Student loans and mortgages have often been referred to as good debt. Credit card debt and auto loans were considered to be the proverbial bad debt.
After spending nearly a decade helping borrowers with student loans, I’m convinced of one thing: there is no good debt or bad debt.
Debt is simply an obligation to pay money owed. It doesn’t matter whether you are paying $500 a month to Sallie Mae or Visa. Either way, it’s money you don’t have because it belongs to someone else.
The “Good Debt” Myth Origins
A common sales pitch for student loans and college has always been that you are investing in yourself.
For a long time, there was some validity to this theory. College degrees meant that you had higher earning potential. Just one generation ago, college cost significantly less than it does today. At that time, almost all students got a great return on their investment.
Changing Finances
Because the cost of an education, even when adjusted for inflation, is triple what it was just 30 years ago, the “investment” is now significantly more expensive.
Additionally, the expected yield on this investment is now substantially less (especially for certain majors). Many college grads are unemployed, and many more are underemployed. They do not have higher incomes. Instead, they have onerous student loan debt.
Another harsh reality is the fact that not all college students will become graduates.
More than a third of first-year full-time college students will not earn their degree within six years. Repaying student loans can be incredibly difficult with a degree. The students who don’t earn their degrees will have a very tough time dealing with student debt.
The Lesson
College is very expensive.
The more you spend does not mean the more you will make.
In my personal experience, college was the best decision I could make for myself. I went to a state school and studied engineering. Almost all of my tuition was paid for through scholarships, and my housing expenses were paid for because I worked as a resident adviser. When I graduated I got an engineering job with the government that offered high pay and great benefits.
Unfortunately, I was not happy.
I went to law school. This time, I went to an expensive private school. Even though I worked full-time during my legal studies, I still incurred a great deal of debt. As a licensed attorney I now make significantly less than I did before I went to law school. The difference is that I love the work I do and would gladly continue what I am doing for the next 30 years.
I share this all to illustrate a point.
Return on investment for a college education is not what it once was. That does not mean you should not go to college. It just means that you need to really think it through. The last thing you want is to be stuck in a job you hate while suffering a lifetime of indentured servitude to Sallie Mae.
Parents and families now need to invest a great deal of time into planning and paying for college. It might lead to some upsetting conversations, but it definitely beats a lifetime of unaffordable debt.
The Bottom Line
Don’t go to college because you think it will magically enhance your income.
Figure out what you want to learn, what it is worth on the job market, and whether or not it will get you a job you want. Then ask yourself if the debt you are about to get yourself into is worth it.
The days of student loans being good debt have long since passed.
Great post! it’s more important than ever to make sure your degree has some good earning potential before you commit tens of thousands of dollars.
The other argument I hear about student loan debt being good debt: the magical student loan deduction. It doesn’t help a whole lot as it is capped at $2500 (I’ve been paying upwards of $7000 in interest each year since I graduated 5 years ago). And a deduction is just that: it’s a deduction from your gross income. It doesn’t lower your taxes by $2500, but simply changes your AGI. Meaning if you’re in the 25% income tax bracket, it really saved you $625 for the year. Better than nothing, but that doesn’t even meet most graduates’ minimum monthly student loan payment.
Great post! it’s more important than ever to make sure your degree has some good earning potential before you commit tens of thousands of dollars.
The other argument I hear about student loan debt being good debt: the magical student loan deduction. It doesn’t help a whole lot as it is capped at $2500 (I’ve been paying upwards of $7000 in interest each year since I graduated 5 years ago). And a deduction is just that: it’s a deduction from your gross income. It doesn’t lower your taxes by $2500, but simply changes your AGI. Meaning if you’re in the 25% income tax bracket, it really saved you $625 for the year. Better than nothing, but that doesn’t even meet most graduates’ minimum monthly student loan payment.
Nice read! As one that has been in debt, I don’t see the difference. Yes, one debt can help you get a better job or gives you a place to stay, but you don’t have to go into debt to achieve that same result. You still have to pay back any debt, so I see no distinction.
