Getting into “good” debt, Part 1: Why education pays but BMWs don’t

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Let’s face it. Debt happens.

It’s a fact of life that almost all of us will need a little financial help at one point or another, whether it’s for our home, car, livelihood, education—even our groceries. Debt is an inevitable circumstance of life, and, for the most part, it’s categorically evil.

But here’s the kicker: Debt isn’t always such a bad thing.

The basics

Ever heard of “good” debt?

Yes, it’s an oxymoron, strange and it seems mythical at best, but believe it or not there are some things out there worth owing money for.

Here’s what’s on the “good” list:

  • your home
  • your own business
  • your education

These are otherwise known as things that will increase in value over time and give you the best bang for your borrowed buck. Because you’re borrowing to finance things that won’t lose their value (and will actually earn you money in the long-run), this kind of debt is considered “good” and justifiable.

“Bad” debt, on the other hand, is money borrowed for things that will depreciate in value over time, sometimes even instantly (think: as soon as you leave the store!). Consumable goods like clothes, cars, video games, and flat-screen TVs are expendables, as are pricey out-of-town trips you can’t afford.

Left unmanaged, this kind of debt could leave you facing years—even decades—of loan payback ahead.

And the worst “bad” debt you can make? Credit card debt, since it usually carries the highest interest rates and the most onerous payback schedules out there.

Education gives back

Student loans—burdensome as they may seem during payback time—are considered some of the best debts to get into, and for good reason. While we all know the value of a good education, student loans have the potential to give back much more than what they take, and not just in terms of job prospects.

“In Canada, interest on student loans is tax deductible, so you can at least get some money back from the government, should you file your taxes properly,” says Vancouver-based finance blogger Youngandthrifty, whose eponymous site aims to encourage better financial health among young Canadians. In other words, government-backed student loans not only increase your future earning potential, they also give you a tax credit on the interest portion of the amount paid on your loan each year.

Nevertheless, it’s important to note that the guidelines for a Canada Student Loan (CSL) vary from province to province, and the amount each student is granted depends on a lot of different factors. Doing your due diligence by visiting the National Student Loans Service Center’s (NSLSC) website and CanLearn will help, as will considering other loan options like a low-interest line of credit from your local bank.

Good debt gone bad

Of course, “good” debt is good only insofar as the “bad” stuff is kept at bay.

Being Gen Y herself, Young knows first-hand how youth and debt often seem to go hand-in-hand. “Gen Y has a mentality like: I want this now. This BMW is nice… I’m already working and earning a living. I can always pay it off,” she says, which leads many young people to make the worst financial choice of all: racking up tons of bad debt in exchange for instant material gratification.

LaToya Irby, a freelance writer with experience as a collection specialist in the financial services industry, echoes this sentiment. “Gen Y-ers are friendlier with debt. They carry higher credit card balances and graduate college with higher student loans,” she observes. “I think they also underestimate the impact of a hard time. They aren’t saving as much as their parents and dipping into retirement too early, which leads them to act on desperation.”

The real problem though is that a lot of students and fresh grads still have “good” student loans to pay back while they’re busy accumulating all the “bad” loans. Most will charge these to a high-interest credit card precisely because they can’t afford to pay with cash, or turn to payday loans and consumer cards to fund their expenditures.

This, unfortunately, is an oft-repeated sin. Charging more than you can afford is never a good idea, but putting essential costs (some of which you already pay interest for) on even higher-interest credit—and the most aggressive collection systems in the loans industry—can cost you years more trouble than it’s worth.

Make your bad debts better

So, here’s the deal: You’ve got good debt and bad debt, but it doesn’t matter either way—you’ve got to pay both of them back, and that prospect is not looking too rosy. Are you screwed forever?

Tune in to Part 2 tomorrow to find out!

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About the author

Jeleen Yu is a long-time TalentEgg contributor and former assistant editor. She graduated from Ateneo de Manila University (Philippines) in 2007 with a degree in business management. She was all set to start a career in the corporate world, but a sabbatical made her realize that her real passion lay in writing and the publishing industry. After serving as a writer and editor for the newsletter of a non-profit organization in the Philippines, she now resides in Vancouver and is currently working towards an editing certificate at Simon Fraser University.