Are student loans good debt or bad debt?
Updated on October 16, 2020
Taking out student loans is a great way to fund your college education and build your career. And, for many lower to middle-income Americans, student loans are a necessity despite the increase in student loan debt each year. However, before taking out your student loans, it’s vital to understand which category they fall into. Generally, there are two types of debt – good debt and bad debt.
This is money owed for things that can help you increase income over time or build wealth. Basically, good debt takes money to make money. Some examples of good debt include student loans, business loans, or mortgages.
While student loans are categorized as good debt, only your ability to turn your business degree into an income that outweighs your loans ensures you can achieve this. For instance, if you have a master’s degree in education, your average starting salary should be around $65,000. Therefore, if you take out more than $65,000 in federal student loans to fund your degree, your loan can quickly become bad debt.
This is because you won’t keep up with your interest and can fail to pay the loan within the standard 10-year repayment plan. Also, if you pursue a degree in an unstable industry or shaky market, you may want to consider taking out fewer student loans as your future income isn’t guaranteed.
This is money owed for things that don’t go up in value or generate income. This includes cars, clothes, and credit cards. Of course, student loans aren’t categorized as bad debt as, in turn, you get an earning potential in the future. But, if you default, your student loan debt may affect your credit card, affecting your ability to buy a house.
This is because when you make late payments, it hurts your credit score as payment history makes up 35% of your score. To avoid this, make your monthly payments on time to establish a solid record of managing credit. Credit companies use this record to determine how risky it is to loan you more money in the future, e.g., for your mortgage.
Ultimately, student loans are good debt when your earnings outweigh your loans. Contact StudentLoanify for more information about student loans.