Very true. It doesn’t matter where that big check is going each month… Bottom line, that money is not yours.
Very well said! ESPECIALLY the part about “think it through”. Not everyone is going to be happy in a career that requires a four-year degree. And too many kids have NO idea what their chosen field pays.
That said, I must admit that I am nearly 60, graduated in 2008 with a degree in technical theater that I knew I would never actually use (I have a satisfying full-time job that pays pretty well) and will be forking over my Social Security check to pay off my student loans. However, it was something I wanted to do, I knew what I was getting into both financially and future-wise, and I have developed a little side business through those I went to school with.
Works for me.
Thank you for your unique perspective! If you had the chance to go back and make a different decision, would you?
If you mean ‘a different decision’ 45 years ago, of course I would — knowing what I know now. If you mean in 2005 when I began college, probably not. I already had some credits toward a theater degree; the loans were not only cheap (my interest rate is 3.5%) but generous (I actually used some of my Stafford loans to fix up my home) and I wanted to finish something I’d left for all the wrong reasons those many years ago. And who knows — if I really HAD to, I could probably get a (miserably paid) job in the field.
Tuition costs are crazy and sometimes a four year degree isn’t worth the cost. But going to college definitely gives you more options. I really wonder how the perception of online universities will change in the next 5-10-15 years.
That will be very interesting to watch develop. I think this is one area where spending takes a long time to adjust to the realities of the market. I think the idea of college always being a good thing is so ingrained in our society that it will take a long time for people to finally realize that some places are outrageously expensive.
100% agree. Tuition rates are getting absolutely out of control. I hope something’s done about it soon, because if people start realizing what a bad investment college CAN be (in a lot of cases it’s still a good investment,) they may stop going. And our country could become even less competitive in the job markets on a global level.
Very well put! I hate when people think that the solution to the student debt crisis is less people going to college. We are falling behind in the global education market. The last thing we want is to turn away capable people who are trying to further educate themselves.
Debt is debt. In some ways student debt is actually worse than consumer debt because you can’t discharge is in bankruptcy (except for in really extreme cases).
I couldn’t agree more. Its absurd that the law is written that way, but in this regard it is better to have credit card debt than student loan debt.
I was an RA in college, too, and agree it helped a lot with absorbing housing costs (though I still foolishly borrowed more than I needed). In retrospect, I think I would have taken a year or two off to really think about career choices, but hindsight is always 20/20!
I think that is great advice. Taking a year or two to enjoy your youth and figure out what you want from life can save you a ton of money in the long run.
I get going into debt for a law, medicine or business degree but that is about it. Being a social worker and taking 28 years to pay off student loans is just unreasonable.
It is unfortunate that we do not pay social workers better in this country. The cost of the required education is ridiculous compared to the pay. We are lucky to have people willing to endure such sacrifices for children.
Trust me…the debt for law (and from what I’ve heard medicine as well) is not worth it. Law school is so unbelievably expensive. With the current state of the legal market, there are so many law school graduates who are unable to find any employment in the profession. I would never recommend the legal profession to anyone, unless you have someone generous enough to pay your way through school or you have a solid connection that pretty much guarantees employment after graduation. Much of the blame can be attributed to the law schools, who continue to admit an ever increasing number of students despite the fact that there are fewer available jobs within the legal profession. Greedy schools combined with an inept ABA spells disaster for newly minted lawyers.
Very true! Many people just automatically label student loans as “good debt” without another thought. But just because it is a good investment to get an education doesn’t mean that you should get it at any cost. I was also working full time while in law school which cut down on a lot of debt. Fortunately for me, I did not have to take any private loans. I would have gone to a public school but the one by me did not offer a part-time program where I could still work. I am glad you love what you do. I know some people who graduated from law school but stayed at their current job because they would be making LESS as an attorney…(too many people assume that attorney positions are in high demand and high paying).
I agree with all of the above Andrew.
BTW, congrats on completing law school as a night student. I know that is no easy task.