I was talking about this with a friend at lunch today. He claimed that it was good debt for people fresh out of college to have as it helped their credit score somehow and he said the interest was tax deductible. Since most kids don't have mortgages it's not bad to have college debt, is this true?
Am I just old-fashioned in not wanting debt of any kind and thinking any debt is bad?
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Your friend is right. It usually has very low interest and helps build credit history which can be hard for someone right out of undergrad. I wasn't aware of the tex aspect, but if that's true, there's another positive for you. Not all debt is bad debt.
the tax benefit doesn't work after u make 80k.... so not really deductible for long
Any type of debt that benefits your future and generally yields a positive ROI is good debt (i.e. college/grad school loan, mortgage, etc.). Any type of debt that yields a negative ROI is bad debt (credit cards, car loan, etc.)
It really all comes down to the interest rate and your ability to earn a return.
I had a small college loan at a 3.5% fixed rate. It wouldnt make sense for to pay it off with cash because i can earn returns anywhere from 2-10x that amount depending on my PA performance and other use of cash.
For all the young guys on the board, you should begin building a credit history as early as possible as your credit score affects all aspects of your life. I got my first credit card at 18 and my first mortgage after working for a year and have continued to boost my cc score ever since.
Good luck to you.
Junkbondswap: I feel like this is a dumb question, but if you don't pay it off with cash, how do you pay it off?
Low interest!? Mine is 6.8%!!
Good god man. My interest rate is around 3.5% for my private student loan. 6.8% is outrageous.
Mine is from the government, who do you get your loan through?
I have my loans through the government - I think there are a total of 10 separate loans. Two of mine were 6.8%, which I paid off within the first 6 months. Now my weighted average rate is 3.7%. Not sure what's causing this discrepancy.
Also - they have been tax deductible up until this point.
Put that in perspective though, where else can you get a non collateralized loan for 7%? Also yea you should look at refinancing that.
I also got stuck with 6.8% loans from back in the day.
swagon,
I believe junkbondswap was talking about paying the entire balance of the loans with bonus money, i.e. completely paying off his debt. He obviously makes his monthly payments with the money he makes, but he's not going to pay off the entire thing to be debt-free.
no it is not good debt. I mean you can look at it that way but no one else does. I bought a house last year and all lending now takes in effect school loans. It use to be looked at from a lenders point of view as something that should help your longer term income ( you can pay your mortage) but that has all changed. without my school debt which is very low I could of got lending in the 400-600 range.. with it I got lending in the 200-400 range... times have changed for buying a home
+SB, this exactly. Sure, it might help your credit history but when the banker calculates monthly payments to determine how much leverage you can handle, he or she will consider your monthly student loan payment. So it becomes a tough calculation on the net benefit to the application process.
Also another thing to consider here is that OPs logic can really be applied to any kind of debt. Blowing out my credit card also helps build my credit history....so does buying a luxury car at interest rates lower than most people's college debt on here....from that perspective, you can call any sort of BS expenditure "good debt".
I have a ballon payment on my college loans.... everyone should look into that
If if you make enough or or able to itemize enough to get the tax deduction, you’re still trading a dollar to the bank for every quarter that you don’t pay to the gov’t.
How simple arithmetic gets lost on so many people in finance and accounting is absolutely baffling.
I think the argument is like this.
I have 50k in loans I have 50k cash
What should you do with it? answer not pay off your student loans since you could get a high yielding bond or something that would cover the interest, plus you get the deduction.
This free money is a nice way to have cash free'd up if you are older. Being liquid with some debt is better than having $0 in the bank and no debt.
Lol wtf, having tens to hundreds of thousands of dollars in principal to repay is hardly good in any sense of the word. As for these "benefits," interest paid is more than the tax deduction so it's still a negative, and as for building credit, having a couple credit cards open for a few years will get you to 730+ so that's hardly a benefit.
I could not have attended college attended college without taking out a loan. And that was after some scholarships and I also worked throughout college to support myself. I ended up with 30K in loans when I graduated - but it was definitely a "good" loan for me.
Few years out of school and I can easily pay the entire thing off today, if I wanted to.
So, yes taking debt helped me out.
Of course, the only reasonable debt
But also, these can turn out to be very bad as well. It's all about what you make of it.
I have classmates who graduated with over 50K in debt with soft majors like Art or Sociology and are working at Starbucks or driving Ubers after graduating. For them, that debt ended up being a disaster. They will probably will get out of the whole they have dug themselves into.
