One of the major disagreements you’ll come across in financial literature is the issue of student debt and whether it’s worthwhile. Let’s look at my remaining student loans (my only long-term debt) under three different paradigms:
1) Good Debt is Cheap Debt. A fairly simple, purely mathematical distinction; you simply have a cut off point for interest rates. All the debt above that level is bad, any below that is good. Simple, hunh?
Well, not that simple; you still have to settle on a cut off point. There are different views on what constitutes the division; Suze Orman, for one, recommends 8%, but there’s nothing magic about that particular number. My student loan, at 2.87%, certainly meets that level for cheap debt, as well as more grueling requirements of 3-5%. So far, so good debt!
2) Good debt buys value. In other words, if you are able to buy an appreciating asset with the debt, it’s good debt. By this logic, real estate mortgages, small business loans, and yes, student loans all qualify as good debt. The result is an increase in earning power in all three cases. That’s two for two, with student debt qualifying as good debt.
3) No debt is good debt. This is the philosophy of Dave Ramsey, among others. By this standard, any kind of debt you acquire is bad debt. Exceptions are made for mortgages, but even those should be paid back as soon as possible. By this point, even the $12,000 I owe is bad debt, and I should make it a top priority to eliminate the debt.
My View: I tend to lean toward the first definition. I don’t feel that I can go through life without any debt, nor should I put investing and other goals aside until I’ve paid them back. In addition, while the purpose for taking on the debt is relevant (particularly to the IRS)
Related Websites
Leave a comment