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Good Debt: Does Such a Thing Exist?

by Shawanda Greene

For years I believed there were three types of good debt: student loans to pay for a college education, a mortgage to buy a primary residence, and a loan to start or expand a business.

Seems logical, right?

On average, college graduates out earn those who only obtain a high school diploma. Home buyers build wealth and fulfill their need for shelter. And as an entrepreneur, your income earning potential is unlimited.

For a while I thought, “No doubt about it; borrowing money to pay for these things is good.”

Fast forward a decade or so, and now, I have doubts.

As is often the case, my little brain gets to thinkin’. In an effort to strengthen the rationale behind my opinions, I start asking questions. Which may or may not result in complete rejection of what I once held as truth.

For the most part, a college degree puts you in a position to demand a higher salary in the workforce. If that’s the case, why not label other debt that helps you make more money as “good?”

Is it wise to use debt to pay for trade or vocational schooling? After all, your earning power tends to increase with education.

What about a home study course?

Would it be okay if I used my credit card to buy a few books that’d make me more knowledgeable in my field?

What about a conference that would allow me to meet influential players in my industry? You never know when a business connection will pay off.

Come to think about it, I need a new suit. You see, I’ve got an interview coming up*. The one I have looks outdated. And I really want to make a good impression on the interviewer. Normally, I wouldn’t think of using a credit card to buy clothes, but we’re talking about my dream job here.

By the way, I need a gym membership. Should I put that on my credit card too? Looking hot is good for your wealth. Didn’t you hear? Studies show unattractive and overweight people get paid less. If I could, I’d exercise outdoors but I have allergies. My neighbors would complain about the noise so I can’t workout at home either.

If it’s acceptable to borrow money to open or grow a business, does it make sense to invest in someone else’s business with borrowed money? I’m ashamed to admit it, but my friend is a better businesswoman than me. Perhaps it’s safer to invest in her than in myself.

So if it’s possible to make money by investing in a business that’s owned by one person, you can make money if you invest in a business that’s owned by millions of people? What’s your opinion on going into debt to buy individual stock? gold? art? vintage wine? real estate?

Oh! I just remembered. Mortgage debt to buy a home is good debt. Even Dave Ramsey, the hater of all money borrowed, deems mortgage debt acceptable. Never mind that real estate is an illiquid asset that’s expensive to buy, sell and own.

But why stop at a primary residence? I could buy an apartment building too. As long as the rent exceeds my expenses I make money.

You need housing; therefore, you can use other people’s money to get it. You know what else you need? Transportation, health care, food. Mmmm. Food. Even if money was tight, surely you wouldn’t mind if I had a modestly price, sit down dinner with my guy. I mean, I gotta eat.

And I refuse to put unhealthy food in my body. I only get one you know. I have to take care of it.

As for transportation, I’m not taking the bus, train or any other form of public transit. Too many crazies take the bus, and I ain’t trying to get stabbed while waiting for the bus to arrive. How do you feel about an auto loan?

Well, I guess that settles it, you asked “Is there any such thing as good debt?” Please. If you frame your argument right, with a bit of logic, a pinch of confidence and a whole lot of delusion, it’s all good debt. Well, unless you’re using a site such as this to obtain credit.

* I do not have an interview coming up. I was just trying to make point.

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{ 33 comments… read them below or add one }

Lance@MoneyLife&More July 4, 2012 at 8:22 AM

Responsibly using student loans, mortgages, and business loans CAN be good debt but there is no such thing as a type of debt that is 100% in every case good. Unfortunately a lot of people taking out student loans won’t figure this out until after they owe $75,000 for an english degree they can’t get a job with :(
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Romeo July 4, 2012 at 11:42 AM

Lance,
I was talking to a young lady the other day who is 22 years old but has $28,000 in student loan debt. She hasn’t even begun her junior year of PRIVATE college. Her reason: She was the first one in her family to go to college so no one ever taught her about the financial ramifications of student loan debt.
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Shawanda Greene July 16, 2012 at 6:34 AM

I wonder why high schools don’t offer a course or at least a seminar on responsible borrowing. I read somewhere that, on average, the U.S. spends over $10,000 annually per pupil. We can’t find a couple dollars to educate kids on personal financial matters that’ll change the course of their life?
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Romeo July 4, 2012 at 11:32 AM

There’s a lot of reaching in this post. Quit frankly, there is no good debt, nor is there a bad debt. Even a payday or title loan is not necessarily a bad debt for someone who has exhausted all other options. Expensive, yes, bad, no.

