I said it for years: “…but it’s good debt.”
More specifically: “I have [a stupid amount] in student loan debt, but it’s okay, because it’s good debt. I mean, at least it’s not credit card debt.”
One day, though, that no longer rang true for me. I started to wonder, what makes debt “good?”
Table of Contents
Rationalizations
Here was my original theory about student loan debt being “good”:
- “It’s a cost that will benefit me in the future disproportionately to the debt that I’m taking out.”
- “Going to college is a good thing, so it’s a worthwhile pursuit to go into debt for.”
- “Student loan debt also has a low fixed interest rate, so it’s not so painful to pay it off over a long period of time.”
If you really look at this list, all it is saying is that student loan debt is better than credit card debt. And I think we can probably all agree that that is the case, but that doesn’t make it “good”.
Mortgaging the night away
What about mortgages? Those are good, right? “Super low interest payments! Mortgage interest deductions! It’s like they are paying me to own a house!”
First of all, I’m not sure I believe that you are making money by getting a tax deduction on mortgage interest payments. If you pay $100 in mortgage interest and get a $25 tax deduction, you are still down $75. Don’t get me wrong, it’s better than being out $100, but not as good as being out $0. (Read another take on the mortgage interest deduction myth that goes even further than this.)
Mortgages (these days, at least) have even lower interest rates than student loans, and do have some tax advantages compared to student loans and credit cards. And you get to own a home, or at least can stay in one while you pay it off. Problem is that we still haven’t shown why any of this is “good”.
Complicating your life to save money
I’m fascinated when people get really creative about their financial plans. Paying for something using a promotional zero interest rate credit card and taking a year or more to pay it back. Taking out a home equity loan and using the money to invest in something with a higher-return, pocketing the spread. I know many people put all of their spend on credit cards and pay them off at the end of the month, netting them lots of frequent flyer miles.
Let’s be honest, some of these schemes can potentially net you some money. But schemes can vastly complicate your life and your financial picture and introduce risk that can more than negate any benefits that you may receive. You have to watch your scheme like a hawk. You add stress to your life. Zero-interest rate credit cards can jump to very-high-interest rate credit cards for reasons that have nothing to do with non-payment. And as for using your home as a bank account, gamble much? Why would you wager with your living space? Why add that level of stress to your life?
…and it was (not) good
Arguments showing how certain debt is “good” usually involve a sense of complicated justification, with the exception of the student loan argument, which is just that “college is a good thing to do.” I agree, but that doesn’t mean that going into debt for it is a good idea. Debt might be a better idea than not going to college at all, but that doesn’t make it good. Would it be better to save up for college if possible? Sure, but that may not be possible. Ditto with buying a house with cash. I understand that’s pretty unlikely. But that doesn’t mean that you should hold onto the debt when you have it. When you get rid of it, you accomplish much more than freeing up your money. You will become more calm, more secure, less concerned about the future. I’m speaking from personal experience. It is unarguably good.
But when you take out debt, be it student loans or mortgages or credit cards, your interest payments are a donation to the companies that gave you the original money. You could spend the next few decades of your life funding them. It’s your choice. But that doesn’t sound very good to me.
But enough about me. Do you think that there is such a thing as good debt?
