Are Student Loans Bad or Good Debt? How to Think About Student Debt

For a lot of people, student loans are one of the first major debts they take on. Understanding how these can affect you is important and this article helps break the decision down.

Are student loans bad? If you're considering borrowing for school, you may be very worried about the answer to this question. After all, most people have heard about the student loan crisis and about people struggling to repay what they've borrowed. These scary headlines may have you frightened about borrowing for school. And that can be a problem if you need loans to fund your degree. 

Fortunately, the reality is that while some people can get themselves into trouble when borrowing, student loans may turn out to be useful for many people. And while this may come as a surprise, if you take the time to think about it, it's easy to see why they can be beneficial under the right circumstances. 

Here's what you need to know to answer the key question, are student loans a good idea for me? 

Understanding good debt vs. bad debt

Although debt gets a bad reputation, that's often because people do not borrow money wisely. Debt is actually a very helpful tool that individuals and businesses use to improve their overall financial picture. That's because debt can give you leverage to afford to make investments you couldn't make without borrowing. 

In order to use debt wisely, though, you need to understand the difference between good debt and bad debt. 

What is good debt?

Good debt is useful debt that has a reasonable interest rate, is within your ability to repay, and that you take on for purposes of investing in something that will improve your net worth.  Almost any type of debt could be good debt. 

  • Credit cards: Credit cards can be good debt if you use them responsibly to build credit and earn rewards points. This means using no more than 30% of your available credit, as a low credit utilization ratio helps your credit score while a high one hurts it. It also means paying off your balance in full before interest comes due. 
  • Mortgages:  Mortgages can be good debt if you make a reasonable down payment on a home and borrow to buy property you can comfortably afford. Interest rates are generally very low on mortgages and these loans allow you to buy a home that will hopefully go up in value. Your home helps build wealth as you pay down your mortgage and as property values rise.
  • Business loans: Business loans can be good debt if you borrow an amount you can afford at a reasonable rate and you have a sound business plan for a company that's likely to be profitable. 
  • Personal loans: Personal loans can be good debt if you use them to help you build credit and finance big purchases at an affordable rate. If you can't afford to pay cash for an essential purchase and can get a lower rate with a personal loan than a credit card, taking out the loan could be your best financial choice -- especially as having a mix of different kinds of credit can help you raise your credit score. 
  • Car loans: Most people need a car to get to work or school. Taking out a low-interest car loan to purchase an affordable used vehicle can be a type of good debt if your car enables you to earn an income. Some people may also choose to take out car loans at a low rate, even if they could pay cash for vehicles, because they can earn a better rate of return by investing their money elsewhere. 

The key is to make sure the debt is affordable, that your decision to borrow won't damage your credit score, and that taking on the debt will improve your situation in the long-run. 

What is bad debt?

In general, debt is bad if you borrow at a high interest rate, if you can't afford to pay back what you've borrowed, or if your borrowing won't leave you better off in the long run. Any type of debt could be bad debt.

  • Credit cards: If you carry a balance on your credit cards, they are bad debt. Credit card interest rates are very high and dwarf the value of any credit card rewards you could potentially earn. Maxing out your cards could also damage your credit score. 
  • Mortgages: Subprime mortgages at high rates are a type of bad debt because they are expensive. So are mortgages you don't understand and can't afford to pay, such as balloon loans that have a large lump sum payment you won't be able to make. If you borrow to buy a home you can't afford, a mortgage can also be a bad debt. 
  • Business Loans: If you borrow to fund a business without a viable plan for making that company profitable, then a business loan could be a bad debt. 
  • Personal Loans: Borrowing for non-essential purchases, especially at high rates, is usually a bad idea. You don't want to take out a personal loan for something you don't really need and make that purchase more expensive by having to pay interest on it. 
  • Car Loans: If you repeatedly take out high car loans for expensive vehicles or you stretch out your payment time on car loans so you're constantly making a monthly car payment, then auto loans can be a type of bad debt. 

Essentially, if you are paying interest and aren't likely to end up improving your financial situation due to your borrowing, then chances are good you're dealing with bad debt. 

Are student loans bad debt or good debt? 

So, where do student loans fit in? Are student loans bad?  

In most cases, student loans are good debt. That's because you are borrowing money to earn a degree that should increase your ability to earn money. Your expanded career opportunities and the extra income that you bring in over your lifetime should more than justify the interest costs that you pay on student loans.

Now, this doesn't mean that the answer to the question, are student loans a good idea, is always yes. You need to consider whether the money you are borrowing will actually provide you with a good return. In other words, student loans are good only if you actually end up making more money or opening up more doors in your career after earning your degree. 

If you don't finish your academic program, if your school isn't accredited, or if your degree won't help you to land a job or teach you important skills that you can use in your career, student loans could end up being bad debt because you aren't getting a good return on your investment. 

How to Make Sure Student Loans are Good Debt

If you want to make sure your student loan debt is good debt, there are a few simple steps you should take:

  • Research academic programs carefully: Make sure that your school has a solid reputation and good job placement numbers for graduates. In most cases, you should steer clear of for-profit schools, which often don't provide a good return on investment. 
  • Don't borrow more than necessary: Student loans are good if you're using them to pay for school -- they aren't good debt if you are using them to fund expensive spring break trips and a lavish lifestyle. Only borrow the amount you need to complete your degree and cover basic living expenses. 
  • Understand your job prospects: Make sure to research career options in your chosen field and choose an academic program that's likely to lead to a good job that you're interested in. 
  • Shop around for loans at affordable rates: The lower you can keep the interest costs on your student loans, the better off you'll be. Interest is the cost of borrowing and keeping it low means more of your money goes to paying down the loan's balance. Your borrowing costs and monthly payments will both be lower if you can score a loan at a competitive rate. 

Juno can help you to get the lowest possible interest rate given your situation. We get groups of students together and negotiate rates on their behalf with lenders to help borrowers save on interest. When you borrow with Juno, the answer to the question, how bad are student loans, is not very bad at all. 

Join Juno today to find out more about your options for affordable private student loans to help fund your degree. 

Christy Rakoczy Bieber
Written By
Christy Rakoczy Bieber

Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbooks and serving as a subject matter expert.

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