I prefer the terms justifiable and unjustifiable. However, within the context of justifiable debt, one should limit the amount they take on. THIS is when people find themselves in trouble.
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Shawanda Greene July 16, 2012 at 6:39 AM

Being that the terms “good” and “bad” are subjective, when to borrow and what to borrow money for is definitely subjective. The point I wanted to make is that any debt could qualify as “good” debt if you can find a way to justify it. You could even make the argument that debt you can’t possibly afford to repay is good debt. For instance, borrowing money for a life saving surgery doesn’t sound like “bad” debt to me.
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nicoleandmaggie July 4, 2012 at 5:20 PM

Good debt is when the risk-adjusted Expected Value (really, the Expected Utility) of the present discounted value of the debt is worth more than that of not taking on the debt.

That means, taking into account probability and risk and the cost of the debt, is the investment likely to pay off in the long term? The person taking in the debt gets to decide what “to pay off” means (and lending agencies get to decide the cost of the debt based on their perceived risk).
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Shawanda Greene July 16, 2012 at 6:45 AM

Under your definition of good debt it’d seem to me that you wouldn’t know whether your debt is good until after you borrow the money. But that would also be the case for any investment. Even if you don’t borrow money to pay for, let’s say, a college education, you won’t know whether you a made a bum investment until years down the road.
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eemusings July 4, 2012 at 9:21 PM

I was lucky to avoid student debt, though a mortgage is definitely in the future. A car loan is also possible (not a preferred option, but I’m not one of those people fully anti-loans. All our cars have been old, and I know the pros and cons of that path). And as un kosher it is to say, I would not be opposed to taking on a very small amount of debt for a round the world trip – as in a couple thousand, in the case that we return to no job, and I would rather carry a bit of debt than drain my savings.
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Shawanda Greene July 16, 2012 at 6:50 AM

To get out of debt, I followed the Dave Ramsey plan, but I made a few tweaks. One of them was having a 3-month emergency fund before tackling my student loan debt. After I paid off my car loan, I beefed up my savings. The $1,000 baby emergency fund Dave recommends is something I just was not comfortable with.
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Marissa @ Thirty Six Months July 4, 2012 at 11:18 PM

I don’t believe that there is such a thing as “good debt”. At the end of the day you still end up owning that money.
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American Debt Project July 6, 2012 at 6:24 PM

I think the question is also personal debt or corporate debt. If you are a business and you operate on Dave Ramsey principles…you could be unreasonably restricting yourself. If you are a business owner with a profitable operation and you take out an SBA loan at 5 to 6% interest to invest in equipment that brings in 20% returns, and you pay back that loan in 3 years…nothing wrong with that my wise business-owning friends!!
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Shawanda Greene July 16, 2012 at 6:55 AM

If you only looked at the numbers, debt can make sense in a lot of cases. However, I think many people underestimate their risk and overestimate their returns. It’s a recipe for losing money.

I can see why many people choose to borrow money when it comes to real estate investment. But if you’re going to take on large amounts of debt, and thus the risk of losing large amounts of money, you need to have cash to cover those losses. In other words, broke people shouldn’t borrow money.

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Kris @ BalancingMoneyandLife July 5, 2012 at 12:55 AM

I was lucky, I managed to graduate from college the first time with no debt; my Masters was sponsored by my company. (whew!).

However, it is far too easy to find yourself in too much debt, even so called “good debt”. My mortgage debt is quite high, and you know whose fault that is? Mine. So I’m working on dealing with it.
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Shawanda Greene July 16, 2012 at 7:00 AM

I think debt drives up prices. Look at what’s happening with college education. If people had to pay cash for houses, they’d cost less.

I applaud you for acknowledging where the fault and more important, the responsibility lies in paying down your mortgage. It’s so refreshing to meet people who take ownership of their decisions.
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Dave, Financial Conflict Coach July 5, 2012 at 9:33 AM

I think the good debt vs bad debt debate is unique for each person.

There are far too many variables to consider- personal income, personal expenses, savings/retirement goals, etc. Also, your willingness to pay interest for the use of that money. To some, just the thought of it is offensive.

Even the depreciating asset argument is not a good measure in some cases, because the emotional value placed on things (car, collectibles, etc.) helps people justify the expenses. It may not make sense to you, but you can’t argue with someone’s feelings.

The short answer: there is no right or wrong answer.
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Shawanda Greene July 16, 2012 at 7:08 AM

For me, debt is either acceptable or unacceptable. Most of it falls in the unacceptable category. I think people should take a personal approach to managing their “personal” finances.

