Is there such a thing as good debt?

August 15, 2011 — Leave a comment

I love good debt, don’t you?  Nothing feels better than writing a check every month to pay on my good debt.  In fact, I send Bank of America a thank you card along with every payment!

Ok, now I’m obviously full of it!  Honestly, does it even sound possible to like debt?  Not to me.  But, there are many financial gurus who praise the concept of using other people’s money to pay for what you want.

The “good” debt title is usually bestowed upon items that are seen as investments like students loans and houses.  Almost everyone can agree that debt from credit cards, credit lines and short term loans can be considered “bad” debt.

Is a home mortgage good debt?

I don’t think a home mortgage is good debt.  First, a house isn’t an investment, which was proven over the last couple years as one third of homeowners have gone underwater on their loan.  Basically, they now owe more on their mortgage than their house is worth, thanks to the decline in housing prices.

Now, don’t get me wrong.  I’m not bashing owning a home or taking on a loan under the right circumstances.  I currently have a mortgage on my own house.  A home can be a smart decision to protect against inflation and provide stability, but it requires way too much cash to maintain it to be considered an investment.  The cash outflows include taxes, insurance, maintenance, renovations and more.

That’s why I don’t consider a mortgage good debt.  However, at some point many of us will take on a mortgage because homes are so expensive, but you should try to not have a mortgage your entire life.  You can eventually pay off your mortgage if you initially purchase a house you can afford and pay extra toward your loan. It takes a lot of hard work and focus.

Is a student loan good debt?

I used student loans to pay for about half of my college, so it’s hard for me to argue against them.  Proponents say they’re worthwhile because they allow you to pursue your goals of higher education.  In fact, so many people use student loans that total student loan debt now surpasses total credit card debt!

Some student loans are necessary, but they’re mostly overused.  I paid for the remaining half of my school with scholarships, work and help from my parents.  In hindsight, I could have worked more while in college to pay my own way so I wasn’t as reliant on student loans.  The problem is it’s hard to actually see the impact of student loans when you’re in college.

Most students think they’ll be rich soon after graduating and will quickly pay them off.  In fact, I recently spoke to a group of college students and asked them when they would earn their first million.  The oldest estimate was 32 and the rest estimated between 24-29 years old.  School doesn’t do a good job of teaching reality!

Many people come to the realization a few years after graduation that all the debt wasn’t such a great thing.  Like my student loan did – their loans stick around for years after graduation.  Even worse, many people who are graduating soon realize they can’t even find a job!

Talk radio host and financial guru Dave Ramsey recommends taking on no debt to pay for school, but he is ok with a 15 year mortgage for a house.  To be honest, I don’t totally agree with Ramsey’s thoughts on student loan debt.  I do think you should do whatever you can to minimize the amount of debt you take on, but you shouldn’t forgo an education just to avoid loans.

I experienced many great opportunities during my four years in college that I wouldn’t have experienced if I was working full time.  These included volunteering, leadership positions, and networking.  I believe they have contributed greatly to my development, and I may not have experienced the same current success if I had stayed busy delivering pizzas instead.

If you want to read more about higher education and if it’s worth it, check out my other post, “Is a college education worth the price?“.  In the end, I’m not going to call any debt “good” because that mindset helps justify its use. As Leonardo Da Vinci said, “It is easier to resist at the beginning than at the end.”

Sometimes debt can be used to help us, but I’ll choose to use it sparingly and pay it off as soon as I can.  Do you think there is such a thing as a good debt?  Let me know your thoughts in the comments.

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