How much of your debt is good debt today?

[wasabirobot]

A funny thing is my kneejerk reaction to this post is that you are ripping me off personally somehow It is the action/reaction concept I think. When I see you say that you racked up 6 figure debt that the government will take from you, I think hey - I'm paying that debt! But in reality, as I think about it further it seems to be no different from any tax break, such as mortgage interest or whatever... Just trying to think about why I reacted like that, as I don't think that I am alone in that mindset.

Rather than feeling ripped off by school teachers, social workers, and the like instead think of it as a small perk of a class of jobs that are woefully underpaid and under-appreciated. Getting benefit from the program is based on qualifying and paying consolidated federal loans within the income-based repayment program. That means that if my husband and I were making a lot of money in our public sector jobs, we wouldn't benefit from the program because our required monthly payments would be much higher than they currently are. My job doesn't even come with health insurance (I had to marry into it) so I don't feel that this is an undeserved perk. Programs like this stem the tide of attrition in difficult but important professions making these public services overall more efficient and populated with educated and driven professionals.

Here is more info on the program: https://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service

 

[Matt]

Rather than feeling ripped off by school teachers, social workers, and the like instead think of it as a small perk of a class of jobs that are woefully underpaid and under-appreciated. Getting benefit from the program is based on qualifying and paying consolidated federal loans within the income-based repayment program. That means that if my husband and I were making a lot of money in our public sector jobs, we wouldn't benefit from the program because our required monthly payments would be much higher than they currently are. My job doesn't even come with health insurance (I had to marry into it) so I don't feel that this is an undeserved perk. Programs like this stem the tide of attrition in difficult but important professions making these public services overall more efficient and populated with educated and driven professionals.

Here is more info on the program: https://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service

Yep, I agree. As I thought through the emotional reaction I do think it is a fair point that the jobs being done are a great benefit for society, and I am not really begrudging anything here, I just thought to share my thought process, as I wonder how many others may consider this the same way. I feel its somehow connected to the capitalist vs socialist view points that exist within politics, and since I straddle both of those lines I think I often think about things from both perspectives.

Sorry to sidetrack from the point, it was just something on my mind.

 

[Miles Mademoiselle]

A funny thing is my kneejerk reaction to this post is that you are ripping me off personally somehow It is the action/reaction concept I think. When I see you say that you racked up 6 figure debt that the government will take from you, I think hey - I'm paying that debt! But in reality, as I think about it further it seems to be no different from any tax break, such as mortgage interest or whatever... Just trying to think about why I reacted like that, as I don't think that I am alone in that mindset.

You raise an interesting point, Matt. I, too, have that reaction every time I hear about friends, family or strangers taking advantage of the federal loan forgiveness program. When it was time for me to consider higher education and its financial impact, I made significant sacrifices (in things like educational prestige and quality of life as a student) so that I wasn't burdened by such a huge amount of debt. So when I hear about the program, I feel something akin to resentment having made sacrifices so that I wouldn't find myself in that situation. To me, it feels like the program rewards behavior that I don't agree with (taking out huge amounts of debt without a realistic ability to repay it). Everyone has a choice when it comes to education, so student loans don't invoke the same level of sympathy in my book.

All of that said, so many close to me (my little sister included) are teaching the next generation and sacrificing day in and day out on their measly, barely-livable salaries. So I am hugely conflicted on how to react to scenarios like this. I think the root of the problem is the inaccessibly high cost of education in our country. It shouldn't be that expensive to be educated. It's a vicious cycle. The more money you have to pay for the "best" education, the smarter you will be, and the more able to rise to the top, whatever that is. This leaves out a huge demographic in our society, those who cannot afford the "best" schools, and their interests go unrepresented and they are further oppressed economically. The problem would be solved if everyone had equal access to education. But that is certainly a pipe dream.

Edit: As a side note, I certainly don't mean to attack @wasabirobot. I'm impressed with your plan. You've sparked an interesting dialogue and Matt took it to the next level, and it's nice being able to discuss what I'll call a controversy in this safe space.

 

[Annie H.]

