In many of our educational materials, we distinguish “good” debt from “bad”. Bad debts, we’ve always maintained, include credit card debt and revolving debts for anything you don’t truly need, like vacations. “Good” debts typically include things that you do need or are good investments for the future, like home mortgage debt and student loan debt.
Auto loans have always held a middle ground between the two. If you need reliable transportation to get to work and earn a living, a sensible auto loan is good debt. If you borrowed $50,000 for a flashy sports car or high-end luxury car you don’t need and can’t afford, then that auto loan is bad debt.
How to distinguish good student loan debt from bad debt
When it comes to student loan debt, things are changing. Consumers now need to treat them more like auto loans. That is to say, some student loans are better than others. Student loan debt for a degree from a good school in a subject area that ensures future employment is still good debt. Loans for degrees from fly-by-night schools that leave you with worthless degree “certificates” or subjects where there are no employment prospects are bad debt.
Recent surveys have found that fewer people think a college education is a good investment. College costs have risen sharply while employment has declined. Many graduates find themselves with mountains of debt and few options for earning enough to repay their student loan debt. Like we said, it’s not college as a whole that should be judged, but each individual degree from each educational institution. An engineering degree from an accredited college is a good investment; prudent student loan borrowing should pay off. A degree in basket-weaving from a non-accredited school is unlikely to be worth borrowing for. (Bear in mind, there is nothing wrong with studying the arts or obscure topics, but if that’s your chosen field of study you should avoid borrowing to pay your tuition, because you’ll be in debt for a long time.)
Community college may be the wiser choice
Many young college students are opting for less expensive educational opportunities right now. This is wise; there’s nothing wrong with starting at a community college or state school and transferring to a larger university later. Whatever education choices one makes, it’s clear that recent trends in student loan debt are unsustainable. We’re counseling people with far too much education debt and this can be the toughest debt to deal with. Student loans are not dischargeable in bankruptcy, and settlements aren’t a realistic option (settlements depend on the threat of bankruptcy, so student loans are not good candidates for settlements).
Ultimately, the best advice we can offer student loan debtors is to pay off their other debts and control their personal finances to free up income to apply to student loans. Free credit counseling can help with that. Whatever one does, it’s important not to default on student loan payments, because those who default lose access to many federal student loan repayment options, like the income based repayment plan or public student loan forgiveness.
Photo: Vishal Arora via Flickr CC
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