The Fairytale of “Good Debt”: Like Santa Claus, It Doesnt Exist

That’s right, there’s no such thing as good debt.  Yet, just 5 years ago, this is the toxic drool that financial aid administrators and mortgage brokers fed borrowers in hopes of sealing the deal on a new loan.

Yesterday’s post surrounding 5 Myths About Student Loan Forgiveness: Debunked started an interesting debate in my home last night around the myth of “good debt”.  We reminisced back to the days when young adults and college students were told that student loan and mortgage debt are good debt.  We remember feeling warm and fuzzy because we were told that this debt was a good thing because we were investing in ourselves and our futures.

But let’s be honest here, good debt is an oxymoron.  Like Santa Claus, in theory it operates to make us feel better but in reality, no such thing exists unless you have the cash to pay it off prior to the interest rate settling in.  If that’s the case, then why borrow the money in the first place?

The argument for good debt states that the debt you incur in this category is an investment in yourself or some other worthwhile asset.  What it fails to recognize is that your credit report does not differentiate this in the same manner.  In fact, any money that you owe to a creditor goes against your credit score and you are still subject to default should you miss payments.

With the looming student loan debacle and many student borrowers owing not only 5 and 6 figure sums, this just isn’t a reasonable statement in today’s economy.

The same goes for mortgage debt.  During the real estate boom of the early to mid 2000s, this was touted as the best debt to have since the home would only appreciate and therefore the risk was a good one.  Clearly, the crystal ball was broken.  And, no one saw 5 years forward that most homeowners would be underwater or unable to pay the mortgage because they have no job with which to do so.

Take a look at this illustration which describes the “investment” one makes in a home over the course of 30 years.  The homeowner could easily take that money and put it in an interest bearing account which keeps the principal safe while utilizing the power of compounding interest.

As a homeowner myself, once I realized this fact, it became clear to me that it is even more imperative that I get debt free and remain so for the foreseeable future.  I don’t care how much assets or equity one has, unless it has liquid cash value then it doesn’t exist.  Cash is indeed king.

There is no way to accurately quantify the value of a college education.  We just know that most employers require it before they will look at your resume.  Keep in mind that there is a difference between the value of an education vs. the value of a college degree.  Big difference.  The former one is able to get anywhere, the latter is a piece of paper not worth much more than the paper it is printed on.

So what say you?  Do you believe in good debt?  Is there such a thing?  Tell us below!

  • AbigailP

    I’m not sure I agree with the idea that homeowners aren’t investing with their mortgage. I think it depends how you look at it.

    All those people who bought too much house or bought with inflated prices… yeah, they weren’t investing. (Even when I was a landlord during the bubble, I had a hard time believing the housing market could keep going up indefinitely.) But if you’re buying a reasonably priced house, you won’t be paying all that much more than you did for rent — and, unlike rent, you’re eventually done with a mortgage.

    That said, you shouldn’t consider it or student loans as an investment. They are a means to an end. They are a calculated risk. I don’t like to think of any debt as “good” necessarily. Just that some are better than others because some are taken out intentionally and thoughtfully.

    For example, we’re saving diligently but we may have to take out a loan for a medical procedure for my husband. We have a couple of years before it gets close to the wire, but the procedure will run around $20,000-35,000. If we don’t have that when the time comes, we’ll take out a loan. We won’t consider it good debt, but we’ll consider the debt as being toward a good cause. To me, that’s a big difference.

  • John@moneyprinciple

    You have to live somewhere so your options are therefore (a) to buy along the line suggested, (b) to rent a substantially smaller property (which would have lower costs of course) but you would then be homeless after 30 years or (c) stay with parents or otherwise live off someone else. 

    Buying has been over-sold particularly in the US and renting means you don’t take responsibility for all the repair bills.  All the same let’s not throw the baby out with the bath water. 

    No-one knows what the future will hold and while debt is not a good thing, nor are savings when banks make the unholy mess they have made around the world.   Unlike money, land is not being created so my money FWIW is on buying property (in a ‘desirable’ area) even if that means incurring some debt. 

    The real answer of course is to make (ie create) enough money when you are young to be able to buy your house for cash.  But while you are building that nest-egg you still have to have somewhere to live that will not disappear if the landlord throws you out.  Unless of course you believe you can make all the cash you need in a couple of years.  Well  I suppose Zuckerberg did but he wasn’t exactly broke to start with.

  • Niki

    I am with you about no such thing as good debt. I really do want to tackle our mortgage debt once we are more ready, I am hoping that will be within the next few years. It will save us so much.

  • The Modern Gal

    I agree that good debt does not exist, especially with the home market being what it is these days. But as a homeowner myself, that graph seems unfair. It doesn’t account for what you would be paying otherwise in rent, and the maintenance budget seems incredibly ridiculous too. I live in a hundred-year-old home and don’t spend anywhere near that on the upkeep (especially considering there’s a separate line for major repairs). My monthly mortgage payment is equal to what I was paying on rent previously, and that mortgage payment includes payment for my interest, insurance and taxes. That means for me the only added cost beyond what I would be paying in rent is the maintenance and repairs.

    Again, I think the point is a good one, but if you do a bit sounder math and then divide it out to what it will cost you monthly, homeownership is still a reasonable expense for some.

    Also, while owing money on a mortgage might hurt your credit score, a history of paying regular payments on time can more than overcome that as that’s the No. 1 thing credit agencies look for. My credit score is actually far higher now than it was two years ago before I’d bought my home.

    • Ginger

      Agreed, the numbers will differ for everyone, but keep in mind this is over the life of the loan. You live in a 100 year old home which will certainly need repairs-a lot of repairs down the line. Home-ownership is only a reasonable expense when you don’t end up losing more money than you put in. With the cost of interest over the course of 30 years, that alone negates any financial benefits. Taxes-if you have to pay $$$ to get the break then is it really a break?

      But I understand your point, different strokes for different folks.