I think the root of the problem is the inaccessibly high cost of education in our country. It shouldn't be that expensive to be educated. It's a vicious cycle. The more money you have to pay for the "best" education, the smarter you will be, and the more able to rise to the top, whatever that is. This leaves out a huge demographic in our society, those who cannot afford the "best" schools, and their interests go unrepresented and they are further oppressed economically. The problem would be solved if everyone had equal access to education. But that is certainly a pipe dream.

You are absolutely right about the cost of an education. It just astounds me and here in CA it keeps going up and up and as you probably know kids can't even get the classes they need to get out of either JC in 2 years or in 4 years from a state college or university. Kids get out of college or grad. school or med school and can't afford to set up a practice or buy or house or even rent some places and CA loses them and the education the tax payers partially subsidized. Something that really irks me is that CA is selling it's college education to foreign and out-of-state students because they tuition is double or triple but that leaves fewer places (CA doth protest but they juggle the numbers) for in-state kids. To take it even further, I've read about businesses that figure out ways for out-of-state students to be granted in-state tuition. I feel much more ripped off about that than I ever would subsidizing the student loans of a teacher, doctor or dentist or gawd forbid, a social worker!

 

[Alex1432]

A funny thing is my kneejerk reaction to this post is that you are ripping me off personally somehow It is the action/reaction concept I think. When I see you say that you racked up 6 figure debt that the government will take from you, I think hey - I'm paying that debt! But in reality, as I think about it further it seems to be no different from any tax break, such as mortgage interest or whatever... Just trying to think about why I reacted like that, as I don't think that I am alone in that mindset.

Man if you let this get to you you don't read to many of the budgets congress passes (if they pass something). They are filled with give aways of your tax dollars from farming subsidies to oil subsidies. It is the nature of the beast. I always get upset when congress authorizes military programs that the military does not want just because cutting it would lose jobs in that politicians district....

 

[Matt]

Man if you let this get to you you don't read to many of the budgets congress passes (if they pass something). They are filled with give aways of your tax dollars from farming subsidies to oil subsidies. It is the nature of the beast. I always get upset when congress authorizes military programs that the military does not want just because cutting it would lose jobs in that politicians district....

For sure.

Just to be clear, I was just sharing a thought process- which for me concluded with ' I was wrong to think like that' prior to my comment. Just a digression from the post but wanted to share it as I'm sure many people might go through a similar process (and perhaps get stuck halfway through it)

I'm totally fine with the loan forgiveness.

 

[Annie H.]

I'm peripherally aware of student loans, high rates, etc. but since I don't have a need for the info it pretty much goes in and out of my brain. I've been asked by a relative to co-sign a private Discover graduate student loan (I am SO not going to do it) because my FICO score is higher than his (he thinks) in order for him to get a lower starting variable (shudder) rate-- 2.99% vs. 7.99%.

I've no info w/regard to these particular loans but have read that with other loans Discover "teases" an offer of lower interest rates just to get a co-signer on board and then doesn't deliver. Any info about Discover private student loans?

https://www.discover.com/student-loans/graduate-student-loans.html

 

[Miles Mademoiselle]

I'm peripherally aware of student loans, high rates, etc. but since I don't have a need for the info it pretty much goes in and out of my brain. I've been asked by a relative to co-sign a private Discover graduate student loan (I am SO not going to do it) because my FICO score is higher than his (he thinks) in order for him to get a lower starting variable (shudder) rate-- 2.99% vs. 7.99%.

I've no info w/regard to these particular loans but have read that with other loans Discover "teases" an offer of lower interest rates just to get a co-signer on board and then doesn't deliver. Any info about Discover private student loans?

https://www.discover.com/student-loans/graduate-student-loans.html

PLEASE tell him not to get a variable rate loan!!!

 

[Annie H.]

PLEASE tell him not to get a variable rate loan!!!

Like a 28 year old will listen to me! I sent him an encyclopedic warning of everything but the end of the world. The good part about it is that he actually has the money to pay off the loan should interest rates rise or...hang on for this one... he stops getting 12% returns in the market (which he has been getting for the last 4-5 years --seemingly the entire history of the world to him). The pool of medical scholarships for which he wants to apply are debt repayment scholarships so unless he has debt, he can't apply. He actually has a thought out plan and can squeeze the last dollar out of a stone; it's just not for me. I'm still shuddering at "variable rate loan."

