Student Loans Good Debt???

[tifnglen]

Ok me and 3 of my friends were talking about finances and debt. One of the girls said if you have any student loan debt you dont want to pay any extra payments and keep it as long as possible (Ex. If your bill is $100 a month pay that and dont pay it off even if you can). I said no debt is debt if you can pay it off do so. I told them you should pay off credit cards and car loans first but being debt free is wonderful (im sure but I dont know lol). Then she said she is debt free and I am like but you have sl debt. She said well like I said SLs are GOOD DEBT.

What is your take??

[bjl584]

Your friends may have been talking about keeping debt if you can earn a higher interest rate elsewhere by investing. That argument aside, I think that all debt is bad debt. I would rather have the money in my hand to do with as I wish rather than have it going to pay down loan balances even if there is a tax benefit. You still come out on top without the debt.

[disneysteve]

Student loans are "good" debt in the sense that it is money borrowed to further your education and, hopefully, secure you a better and higher-paying career. So it is an investment in yourself.

As to how best to pay them back, that really depends on the situation and mainly on the interest rate of the loans. If you can earn more investing the money, do that. If the loan rates are relatively high, it might be better to pay them off.

[disneysteve]

You still come out on top without the debt.

Not if you invest the money for a higher return elsewhere.

[sweeps]

There is nothing inherently good or bad about debt. If your friend is able to earn more by investing than she would by paying extra on her student loan, then there is nothing wrong with stringing the loan along. On the other hand if your friend is buying clothes and shoes with money she could be using to pay off her student loan, then that's a problem.

[Caoineag]

Its really an interest rate game. I am paying mine on the 10 year plan and won't pay them off early because it would be better for me to pay off any mortgage I get thanks to the interest rate, even with me getting a 15 year mortgage.

And to me, debt is debt. Just because you can deduct the interest on a debt doesn't mean its good debt (I have heard people claim mortgages are good debt as well because of this.) So I am going to pay the most expensive debt first and work down from there.

[bjl584]

Not if you invest the money for a higher return elsewhere.

True, but in certain situations I feel that it is better to not have the debt, especially situations where you need liquidity for purchases. If all of your money is tied up in debt repayments or locked up in investments it is hard to leverage for better interest rates or prices. The only way to buy in that scenerio is to take on more debt. Cash is still king.

[disneysteve]

True, but in certain situations I feel that it is better to not have the debt, especially situations where you need liquidity for purchases.

I'm not sure I'm following you. If you are concerned about liquidity, that would go against repaying the debt early. Dragging out the payments keeps your money accessible.

[LivingAlmostLarge]

Steve, don't argue with people who don't get math. It's like explaining why money in the bank is better than a paid for home. If you have $300k home and $300k in bank you are the same as the person with $300k paid for home. But some people don't get it, they only see the word debt. They can't see the forest for the trees.

Anyway, student loan debt is not necessarily bad. Would you prefer all doctors only come from rich families who can afford it? Or would you prefer it be the best suited, most capable people? If we didn't have student loans, going to school would be a class based system, which would only be available for those rich enough to afford it.

[jIM_Ohio]

Student loans are an investment in that they are trying to increase a person's earning power, and a person's earning power is the most important asset they have. Investing in earning power is a wise decision!

I see lots of posts on this board and others with people in 6 figure student loan debt. That can't be good any way I cut it.

The debt might prevent you from getting a house (because of debt ratios)
The debt will not get wiped clean because of bankruptcy (that can't be good).
The debt is only tax deductable to a certain extent (and after 10 years, even that extent is not deductable). That can't be good either.

Student loans are debt to make an investment. I would look at decision did the earning power increase as a result of the investment? If so it was NEEDED debt. If earning power did not increase it is bad debt.

I think good/bad is not the question, needed/unneeded is a better question).

[jIM_Ohio]

Steve, don't argue with people who don't get math. It's like explaining why money in the bank is better than a paid for home. If you have $300k home and $300k in bank you are the same as the person with $300k paid for home. But some people don't get it, they only see the word debt. They can't see the forest for the trees.

Anyway, student loan debt is not necessarily bad. Would you prefer all doctors only come from rich families who can afford it? Or would you prefer it be the best suited, most capable people? If we didn't have student loans, going to school would be a class based system, which would only be available for those rich enough to afford it.

I assume the 300k home is fully mortgaged?

The 300k in bank grows, so it is actually better than a house worth 300k on many levels.

Don't mean to hijak the point made, but thought I'd chime in.

[jIM_Ohio]

Its really an interest rate game. I am paying mine on the 10 year plan and won't pay them off early because it would be better for me to pay off any mortgage I get thanks to the interest rate, even with me getting a 15 year mortgage.

And to me, debt is debt. Just because you can deduct the interest on a debt doesn't mean its good debt (I have heard people claim mortgages are good debt as well because of this.) So I am going to pay the most expensive debt first and work down from there.

I agree keeping debt to get a tax deduction is bad.

But there is more to being "good debt" than the deduction. I think of a house as good debt because I bought my house for 352k and borrowed most of it. When I sell the house I expect to get 750k for it. So borrowing 280k to make 470k makes sense to me (that makes the 280k good debt).

It might cost me 500k total (between P&I payments) to make the 750k, but I still came out ahead because the house is an appreciating asset.

[sweeps]

I assume the 300k home is fully mortgaged?

The 300k in bank grows, so it is actually better than a house worth 300k on many levels.

Yes, except typically you won't be able to make as much in savings interest than you're paying in mortgage interest (even after deduction). So you are losing some money in exchange for liquidity.

[m3racer]

You should tell your friend I have about $230,000 of "good debt".....LOL. In reality it's not "good debt" but more like a noose around my neck. You got to love the Ivy League and their outrageous tuition bills.

[jIM_Ohio]

Yes, except typically you won't be able to make as much in savings interest than you're paying in mortgage interest (even after deduction). So you are losing some money in exchange for liquidity.

if a person kept 300k in savings, there is a much bigger problem. My 300k would be earning north of 6% somewhere in other than a savings account.