

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hushnow

May 11, 2009 07:42 PM

I understand what good debt is and bad debt is, what I don't understand is if good debt is really good debt. To me that sounds like an oxymoron.

Our neighbors recently graduated from college student loans and all. They started the job hunt at the beginning of this year. With a college degree they felt like they could easily triple their income, pay off their student loans, and move to a different state. Instead the economy slumped. Now he's got the degree but no job. And he's got the debt, but the same income.

So they will be stuck paying off student loans with the same income that they had when they created them. Does that make sense? If you have the same income as you did before, why wouldn't you pay it as you go?

I have a family member that has $100,000 in student loan debt. He graduated from college and got a job at Pizza Hut making $9.00 an hour. What I'm saying is that degrees don't get you a job. They get you a piece of paper saying your trained in something. Like wise college gives you an education, but not the career. So is that really "good" debt?

Also homes don't always appreciate in value. Take our current economy. So was that debt "good" debt? Also the tax deduction for a mortgage is a joke. That means that you pay someone say, $10,000 in interest and the Government says you don't have to pay $3000 in taxes. That's ridiculous. Why would anyone pay $10,000 so that they didn't have to pay someone else $3000.

Did you know that when you buy a $100,000 with a 5% interest and a 30 year mortgage you end up paying for the home twice! How is that "good" debt?

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dcanswerer

May 11, 2009 09:08 PM

I definitely understand your points. And it's true, for many people taking huge amounts of student loan debt were not good.

But statistically, over the entire length of your career, you make far, far more with a college degree rather than without a college degree. So if you have to borrow $50-100k, but you're going to make maybe $500,000-1,000,000 more over the next 40-50 years (not at all out of the question), it is definitely worth it.

Also, student loan interest rates are often extremely low. So even if you are paying off your loan for the next 30 years, if your interest rate is 3-4 percent, that's barely above inflation. If after graduation you are investing your extra money in the stock market rather than paying down your loan as quickly as possible, you will make a historical average of about 10 percent in the stock market. So you will be in debt, but you will have leveraged that debt to make more money.

I definitely agree that taken to the extremes, any debt can be bad. And if you are unfortunate and you can't get a better job after getting your college degree, then that degree might not have been a good investment. But my thinking is that for the vast majority of people, a college degree (and resulting student loan interest) will pay itself off and more over the life of the loan.

And I don't think the mortgage interest tax deduction is a joke. Yes, over the life of the loan, you are going to pay far more for the house than it was originally worth. But over 30 years, don't you expect that the house is going to be worth vastly more than when you purchased it? Even ignoring the housing bubble where house prices skyrocketed (and then crashed) recently, real estate has historically increased in value. So yes, I think that a $300,000 house can definitely be worth $600,000 within 30 years. And if you also get the tax deduction in addition to that, it's just added benefit.

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