Two years post-college graduation, my spouse and I found ourselves saddled with student loans and a mortgage payment, albeit free of credit card debt, car loans, or any other form of debt. We self-congratulated, believing we only possessed “good debt”. It is, however, an undeniable fact that life is a continuous learning curve.
Over time, we often found ourselves questioning the concept of good debt, especially as we strove to meet our loan payments while also aspiring to live our dream life.
Typically, student loans and mortgages are classified as “good debt” as they represent investments in your future. Student loans facilitate higher education, thus increasing your chances of securing better paying jobs, while mortgages enable us to become homeowners. Despite the 2008 housing bubble, real estate is generally a good investment: meaning your mortgage payments compound over time.
Conversely, “good debt” does have its disadvantages. Let us discuss these disadvantages and potential ways to manage them.
WHEN “GOOD DEBT” TURNS BAD
1. RISK FACTORS
Any form of debt comes with inherent risk, which is the uncertainty of your capacity to repay the debt. Your current financial stability might be solid, but bearing in mind that student loans and mortgages are generally long-term debts, do you have a contingency for a change in your financial situation? Loss of employment, for instance, increases the risk.
2. FINANCIAL STRAIN
The gravity of my student debts didn’t dawn on me until after graduation. Once I started taking out loans, I felt obligated to continue schooling until completion to avoid loan repayments. Consequently, I borrowed what I needed to stay in school, with little regard for the cumulative loan repayments after graduation.
Indeed, what might seem like a prudent idea swiftly becomes a post-graduation nightmare for some students. Entry-level jobs in their field may simply not pay enough to live comfortably and cover minimum loan repayments, forcing them to move back in with their parents and take on part-time jobs or wait for higher-paying opportunities.
This pattern can be seen with mortgages as well. Often, young couples manage to put together a modest down payment, buy a house at the top of their budget with the belief raises and promotions in the future will make it more affordable. Regrettably, they may find themselves living in a dream home that’s quickly becoming a nightmare.
3. DELAYED ASPIRATIONS
We all have dreams beyond our careers, be it traveling the world, starting a family, or running our own business. Accomplishing these dreams usually requires money, but with bills to pay, savings may be inadequate.
To avoid becoming swamped by your “good debt,” early and frequent planning is crucial.
1. PLANNING AHEAD
Consult friends, family, or a professional who can guide you in formulating a budget that can accommodate your dreams. For students, it’s vital to research potential starting salary and how increasing student loans may affect your financial independence.
Accept advice and feedback from friends and family to gain insight into the potential pitfalls of owning a home.
2. SELF-REFLECTION
Prestige often comes with a higher price, be it attending an Ivy league school or living in a posh neighborhood. Therefore, before acquiring “good debt,” consider reducing your financial burden by adjusting your expectations. Consider, for instance, how successful practitioners in your field have attended state schools and live in every type of neighborhood.
3. LEARNING TO COMPROMISE
Your mortgage advisor may qualify you for a larger home loan than is financially comfortable, especially when future childcare costs are factored in. Reign in your dreams to match your budget. Keep in mind whether a shorter loan term might suit you better, despite higher monthly payments.
4. PATIENCE IS A VIRTUE
If you are uncertain that you will remain in one location for at least three years, reconsider buying a home.
5. FOCUS ON YOUR GOALS
Before you start borrowing for education, be sure to have a clear idea of your career path. Otherwise, an unplanned change in career might leave you unable to service your student loan.
In sum, if used wisely, mortgages and student loans can provide a pathway to your dream life. However, it’s important to consider how these loans might impact that dream before they transform into “good debt”.
Let’s hear from you. How have student loans or mortgages impacted your life? How have you planned to repay them?
