Having experienced the Great Recession earlier this decade, we’re all familiar with the dangers of over-extended consumers maxed out on debt with little savings to speak of.
The consequences of those actions are so great, many financial experts started rethinking if there is such thing as "good" debt anymore. But the conventional wisdom remains: if managed properly and prudently, debt – for the right things -- can still add to your bottom line.
What is good debt? As opposed to credit cards with high interest rates that can be easily abused, good debt can provide long-term financial benefits. Traditionally, the two most common forms of debt that could be considered good are loans for school and buying a home.
How? Statistics still indicate a college degree is an expense that will pay dividends for years.
A graduate with a bachelor’s degree can earn, on average, $2.3 million over their lifetime, compared with just $1.3 million for someone with just a high school diploma. Lifetime earnings with a master’s degree jump to about $2.7 million.
And those taking out a loan for a bachelor’s or master’s degree in fields like engineering, finance and technology can earn even more. Those who study education, social work or communications tend to make less money.
But that’s no excuse to write a blank check to just any college. A pricey Ivy League education doesn’t always guarantee a high-paying career, either.
A study from executive recruiter Spencer Stuart found that in 2006, only 10% of CEOs at the top 500 American companies held Ivy League degrees. In fact, more of them attended the University of Wisconsin than Harvard.
College doesn’t have to break the bank. Attending a less expensive community college for two years before transferring to a state school can save thousands. Plus, grants, scholarships and state and federal financial aid can often knock off about half of tuition costs at both in-state public and private universities.
Purchasing a home can be another instance of good debt if done right, and taken with a proper conservative mindset. The number of years you stay in a home, your down payment, interest rate and even tax bracket will impact whether renting or buying is best for your situation.
But with those factors worked out, owning can actually save you money.
According to real estate site Trulia, on average, it’s about 38% cheaper to purchase, assuming a 30-year fixed rate loan at 4.5%, than it is to rent in the 100 largest metropolitan areas right now, when comparing similar properties.
The rate at which homes appreciate varies, so Trulia recommends considering the worst-case scenario when contemplating a purchase. If prices in Pittsburgh, for instance, rise just 1.3% annually, the worst appreciation over any seven-year period in the past 20 years, buying is still 41% cheaper than renting.
Research also suggests owning a home still builds wealth, too, especially for low- and moderate-income households. A recent study found that homeowners’ net worth and total assets grew more than that of renters over a three-year period.
So what do you think? What debt do you consider to be good or bad? Connect with us on Twitter and use the hashtag. #JEI.
- Personal Finance - Career & Education
- Banking & Budgeting