Are Student Loans Bad or Good Debt? Here’s what you need to know

Note that the student loan situation has changed due to the impact of the coronavirus outbreak and the relief efforts of the government, student loan lenders and others. Check out our Student Loans Hero Coronavirus Information Center for news and additional details.

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Are student loans good or are student loans bad? Are they a big plus, or are they just adding to a bad investment?

In reality, they can be both. Good student loan debt could earn you a college degree to help you move up the career ladder. Bad debts on student loans can leave you ill-equipped for repayment, hurting your finances for years to come.

To better understand the pros and cons of student loans and other debt, let’s take a look at the following:

Good Debt Against Bad Debt

Let’s see what is the difference between bad debt and good debt:

What Makes Debt Good?

What exactly is good debt? It’s about borrowing money for something that will appreciate or increase in value and make your loan worth the investment in time and money.

Mortgages : Home loans can be considered a “good” type of debt. Unlike a car, which loses value the moment you leave it, a home will (hopefully) increase in market value over time. If you sell it years later, you will (ideally) make enough profit to offset some of the principal and interest you paid on the loan.

Small Business Loans: Entrepreneurs who borrow can also stay on the safe side of debt, as the money they invest in paying for overhead, office space, equipment, employee training, and wages should pay off over time. time if their business is successful.

Leslie Tayne, a debt settlement lawyer with New York-based Tayne Law Group, described good debt as “debt that you can easily keep on budget and debt that has given you an edge.”

Basically, good debt will allow you to “be grateful for what debt has allowed you to have,” she told Student Loan Hero.

What makes debt bad?

In a nutshell, a bad debt is when you borrow money to pay for something that decreases or loses in value over time.

Auto loans: Not only is the potentially high interest added to the total amount of principal borrowed, but the car you bought is usually a depreciating asset. In this case, buying a car through a car loan might simply add additional interest charges on top of maintenance, insurance and gasoline that normally add to the going price of the car. car.

Credit card: This can be a good form of revolving debt, but can get “bad” if you allow your balance to build up, making interest unmanageable. While some cards come with rewards and perks, they may be worth it if you end up paying a bundle of interest.

Payday loans and cash advances: Other debts like these products often carry incredibly high interest rates that can eat into your budget. Likewise, large purchases that need to be funded, like luxury items you don’t need, can be considered bad debt because they don’t increase in value.

“Debt is only bad when it gets unmanageable, out of your budget, and you can’t pay it anymore,” Tayne said. “It can also include debts that just don’t make sense or debts you didn’t even intend to take on. “

So, are student loans bad or good?

In the good debt versus bad debt debate, student loans fall into a gray area. They can be considered good debt because the money you borrow to go to school allows you to graduate and get hired into a high paying job. This debt should pay off over time with a lucrative career in place.

In fact, having a college degree dramatically increases your earning potential, compared to less educated peers, according to Student Loan Hero research.

On the other hand, student loans can be bad because this degree does not guarantee a job. Student loan debt currently exceeds $ 1.64 trillion, with more than 45 million borrowers facing repayment of their obligations, according to our student loan debt statistics.

Although unemployment among university graduates has been historically low, it does not always remain so. The Great Recession of 2008 and the coronavirus pandemic that erupted in 2020 both made the job market for new and recent graduates worse. Even former students who find work more easily than their peers may not earn the kind of salary that makes it easier to pay off student debt.

In fact, student loans can be the most difficult type of debt to reduce to just “good” or “bad”, since everyone’s financial and credit needs may differ. Instead, consider both the pros and cons of student loans.

Is Student Loan Debt Good? Yes when …

  • Student loans allow you to pursue a college education without having to pay all of your tuition fees. With a college degree, you improve your chances of finding a stable, well-paying job.
  • Some federal loans are subsidized. If you qualify, your interest will be paid during certain periods.
  • Interest rates on federal loans are currently lower than those on most other loan products, and the interest is tax deductible.
  • Federal student loans come with a variety of repayment plans (standard, progressive, extended, income-oriented, etc.) that can make it easier to align your loan repayments with your budget.
  • You have opportunities to refinance your student loans if you’re struggling with debt – and with federal loans, you have additional options, including mandatory abstention and various loan forgiveness programs.
  • With timely and disciplined payments, student loans can positively add to your credit history and score.

Is Student Loan Debt Bad? Yes when …

  • Even though a college education improves your career chances, you might still find yourself unemployed after graduation.
  • Entry-level workers fresh out of college may also not earn enough to comfortably afford loan repayments. In addition, the high amount of debt relative to a lower salary can produce a debt to income ratio, which can harm your credit.
  • Unaffordable student debt can lead to delinquency and even default, which can ruin your credit score and prevent you from being approved for other types of credit.
  • Student loans have historically been difficult to release in bankruptcy, forcing you to prove that paying down the debt would cause you undue hardship.

How to turn student loans into good debt

The safest way to get student loans in good debt is to have enough cash on hand to pay off the majority of your interest before it runs out – but if it did, there is no way. would have no real reason to take out a loan in the first place.

A look at the pros and cons above may lead you to ask yourself: should I get student loans? From a financial point of view, it is often a necessary evil for students who do not have the luxury of grants and scholarshipsfamily money or other sources of money for college.

Borrowing money for student loans may be inevitable, but by carefully managing your debt, you can turn it from bad to good.

André Pentis and Laura Gariepy contributed to this report.

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About Walter J. Leslie

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