You can define good debt as borrowing for things that will appreciate in value, or will not depreciate. In other words, when you borrow money to invest in something durable and you’ll see a tangible return on that money, you’ve acquired good debt. Nearly all good debt is characterized by lower interest rates, and it includes loans to purchase property, or to start a business. Student loans are considered good debt under many circumstances because they usually have low interest rates and they represent an investment in your ability to make more money. Since a college educated person is likely to make more money than someone without a college education, most credit agencies see your student loans as good debt.
If you take out a mortgage on a house, or you fund a business, you may be able to repay the loan by selling the house or the business
There are some that argue that any debt is bad debt since you have to pay it off. If you apply for other loans when you already have large student loans, potential creditors will still weigh your debt to income ratio to see if you can really afford to make payments on another loan. When you have several tens of thousands of dollars in student loans, even though this debt is considered “good,” it may still affect your ability to purchase other things with credit, like homes or cars.
Failure to comply with student loan payment schedules can easily wreak havoc on your credit rating. Like any debt, not paying on time or missing payments can lower your credit score and subject you to fines or fees. Some fields of study notoriously don’t have high paying jobs when you do finish school.
If you take out loans and don’t finish your college education, you may not have increased your earning potential
If you earn your teaching credential, for instance, you may have a difficult time managing high payments for large loans on a relatively small starting salary. It makes sense to evaluate the earning potential of the field you plan to enter, and use this information to make prudent decisions about loans. When other sources of funding are not available to you, you may also want to consider choosing colleges that cost less so that your total amount owed when you finish college is not prohibitively expensive.
One significant difference between student loans and other types of good debt is that you’re not investing in something you can return. You can’t sell your college education, and barring a few circumstances like permanent and total disability, you cannot escape paying student loans.
Declaring bankruptcy will not clear most student loans, as it might with business loans or mortgages. Essentially you are stuck with this debt, which though it may be considered good, can also be very bad when you’re not making enough to repay it. Many loans do have options to defer repayment, but these are of short duration and it usually means you acquire interest while the loan is being deferred. Furthermore, if you default on any of your loans and plan to go back to college, don’t expect to be able to get more loans. You have to maintain a consistent payment schedule, repay anything you may owe in back payments, and clear up the default before you get more student loans to continue or finish a college education.
Tricia has a Literature degree from Sonoma State University and has been a frequent contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.