Over the last few years I’ve spent a lot of time pondering debt and whether there can ever really truly be a good kind of debt. Oh, I know a lot of people refer to things like student loans and mortgages as “good” debt, but how good is it really? I mean, wouldn’t it be better if you had no debt at all? It’s not like when you tell someone you have student loan debt they ever say, “Good for you!” It’s really not that good a thing unless you start comparing it to other kinds of debt.
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Yes, student loan debt looks pretty darn good next to credit card debt I guess- well, unless you take into the account the fact that credit card debt is often discharged in bankruptcy- whereas student loan debt is almost NEVER dischargeable in bankruptcy.
My point is this: if any type of debt were all that good, wouldn’t we all want some? But the fact of the matter is that most of us (and in particular most readers of this blog) are avid debt haters and are out to annihilate debt at all costs, if you haven’t already.
Debt is Risk
Why is it that we all hate debt so much? I guess that most folks would say things like they hate paying interest, they hate owing somebody something, or they just hate seeing money flow like water out of their checking account each month to go toward things or experiences they’ve purchased in the past. But I would say that, at its core, the reason we all SHOULD hate debt so much is because debt symbolizes risk.
What the heck does that mean? Well, take Mr. CMF and me. We have kind of a lot of student loan debt hanging around. I know a lot of “experts” would consider this to be good debt. However, we actually have a six figure amount of student loan debt between the two of us. Yeah. A LOT.
Right now that student loan debt represents risk to us, because if one or both of us were to lose our jobs for whatever reason (especially if it were Mr. CMF, since right now he makes a lot more than I do), we would be put in a risky situation.
The risk arises because our lenders do not give a rip about whether we are employed or not. They want to see us making payments every month no matter what, and those payments would still be due if we lost our jobs. Yes, there are things like hardship forbearance and things like that, but for the sake of this conversation we’ll pretend those aren’t options- after all, we want to get rid of debt, not help it hang around longer!
But that’s just it- if we lost our jobs we might be forced into a situation where we HAD to try to get forbearance on our loans if we could not pay them- which would put us at risk of having our payment term stretched out even longer and thus having to pay more interest. Now, luckily I’ve been a good little PF blogger and we’ve saved up a solid emergency fund- but if we could not find jobs again for whatever reason before we ran through it we could potentially face a situation like that- IF we let our student loans continue to hang around.
Is There Such a Thing as “Good” Debt?
Take the other kind of debt that many “experts” will tout as good debt- mortgages. Millions of us hold mortgages, but how many of us have stopped to think about what would really happen if we could not pay those mortgages?
Unfortunately far too many people found this out during the recent real estate crisis in the U.S. when they stopped paying mortgage payments- and the banks came after them and seized their homes in many cases. Do you know where your family would live if you couldn’t make your mortgage payment and the bank seized your home? Although this is obviously an extreme situation, it very neatly encapsulates why it is that debt is so risky.
Sadly, at least for Mr. CMF and me, we got ourselves into a lot of debt in the form of student loans when we were in our 20s and still pretty naïve about money. We didn’t know a lot financially-speaking then and because of that we made some decisions that we now regret, such as living too high on student loans when we were in grad school. And actually for a long time after grad school- for about five years, to be exact- we didn’t bother paying any extra on our student loans because we had drunk the “it’s good debt” Kool-aid and we figured we could make a better return on our money if we invested.
Now, this may be true- our student loans are currently locked at 2.5% and 3.5%- but this doesn’t erase the fact that it’s still a six figure debt and it represents a large risk to us were we to ever lose our jobs or become unable to work. We did in fact invest our butts off over the last five years- and we now have a nice nest egg to show for it- but we sure have a large student loan debt mountain to climb. I guess you could say that we are the epitome of well-educated debtors.
And Back to Risk
It all comes back to the fact that when you take on a debt, any debt, you are assuming the risk for that money and you are agreeing to pay it back. Now certainly in the case of a house or a car you may choose to sell it prior to paying it off and then you would not owe those payments anymore- but for the life of the loan you are agreeing to make those payments every month when you sign on the dotted line to take out a loan.
But What’s the Other Risk of Debt?
What? There’s more risk to debt? Isn’t it already bad enough? Yes, there is actually another kind of risk to debt. The other risk is what I’ll call opportunity cost.
Say Mr. CMF and I DON’T get laid off or get laid up in a car accident. What if we just hate our jobs and want to quit? The risk that we take by keeping our debt around is that we need to maintain jobs that will allow us to make those payments every month. But what if I decide that’s my life’s passion is to become a freelance documentary filmmaker and I want to ship off to sub-Saharan Africa for a year? If I still have student loans, mortgages, and other debts hanging around I may not want to come back to the US, because if I skip out on those payments for a year my lenders are most definitely going to notice!
