Today’s excerpt is from Financing Your Life. It’s taken from Chapter 13: Good and Bad Debt
Good and Bad Debt
Debt is not always something that can be evaluated in a broad way, as in, “All debt is bad!” There are some types of debt that are good and while the underlying purchases shouldn’t be made without lots of thought, they also aren’t necessarily a waste of money.
The major difference between good debt and bad debt is that good debt can be seen as an investment. Think about it—if you buy a stock or other investment that you think is a good bet, something that’s going to make you money in the future or that might provide you with income during retirement, you will pay for it through commissions and policy fees because you realize that it’s going to be worth more than those costs at some point in the future.
Some debt can return the same type of gain, although it has an expense through interest. An example of this can be found in the purchase of real estate. It’s the rare individual who can afford to pay cash for real estate, so they often rely on a mortgage loan. The mortgage has costs, fees and interest but at the end of the day, not only does the purchased home provide shelter, comfort and safety to the family living within its walls, it also grows in value over time so that the interest and fees are more than paid for.
Every individual must make his or her own decisions regarding whether a certain type of debt is good or bad. Generally, investment debt in real estate or a business venture can be considered good.
Another type of debt that can be good, when taken out within reason, is student loan debt. When student loans are relied on to completely support a student in college, they can be very dangerous and irresponsible. But when student loan debt is taken on in order to pay for classes that will help the student secure a higher-paying job in the future, they can be seen as an investment; the cost of the loan, paid through interest charges, can be worth paying in order to unlock the higher income potential in the future. Additionally, tax breaks afforded to students through programs like the American Opportunity and Lifetime Learning credit and through the deductibility of student loan interest—which does not need to be itemized, making it far more accessible to the average taxpayer—can reduce interest even more, allowing the student to realize a return on this investment in debt pretty quickly.
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