 

[Matt]

Like a 28 year old will listen to me! I sent him an encyclopedic warning of everything but the end of the world. The good part about it is that he actually has the money to pay off the loan should interest rates rise or...hang on for this one... he stops getting 12% returns in the market (which he has been getting for the last 4-5 years --seemingly the entire history of the world to him). The pool of medical scholarships for which he wants to apply are debt repayment scholarships so unless he has debt, he can't apply. He actually has a thought out plan and can squeeze the last dollar out of a stone; it's just not for me. I'm still shuddering at "variable rate loan."

Yeah, everyone is a genius in a bull market.

 

[Annie H.]

Yeah, everyone is a genius in a bull market.

Well, if you would have asked me in 1987... It took that crash to wake me up. I have a very special relationship with crashes as a few of them have happened during my birthday week--1929 (no, I don't remember 1929 but it was in October), 1987, 1997 and 2008. One of them actually happened on my birthday--what a treat! Passive, index investing all the way (except for some fun $$) for me.

 

[Sesq]

I am going to kind of miss my car loan when its gone in a couple months. 0.9% interest per year and I have been repaying it via MS with GC bought with a 5% card (so net 4%).

 

[3rddayfan]

I am going to kind of miss my car loan when its gone in a couple months. 0.9% interest per year and I have been repaying it via MS with GC bought with a 5% card (so net 4%).

Very interesting. I've heard of doing this but am unaware of the actual method(s) (must be many out there since everyone is different) employed to carry such a challenge out. Our car loan rate is less than 4% but we have a few years to go. Sounds like you made a few bucks, too.

BTW, bought the car through Hertz sales and although the process became cumbersome, in the end, Hertz treated us well (thanks to the local Hertz peeps). Paid for an inspection at the local car dealer service center and was alerted to potential problems. Cars bought through Hertz are "as is" but because I had documentation, I had the diagnosed repair done (both sides) by Hertz locally AND I got FOUR new tires, not just one replacement that was suspect. It was MY Christmas present from above!!! ")==

 

[grebel]

wow, clearly a higher level of conversation going on here than I, myself, am ready to really respond to. But to Matt's original post, I see my Student debt and my Mortgage both as "bad debt" in that they are not growing or increasing my money (like an investment would). I would probably feel differently if I were taking out debt for a business. My saving grace right now is that renters are largely paying the mortgage and we were able to put my wife through Grad school with cash...

 

[El Ingeniero]

wow, clearly a higher level of conversation going on here than I, myself, am ready to really respond to. But to Matt's original post, I see my Student debt and my Mortgage both as "bad debt" in that they are not growing or increasing my money (like an investment would). I would probably feel differently if I were taking out debt for a business. My saving grace right now is that renters are largely paying the mortgage and we were able to put my wife through Grad school with cash...

If your student loan qualified you for a higher paying job, it is good debt.

If your mortgage + home insurance + property tax is cheaper than renting a suitable apartment, it is good debt.

Edit: Geez, I just noticed the part where renters are largely paying the mortgage ... dude, that's not debt, that's an investment. If that goes on long enough, you will see a profit on that sucker.

 

[grebel]

You're right about the house. I just don't like debt.. even when its making me money.

As for the school loan, its hard to tie my job directly to my college education, but then again, most decent jobs require a college degree just to be considered for the job, so I guess in that sense it paid for itself.

My wife's graduate degree paid for itself amazingly well, and she is in a very poor earning field (social work). She got hired at her internship a month after graduating and immediately was making $15-20k more than she would pre degree!

If your student loan qualified you for a higher paying job, it is good debt.

If your mortgage + home insurance + property tax is cheaper than renting a suitable apartment, it is good debt.

Edit: Geez, I just noticed the part where renters are largely paying the mortgage ... dude, that's not debt, that's an investment. If that goes on long enough, you will see a profit on that sucker.

 

[KevLe]

This is a great thread for a serious discussion about debt.

