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!