27 January, 2023

Are Student Loans Good Debt or Bad Debt? Here’s What You Need to Know

Are student loans good or bad? Are they a great benefit or do they just add up to a bad investment?

In fact, they can be both. Good student loan debt can get you a college degree to help you move up the career ladder. Bad student loan debt can leave you ill-equipped to repay, crippling your finances for years to come.

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

Good Studnet debt vs bad Studnet debt

Let’s take a look at what the difference is between bad and good debt:

What makes Good debt?

What is good debt, exactly? 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: Mortgage loans can be considered a “good” type of debt. Unlike a car, which loses value the moment it pulls out of the parking lot, a house will (hopefully) increase in market value over time. If you sell it years later, you’ll (ideally) make enough profit to offset some of the principal and interest you paid on loan.

Small Business Loans: Entrepreneurs who apply for loans can also be on the bright side of debt, as the money they invest in paying for overhead, office space, equipment, employee training, and salaries must be paid overtime to make your business profitable. exit.

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What makes debt bad?

Simply put, bad debt is borrowing money to pay for something that diminishes or decreases in value over time.

Auto Loans: Potentially high-interest rates not only increase the total principal amount you borrow, but the car you buy is often a depreciating asset. In that case, buying a car through an auto loan could add additional interest costs on top of maintenance, insurance, and gas which are normally added to the car’s current price.

Credit cards: This can be a good form of revolving debt, but it can turn “bad” if you let your balance build up, making the interest unmanageable. While some cards come with rewards and benefits, they may or may not be worth it if you end up paying a ton of interest.

So are student loans good or bad?

In the debate between good debt and bad debt, student loans fall into a gray area. They can be considered good debt because the money you’re borrowing to go to college is your ticket to earning a degree and getting hired in a high-paying job. This debt must be paid off over time with a profitable career.

In fact, having a college degree significantly increases your earning potential, compared to your peers with less education, according to the Student Loan Hero survey.

On the other hand, student loans can be bad because such a degree does not guarantee employment. Student loan debt currently tops the $1.64 trillion mark, with more than 45 million borrowers facing payment, according to our student loan debt statistics.

While unemployment for college graduates has been historically low, it hasn’t always stayed that way. The Great Recession in 2008 and the coronavirus pandemic erupting in 2020 have worsened the job market for graduates and recent graduates. Even alumni who find jobs 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 borrowing needs can be different. Instead, let’s consider the pros and cons of student loans.

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Is student loan debt good? If

Student loans allow you to get a college education without paying full tuition. With a college degree, you increase your chances of finding a stable, well-paying job.

Some federal loans are subsidized. If you qualify, your interest will be paid over the selected time periods.
Federal loan interest rates are currently lower than most other loan products, and the interest is tax-deductible.

Federal student loans come with a variety of repayment plans (standard, graduated, extended, income-driven, etc.) that can make it easier for you to align loan payments with your budget.

Is student loan debt bad? If

Even if a college education improves your career chances, you may still find yourself unemployed after graduation.

Entry-level workers fresh out of college may also not earn enough to comfortably afford their loan payments. Also, the high value of debt compared to a lower salary can produce a distorted debt-to-income ratio, which can damage your credit.

Unaffordable student loan debt can lead to default and even default, which can ruin your credit score and prevent you from being approved for other types of credit.

Also Check: List of International Scholarship Deadlines in December (Fully Funded)

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