I see what you're saying about good debt vs bad debt. I'd like to add that when you have any form of debt, the primary goal ought to be about paying it down as fast as possible. And what that means is to actually pay more than the minimum requirements regardless if it's good debt or bad debt.

It's obvious that you'd always want to pay in full for a credit card because you shouldn't buy something you can't outright afford. It's easier said than done but generally speaking, this is an accepted logic.

Where it gets dangerous is with the good debt that you describe. I can recall too many times where a friend or family member pays the mortgage every month on time during the housing bubble but because they felt a sense of accomplishment and/or financial security on their well intended good decisions, when things came up like a house repair or they needed new appliances, and coinciding with the rising value of their home, they'd take a loan out of their equity to pay for these things without ever thinking they should have paid more in their monthly mortgage payments.

Or when in the case of student loans, you only pay the minimum monthly requirements and a decade later, you find yourself still paying your student loans but because the economy tanked, you're out of a job and suddenly keeping your savings to survive the tough times becomes much more important than paying down a debt that was so long ago.

My point is that even though it's good debt for a variety of reasons, I caution because more often than not when we feel safe/secure or we put our guard down, it's just human nature to act on our impulses, which can potentially hurt you in the long run.

And I speak from experience because I recently decided to cut my usual living expense habits and make big $1200/mo payments on my student loans, which helped me finish off $10k of my remaining student debt in 8 months BUT it took me 6 years to pay down $18k when I only paid the minimum $245/mo. The difference in interest alone made me want to punch myself in the face.

So yeah, that's my two cents. Men lie, women lie, numbers don't

 

[grebel]

I heartily agree! I think it can be easy to sit back on a mortgage and pay it at the minimum. Seems like a better idea to get that thing paid off. I'm in the same boat as you on student loans. I dicked around for years paying just the minimum, this year I'm trying to pay it off as aggressively as possible. Loans seem tailor made to mess with our heads and get us to pay more money. I like looking at my Mortgage payments every now and then to be reminded of how much of our money is going to interest alone. Its a really sobering thing to look at.

 

[Alex1432]

Perhaps good debt should be thought of as taking it a loan. If your student loan is one hundred dollars a month but you can afford to pay 1100 a month then you are taking out a loan for one thousand dollars at the interest rate of your student loan. If your interest is three percent plus a tax benefit one can argue it's a good loan to invest and you can probably make more money. If you are betting one thousand dollars a month on double zero in roulette then kind of a waste.

Being debt free psychologically also had huge benefits but that is a personal thing.

 

[Matt]

Being debt free psychologically also had huge benefits but that is a personal thing.

It also has drawbacks. When you have no debt your desire to earn more money decreases as you have less external pressure. You need to replace the pressure of debt with internal motivation and new goals.

Not a bad thing, but overall, you might actually do better being in debt for a while to learn how hard and how much you can work before the external debt is removed.... kinda like training wheels.

 

[MarkD]

PLEASE tell him not to get a variable rate loan!!!

@Matt, @Annie H. , @Miles Mademoiselle See my post here (which didn't get a whole lot of visibility compared to this thread): https://saverocity.com/forum/threads/student-loans-fixed-vs-variable-and-private-vs-federal.88868/

Aren't the Feds under some pressure to keep interest rates low for the long term? I mean we can't predict the future but how as a society can we go from mortgage rates in the low 2-3% range to double-digit rates without some kind of financial collapse?

 

[3rddayfan]

I suppose there is no good debt but if there was:

Good debt is the car financed at an affordable rate so that it is utilitarian in nature keeping one's income ongoing. Maintaining the car and managing one's commute are the variables.
Good debt is when the emergency fund stays where it belongs while unsecured debt is at 0% APR and it's managed with focus and on time payments.
Good debt is when you buy a washing machine at 0% and stay safe from some areas, paying your balance off when the bonus APR is ending.

JMHO.

 

[Beltway Explorers]

I consider my mortgage to be debt that I'm comfortable holding. Our payments (including taxes and insurance) are well below what we would pay for a smaller rental home and we are getting some decent tax credits out of it since we itemize. We bought a home that hadn't been updated since the 1960s so we are building some great equity as well.

