Good Debt vs Bad Debt: Not All Loans Are Created Equal

by Jacques Sprenger on October 22, 2008

Credit and debt are financial tools that when used well, can help you succeed financially. It helps to know the difference between good debt vs bad debt.

good debt vs bad debt, loans

Not All Loans Are Created Equal

A few years ago, I decided to earn my master’s degree in education. My first step was to go to this government’s site on financial help for education.

I filled out the application after learning that my university would charge me $15,000 for the whole process online, not including books of course. The school was paid directly by the Department of Education during the two years it took me to complete the master’s degree. Check this out for detailed information regarding federal education loans.

Where my student loans worth it?

Are you kidding? My school immediately increased my salary as a teacher by $3,000 annually. So even without any other help, I would have paid back the loan in 5 years. I had, however, a ‘hidden’ ace which was something I took on and which I wholeheartedly recommend to prospective teachers: teach in officially declared poor areas of the country. My loan was thus ‘forgiven’ (i.e. paid by the government) — a clear case of ‘your taxes at work’.

Good Debt: Student Loans

Student loans are typically recognized as good debt. But please remember that with educational costs — you get the most bang for your buck when you consider a couple of conditions:

  1. You are certain that you’ll work in your field of study.
  2. Your future salary will be sufficient to PAY for education loans you take. Unfortunately, few college bound students plan ahead that far.

Once you graduate, live off your wonderful and caring parents whenever possible and minimize your expenses. After a couple of years they will, quite likely…and very politely, ask you to move out. They need their privacy after all and your loud parties on Saturday night (or the extra laundry) may begin to exhaust their patience. But, by then, you’ll have repaid a big chunk of your loan if you’ve acted smart by not overspending.

Good Debt: Buying A Home

I recently met with a young couple living in an apartment. Both of them were paying off students’ loans, both were working with decent salaries (about $50,000 each with no children, one beautiful dog), and both were anxious to buy a home. They sat down, made a budget, and decided that, yes, they had the means to pay a mortgage on a ‘used’ house.

Investing in a house is always a good move; in the long, long, run, say between 10 to 20 years, its value will increase. Forget about the present housing slump; it’s part of the market’s vagaries. It’s also a wonderful opportunity to buy cheap. Just make sure that you want to live in that area for a long time.

One caveat: we’ve learned our lessons with the current housing bust, so do avoid those risky mortgage loans; the more creative ones can be the most troublesome.

Good Debt: Start A Business But Watch The Risk

So you want to start your own business; if you are not Bill Gates, be careful. For some in-depth insight and additional tips, take a look at’s article series on taking on business debt. When it comes to getting into business for yourself, you’ll want to pursue good, workable ideas, and to be well-prepared; also keep in mind that more than 80% of new small businesses fail within 2 years.

The ‘Baddest’ Debt of All: Spending On Random Stuff

When I got my first paycheck as a single man, I was giddy with excitement. My money, finally! I wanted to spend the whole thing on crazy stuff (The whole $300). I felt rich, I felt proud. I didn’t realize that I was also being reckless. Incurring debt when you are fresh out of college may just be the most foolish thing you can do. Sure, we’d all like to look cool with designer sunglasses, shoes and clothing. We want the elegant sofa we saw at Macy’s. But let’s think this through a moment. To gain financial success, you’ll need to learn to live within your means. If you’re still juggling student loan programs and working on fulfilling your student debt obligations, you’ll need an even tighter rein on your budget. But be encouraged with the thought that once you’ve handled those loans, maybe then you can think about splurging…! Well, maybe just a little. 🙂

If you enjoyed this post, you can get free regular updates through our RSS Feed, or you can have our latest posts delivered to your email inbox by supplying your address here. Your address will only be used for this purpose, and you can unsubscribe anytime.

{ 2 comments… read them below or add one }

1 Aya @ Thrive October 22, 2008 at 12:14 pm

I think that in many case, investing is a risky challenge that many of us are scared to take even though they might give great returns. In your case, your salary went up, which proved that your decision to take the classes was a smart investment and the returns were beneficial. I would love to go back to school and acquire more skills and polish my resume and find a good job, but I still fear that student loans will be the only thing I end up with. I wonder what I can do so that my student loans will be good debt like you suggest.

2 Scott Crawford December 1, 2008 at 8:05 am

Great post. I think another lesson learned from the credit crisis is that mortgage debt can be good debt or bad debt. We went into this decade thinking that we had somehow figured out the housing market and that we were guaranteed a great investment return of 5-10% a year. As a result, many of us went in over our heads to buy an asset that we felt would appreciate as an investment.

Although your home can potentially offer great investment returns, it is fundamentally an EXPENSE and the return it gives is primarily one of avoiding paying rent over time. The safest way to make sure we don’t get in over our heads is to treat it like any other expense. This is what the “front end DTI” ratio is designed to do. If we budget this expense to the banking standard for a healthy level of 28-30% of income we will make sure that we can afford our house payments regardless of what happens to the market.


Leave a Comment

{ 6 trackbacks }