It's good debt in the sense that it encourages you to be productive: get a good education, get a great job and pay it off ASAP. That's where the good stops. They show up as unsecured loans on your credit report and unless the amount you borrow is tiny, they almost ALWAYS hurt your credit score (know from personal experience). My credit monitoring tool has a simulator that says if I paid off half my debt (roughly 30K) my credit score would go up by 20-25 points, which is huge. Also, as someone else mentioned, once you cross 80K (which happened pretty quick for me and most of us in Finance) you can say good bye to you ability to deduct interest from taxes. All that boils down to this: avoid student debt if you can and borrow wisely if you have no choice. For some it can be like herpes and they might never be able to get rid of it if they don't borrow wisely.
Have to disagree on the Credit Score point. My Credit Score (length of credit history) was helped by the fact that I took out student loans. In hindsight, I should have gotten a secured credit card wayyy earlier than I did.
Additionally, paying off the high interest student loans to 0 hurt my credit score. I use Credit Karma.
So although I could pay off my loans completely, I keep small balances open and plans to use the whole 10 year term to pay them off.
Unfortunately debt/credit have been abused resulting in a very negative view of these concepts in society in general. Instead, debt should be viewed as a tool that can be used to help you. As long as you use that tool correctly it is beneficial. Your friend is right in that student loans can help establish credit, but at the same time, it can be argued that you can just as easily establish credit without student loans (i.e. credit cards etc.). Overall, just remember that excessive debt is a bad thing, but debt itself is not bad and should be viewed as a resource, not something that is somehow morally wrong.
Not to get into a philosophical argument with anyone about the merits of college, or what colleges do and don't stand for in this day and age. But debt is simply a tool (not good or bad), money borrowed for a good/service now in return for more money out of pocket in the future. If the value (be it tangible or intangible) you derive from taking on debt nets you more than the cost + interest you end up paying in the future, you made a good call, if it doesn't, you didn't.
I think in broad terms if you have to take on debt for college, you (and any potential cosigners) should have a frank discussion as to what the end goal is. If you're unsure of what you want to do, I would suggest pumping the brakes maybe hitting up your local Community College, busting out your GenEds at a fraction of the cost of a 4 year institution and try to figure out what piques your interest.
Pretty damn good post
This question is moronic. If you have the choice between attending the same school by either taking out student loans or having a full scholarship/parents pay, why the hell would you choose the first option? End of discussion. Comparing student loans to a mortgage or business loan is fallacious. Scholarships and grants allow one to potentially attend college for free. There is no way to obtain a house or start a business for free. The fact that we pay outrageous amounts for higher education is absurd, not something to be praised. Get a grip.
Debt of any kind can be bad or good. So long as the ROI is positive. Shit I know people who have started businesses with their credit card that have returned them thousands of times over what it cost them. Just as I know people to whom college is the single worst "investment" they will likely ever make. It really just depends on the person behind the debt and what they plan on doing with it.
Exactly. For me, the ROI was BIGLY positive.
Guys, all that the question is asking, from my understanding, is if student debt is "good" for your credit score, which it is in 3 ways: 1) Increases Avg Age of Credit Lines 2) Increases Number of Accounts (Every year's loan and type (sub vs unsub etc) are a new line) 3) Will be "current" because you're not paying anything throughout college.
Yes, it helps build your credit score (i.e. experian and Transunion), but is a negative if you're trying to take on other debt. So yes, your friend is correct that it does "help", but no, debt is not good, and it's definitely a net negative if you're trying to take another loan, so what's the point of artificially boosting your credit score at the expense of cash flow?...
P.S. (OMG the world we live in where college provides so little value and now people are being brainwashed to think debt is a good thing!?)
My Credit Score would be wayy less if I did not have student loans.
1.) Avg Age 2.) No of Accounts
Don't understand #3.
As far as the credit agencies are concerned you are current on your debts, they don't take into account that you are in school and not making payments, so it looks better by their calculation to say, "@NJDevil" has loans for $20K outstanding for 3 yrs, and all payments are current and have been made over those 3 yrs." The fact that there are not actually payments are irrelevant. This allows you to have good standing for that time despite not making any real payments. A subtle difference that matters over the course of 4+ yrs.
Anyone looking to take on debt, I'd love to sign a promissory note with you.
To be clear, I will not be lending you money, but I'll happily allow you to be indebted to me--I'll even give you 0% interest.
Debt is usurious +1
You are a finance bro, you tell me: If you can borrow 30-year debt at an interest rate below what you could receive from a 30 year Treasury.. should you?
well considering universities are becoming (essential) mult-billion dollar (tax exempt) hedge funds that gladly accept your money in return for the distribution of (widely accessible) information that you're required to memorize in return for an arbitrary number 0.0 - 4.0 (and a piece of fancy paper after 4 years)... not sure it's a good "investment".
this is coming from a guy who went to an Ivy (for his Masters degree).
the only thing you could get that's worthy are some great connections.
but even then, there are cheaper social clubs out there.
Keep in mind who your audience is OP. Lot's of these people here think leveraging 150k in loans in hopes of one job is a smart move which implies their college was paid for via parents/trust-fund.
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