My student loans from the early 2000s have an interest rate of 0.07 percent. While I could pay them off, my savings account is making 0.95 percent on the money that I would use. I don't know if I'd consider it good debt, but financially it makes more sense for me to put those funds towards my emergency fund or mortgage than towards loan repayment.

Really debt is about tradeoffs. If you're going to make more money elsewhere then couldn't all debt be "good" in a way? That's my left brain talking...

 

[Milestogo]

More food for thought. In the early 90's we lost our home because we couldn't afford our mortgage payments when the economy crashed and all of our hard earned equity (both cash from large downpayment and market equity) was lost. We tried but couldn't sell our home for the balance of the loan. We vowed to never again owe on a mortgage and so after we got on our feet and bought our next home, we worked very hard to pay it off. Then the economy crashed all over again. This time we kept our house but couldn't sell it for enough to recoup our investment in it. So, the question is... Is it better for the bank to take the loss as in our first home (the government bailed them out so how much of a loss was it really?) or is it better for the homeowner to take the loss. Looking back I think the smart ones were the ones (and I met a few of these smart folks) who refinanced as the market increased and put their proceeds in an annuity account where it remained safe. When the market crashed, these folks also lost their home but their kids were able to go to college because they were smart enough to refinance but not spend the money they borrowed. If I had it to do all over again, that is what I would do. I have no sympathy for the banks. I watched them refuse to renegotiate loans so the homeowner could stay there, foreclose, then sell to an investor for less money than the homeowner was willing to pay. Just my opinion and of course if you refinance you must make payments so it is a tough decision. But I think you are better off with a mortgage. Just be smart about it.

 

[DanT]

Debt usually translates into leverage. Leverage means risk. Debt can be good if it is for instance a 0% car loan. If you had the cash to pay for the car, why bother? You can take the loan and preserve your cash. The cash could put into a safe investment. Of course in today's low environment it is not as big as a return as it used to be still a net win. If you are into MS you can even make some extra money paying off the loan. Also, perversely your credit score is better off with a mortgage and/or installment loan. Student loans are bad because the interest is not deductible for many people and it is very difficult to discharge in bankruptcy(which is topic worthy of discussion in of itself!). When I got married first thing I did was work on paying down my wife's student loans which thankfully were not that much. Her credit card debt I was able to move it around to 0% cards(I miss those days of 0% and no balance transfer fees!) and paid those off.

With mortgages, it really is a matter of one's goals and risk profile. Some would rather take a mortgage even if they had cash in order to have liquid assets on hand to take advantage of investment opportunities that come up. Again though that means leverage. Leverage is not a bad thing but it's risk. More risk, more reward(or bigger the fall). It's like buying stocks on margin except that you don't have to worry about a margin call which is why the real estate market dries up in a downturn. For those that can afford to do so they would rather wait out the downturn but if you are forced to sell an illiquid asset in a bad market then the pain will be great. IMO one of the big mistakes many people make is that they borrow the maximum amount that they can when they buy a house. Any sort of setback and they are in deep trouble.

 

[30French]

My student loans from the early 2000s have an interest rate of 0.07 percent. While I could pay them off, my savings account is making 0.95 percent on the money that I would use.

I think I would keep that 0.07% debt around "like a pet" as Dave Ramsey would say. After inflation they are paying you to hold onto their money.

 

[thehustla]

Live in a duplex while tenants are paying my mortgage. Good debt

 

[DanT]

Until you get tenants who are deadbeats or who start a fire because they were smoking in bed or who trash the place or any of other number of scenarios that almost inevitably come up if you are a landlord for long enough.

 

[GettingReady]

I get the leverage part, but I'm just not comfortable with debt of any kind including mortgages, school loans, or car payments. The thought makes me physically ill. It was really difficult when I started playing this game and saw all the CC bills. It's still hard but easier if I at least pay them down to 5k or less. I have to keep reminding myself it's not debt per se, and I frequently compare the amount owed on CCs versus the amount sitting in different accounts.

 

[DanT]

Some people are simply more risk averse than others. Not necessarily a good or bad thing it just is what it is. People also tend to be more risk adverse the older they get.