Here’s the big take-home point here: Having your debt continue to hang around could COST you the opportunity to follow your dreams; or at least, it could certainly slow down your progress.
The Problem the Joneses Too Often Make
The problem that I think many people (at least in the US where commercials tout the cost of pretty much any consumer product in terms of its “low monthly payments”) make is that they allow the payment mentality to win out and assume that because they often have that amount within their monthly spend that they can afford the item.
I see this a lot with individuals that I work with. They are making payments on houses, usually two cars, and maybe other luxuries such as a boat, private school for the kids, etc. What no one stops to think about is the fact that they are playing a game of Russian roulette with their finances- and they are literally only one serious car accident, one debilitating illness, one layoff, or one lawsuit away from losing it all. That’s RISK.
So What’s a Girl (or Guy) to Do?
The answer is simple really: reduce your debt if you want to reduce your risk. And, almost more important- stop taking on new debt!
Suggested Reading: There are lots of great books out there about getting out of debt! One that I particularly like is Debt-Free: 9 Step System to Get Out of Debt Fast and Have Financial Freedom: The Quickest Way to Get Out of Debt Forever
Is your debt holding you back from doing things that you want to do with your life? Or has it held you back in the past? Please feel free to share in the comment section!
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Amen, sister!!!
Our six figure student loans keep me from being a stay-at-home mom (as anyone who has visited my blog knows). I would definitely shout from thrift ops that folks should not take out student loans. Take longer to graduate from school. Work your way through, but don’t take out loans.
It’s funny how I often justify our debt as being only student loans, but you are right – it might actually be worse that they are. My hubby’s family has actually suggested bankruptcy a few times, but they are pretty clueless about how student loans work. Which is probably why hubs was encouraged to take them out in the first place 😉
Student loans are really an insidious kind of debt I think. In theory they seem like a good idea- I mean, getting an advanced degree and the potential for a higher-paying job sounds like a really financially smart thing to do. But unfortunately student loans are often taken out by people who have a total lack of experience in financial matters (self included, at the time!) and I think this is what contributes to student loans being the massive financial concern that they are for many many people today.
I would never refer to my student loans as “good” debt. No-good, terrible, awful debt, yes, but never good.
I think the opportunity cost is the most damaging – I’ve stayed in jobs I didn’t like because they paid well. I guess that’s my punishment for living the high life in grad school.
Oh, I so hear you there! I was pretty much an idiot in grad school and lived WAY too well given my almost nonexistent salary at the time! You are so correct that debt is a huge anchor- it can keep you in jobs you might otherwise leave if money weren’t a factor.
For us, debt is a risk and a huge pain. We hated paying payments on everything, and it didn’t matter that we could afford it. Our lives are simpler now that we only owe money on a small mortgage, but I would like to get rid of that too ASAP.
Nice! We still have the student loans hanging around but I cannot wait for the day that they are gone!!
Dee, I’m with you! I couldn’t agree more. I have $160,000 of student loan debt – that’s all mine. It’s enormous. I do not consider it good debt, and I cannot wait to get out of it (that’s down from $206k by the way)!
Holy cats! I know, some would say it’s “good debt”- but in my opinion the only good debt is someone else’s! AWESOME job on getting your student loan balance down by so much already!
Great thoughts here Dee, I could not agree more. I think we can way too easily trick ourselves into thinking we only have “good” debt when it’s still debt. Too often we get ourselves into that payment mentality and think it’s only normal because everyone else is doing it. I know I was guilty of that in the past and have vowed to never let it hold us back again. Society tells us it can’t be done, but it most certainly can – you just have to want it bad enough to work for it.
I think that type of thinking contributed heavily to how I got myself into so much student loan debt in the first place. Back in grad school none of us were particularly frugal and it seemed to be the norm to be living off student loans and not working much while in school. Ugh! So glad the hubs and I woke up and smelled the coffee- although not until we’d already taken out quite a bit in student loans 🙁
Mmm, I guess debt is an obligation and I am a commitment-phobe. That said, we are most likely going to be borrowing in order to get a halfway decent car for our next vehicle – but you can bet that loan is going to be tackled gazelle style.
Great point about debt being an obligation. For us, we are really looking forward to ditching some of that obligation sooner rather than later!
I think that when people talk about “good” debt, they mean it in a way that the debt will pay off in future returns. But, like you said, it’s still a risk!
I think you are right- but I think that too often in popular culture that is perceived as “it’s a good thing” or as “it’s not harmful.” I think that both of these things can be true- but for a lot of folks who are saddled with big student loan debt (self included), it’s having a much longer-term impact than ever anticipated by the borrower.
It’s true Dee that debt is risk and oftentimes people do not measure their risks appropriately, or they use the wrong metrics for measuring it. The payment plan is deceptive and the problem with that is if you have too many payments then with a change or job or something unpredictable, it is easy to fall behind quickly.