However, some of our decisions are just stupid. If a person is about to make a mistake that will land them in a worse position financially, emotionally, etc., then I’m prone to speaking up. If said individual is a close friend, I’m definitely speaking up.
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Michelle July 5, 2012 at 10:02 AM

I think debt can be good if it’s realistic, you have a realistic goal of paying it off, and it helps you positively in the end. My student loans weren’t horrible. Yes, I would prefer to have none but that would’ve been hard.
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Shawanda Greene July 16, 2012 at 7:11 AM

I wasn’t thrilled to graduate with as much student loan debt as I did. In hindsight my student loans weren’t necessarily bad. My interest rate was super cheap (it went from 2.625% to 1.625%) and the balance was about a third of the salary I earned fresh out of college. As a result, I had no problem paying them off quickly.
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Nunzio Bruno July 5, 2012 at 10:10 AM

Interesting and rationalizing can really be one of the biggest hurdles we put in front of ourselves. I think there really can be good debt in so much as managed debt helping you to build your credit score and credit health. When you are talking about an investment, whether in yourself or for some kind of more traditional vehicle, as long as you are keeping tabs on it’s return vs the premium on the debt that can be healthy as well :) In case you haven’t noticed I’m a big fan of using leverage (credit) to make ourselves more profitable or yield a bigger return and even being smarter/more informed…because that means you might make better decisions later!
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Shawanda Greene July 16, 2012 at 7:19 AM

I see. :) If someone with, let’s say, $100K in the bank, a steady income, and no obligations or pending obligations told me they wanted to take out a $10K auto loan at 2%, I wouldn’t think the decision was terrible. It’s one I’m not likely to make, but it’s not stupid. Now, if you’re broke with a small, sporadic income, and a crap load of debt already, that car loan starts to looks more and more like bad debt to me.
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Holly@Clubthrifty.com July 5, 2012 at 10:45 AM

I think that for certain people, there is such a thing as “good debt.” If you use debt in a way that will maximize your wealth, (buying a house or business) then good for you. However, giving people the idea that some debt is “good” is probably not a good idea.

Some people take the idea of good credit and run with it!
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Shawanda Greene July 16, 2012 at 7:21 AM

“Some debt is ‘good’ is probably not a good idea.”

This is precisely why the U.S. recently found itself in a housing bubble. Next up, the student loan bubble.
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MyMoneyDesign July 5, 2012 at 12:45 PM

The only good debt I can think of it is one that pays for itself over the long haul – like a business or rental house that brings you more money every month than you pay out. Otherwise, if it’s just money coming out of my pocket – that hurts!
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Shawanda Greene July 16, 2012 at 7:24 AM

I have a hard time referring to any debt as “good.” However, debt that makes or saves you money (or your life) with very little risk is okay. If you can afford to repay the debt, then it’s acceptable. It’s not good, but it’s not necessarily bad either.
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bog0fdebt July 5, 2012 at 3:31 PM

I tried to justify (and suceeded) all of my debt. I know better now and am working to pay it off. Maybe eventually I’ll get more when I buy a house but that won’t be for a LONG time (maybe never). And if I do end up with more debt, I’ll have a decent sized downpayment and have it payed off really quick. I’m happy with renting right now though. Other purchases, I’m trying to do all in cash (like my wedding) and not get into further debt.
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Shawanda Greene July 16, 2012 at 7:27 AM

Good for you. Borrowing for a wedding sounds like a bad idea. Marriage is hard enough. And lack of money and debt certainly won’t make things any easier.
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Dominique Brown July 5, 2012 at 9:23 PM

Good debt to me is when you borrow money and your Return exceeds said borrowed monies interest rate + risk free rate of return after you factor in state/local and federal taxes.

For example. In real estate (my rental empire). I borrow at 4.75%, the risk free rate of return is what ever the 10 year treasuries are , tax rate (doesn’t matter yet, I’m an s-corp with tons of passive activity losses). So, at a minimum let’s say I have to clear 5-6%.

Well.. I pull in much higher return than that.

So, I call my real estate financing… good debt

Other things are harder to quantify but you get the gist.

To sum it up.. it’s only good debt if your return on investment after taxes exceeds the interest rate (of the debt) + risk free rate.

To throw a little salt in the dish.. factor in the payback period. Is it within acceptable ranges? I am one of those people who think student loans (education) can be quantified.
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Shawanda Greene July 16, 2012 at 7:36 AM

Great definition. My student loans paid off because my degree paid off. That’s how people who choose to borrow money for college should look at their degree. Even if they paid cash for a college education, will they recoup their investment AND what kind of returns will they earn?
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Holly Thrifty July 8, 2012 at 3:19 PM

Good debt or bad debt–anytime you pay more than you HAVE to pay, I consider bad debt. If you could reduce the amount of interest you pay on your mortgage over time–why not? We’ve heard about leveraging, but in this economy many of the folks who did that are struggling to hold onto their big homes, big cards and big expenses they never could afford in the first place.

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Shawanda Greene July 16, 2012 at 7:38 AM

Yep. Regardless of what you borrow money for, it’s probably going to fall in the bad debt category if you’re overly optimistic about your returns and your ability to repay.
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Kathleen @ Frugal Portland July 10, 2012 at 8:12 PM

I’m beginning to think that good debt does not exist. At least right now. I think it’s acceptable to buy a house with 20% down, but other than that, I’m not interested in any debt.
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Shawanda Greene July 16, 2012 at 7:39 AM

Same here. I can’t foresee myself borrowing money for any other reason.
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