It’s so scary when you think about it, isn’t it? That’s what happened to so many during the great recession and the real estate bubble burst- people had big mortgage payments and then lost their job or whatever and all of the sudden the life that you thought you had has evaporated along with your ability to pay for it. Sadly I think that part of the problem in the real estate bubble burst is that too many people did not stop to consider this possibility prior to purchasing the home. On the one hand I think, why would they? But on the other hand this goes to show once again why an emergency fund is so very very important!
Great points here, Dee! Our only debt is our mortgage and we’re actually quite happy with it because of our extremely low interest rate (3.8%). We’re not accelerating our payments as the rate is so low that we’ll likely experience better returns by investing our excess cash. But I agree with you that very little debt is “good”!
That’s our motto! We go back and forth on whether we should be investing extra cash or using it to help pay down our low interest rate debt. On the one hand, we want to be debt free SO BADLY. On the other hand, we want to build investments and increase our passive income. But having so much debt, regardless of the interest rate, is really starting to have an impact on our decision-making process and our life happiness, so for right now we are in debt annihilation mode!
Excellent points! While I’m not a zero debt guy, I love your point that most readers of your blog SHOULD be anti-debt. I’ve met too many people who got into trouble with leverage, only to have something like a job loss (like you discuss) derail their grand plan.
Oh I know, it’s frightening how quickly the house of cards can come tumbling down with one job loss or serious illness. I know it’s impossible to predict those things, but when you think about it, it really does make you realize how quickly you could be one tragedy away from losing quite a bit. The hubs and I have both life insurance and disability insurance, and I call those my “sleep at night” insurances. But of course a job loss would not be covered by either of those!
So true Dee. I had somebody the other day try to argue with me that my $43,000 of student loan debt at 6.5% was “good debt” and didn’t really need to be paid off ahead of schedule. The only time a debt is really good is when it’s gone.
Amen!!
No debt is good debt. Get out. Stay out.
Well said!
Debt haters unite! I agree with you that the key is to stop taking on more debt, no matter where you are in your journey.
You’re never going to get out of the hole if you don’t set down the shovel at some point!
I’m really fortunate I don’t have student debt to worry about. Nevertheless, I know people who do and I think if you have debts to finance something positive or your basic needs, it’s not too bad to have one, as long as you focus on annihilating it as soon as you can, because just like you say, any kind of debt presents risks.
Kudos to you for having no student loans! That’s definitely the way to go 🙂
I’m with you 100% on this one, which is why my wife and I are going to be finished paying off our mortgage (the last of our debt) this year at ages 30 and 33 respectively. We hate having debt!
Wow, so impressive! Awesome job on getting rid of your debt (almost!) Good luck on the last few months of your debt payoff journey!
I am with alot of other reads in that I hate debt. My plan is to abolish all of it before I reach age 40 (and with any luck, sooner than this). The student loans
And I agree, would I ever tell someone, “Hey man, check out this AWESOME debt I have!?” No… probably never…
Excellent plan! Same here on the get rid of debt before 40 plan! Hopefully sooner!
Holy cow, I LOVE this!!! Not too many people think of the opportunity cost! I definitely remember vividly what a different it was to graduate debt free vs. my friends graduating with student loan debt. They just had to make sure they got a job. I only had to make sure I could eat and live somewhere, so I was able to be way pickier.
On the flip side, when I graduated with a ton of debt from grad school, I had to go right back to my old job to start making payments. It’s really only now that I’m in a position to start looking for what I want to be doing vs. surviving.
It’s an enormous difference to graduate debt free versus with debt, isn’t it? Glad to hear that you are now in a position to be looking for what you want to do!
You’re absolutely right Dee, debt does = risk.
I’m a huge fan of using deductible debt (good debt) to increase my asset base and move towards retirement, but using debt to increase your asset base also magnifies gains and losses.
You just need to keep on top of your LVRs and “manage” your risk.
You nailed it with opportunity cost. We really are being forced to work if we have debt. Not that work is bad, but often times it’s work that we don’t want.
Fantastic article!
Hey Dee, Luckily for me, I really don’t have debt. I’m with you though, there’s no such thing as good debt in my book. I love that you took the time to mention opportunity cost. That’s an underestimated factor in many financial decisions. Thanks for the great read!
I recently encouraged my parents to pay off their mortgage because they are interested in retiring soon. My father didn’t feel comfortable even considering an earlier retirement until 100% of his debt was gone. Overall, he seems happy with his decision.
Unfortunately student loan debt rises each year in the U.S. Student loans are easily accessible which equals more profit for the government.
We are on our way to debt freedom with my student loan next on the chopping block. I think debt holds you back in so many ways, but staying positive being debt free will create so many freedoms and choices, I look forward to the day.