There is No Such Thing As “Good Debt”

If you’re in a hole, stop digging!

“Debt, n. An ingenious substitute for the chain and whip of the slavedriver.”
–Ambrose Bierce (with a hat tip to Adam Baker)

I’ve recently had two people whom I know tell me that there is such a creature as “good debt.” First, I received an e-mail from someone who talked about student loans and mortgages as being good debt. Then, I saw this post from my friend Philip Taylor over at PT Money which argued something similar.

At the risk of misattributing, let me sum up the “Good Debt” camp’s arguments:

  • You’d never be able to get a house. They argue that without debt, people would not be able to purchase homes, which is, after all, the Great American Dream.
  • You’d never be able to go to school. How could you go to get education beyond high school if it weren’t for Sallie Mae and her friends providing you with cheap money so that you could get smart?

Now, lest I subject myself to the cries of hypocrisy, I confess that I have had a mortgage and student loans, and I’ve also done some pretty dumb things with credit cards (such as having to confess my shortcomings to my then fiancée and not being able to work for my dream job at the WWE). It’s not like I’ve never borrowed money from lending institutions before.

However, there is a different way.

“Good debt” is simply a marketing ploy by banks and lending institutions to convince Monkey Brain that it’s OK to go borrow money. It gives him an easy out, a way to justify the easier wrong than the harder right.

Let’s look at how Monkey Brain views this transaction.

Research shows that we discount our future selves when compared to our present selves. It’s called hyperbolic discounting – and the further out into the future it is, the more we discount it. That’s why 30 year mortgages and 10 or 20 year student loans are so attractive. We get to spread little drips of pain far, far into the future rather than having the pain now of saving up and deferring the pleasure into the future.

Now, allow me to address the concerns that people have that they can’t live without debt. Also, if you want to see what a world without debt would look like, you can check out my U.S. News & World report article.

  • You can pay for college without student loans. There are a few ways to do it. You could work during school and pay for room, board, and tuition with the proceeds earned while working during school. You could also work for a period of time and save up enough money to pay for college. Finally, you could join the military and get the GI Bill to pay for your schooling.
  • You can live without a mortgage. I think a lot of people equate owning a home with a sudden increase in wealth. To me, this is the wrong way of thinking; you can read my U.S. News & World Report article about it here. However, there are benefits to home ownership, so if you want to become a home owner, you could rent while you save up enough money to actually pay cash for a home. I know it might take a while, but it can be done.

But, wait! you cry. What about the mortgage interest deduction on your taxes? What about student loan interest deductions? Surely those are worth something, aren’t they?

Yes, but only in the amount that they exceed your standard deduction. Remember, we’re talking about the incremental benefit. It’s not as simple as “I have a 25% tax rate and $10,000 in mortgage interest, so now I get $2,500 back.” Your benefit is only as good as the amount that you can increase your deductions beyond the standard deduction. Furthermore, once you get to a certain income level (and isn’t that why you go to school?), the student loan deductions go away.

If you’re concerned about doing your taxes correctly, I’ve used
TurboTax Online (#aff)
for several years, and, despite the complicated status of our taxes, have had no problems filing my taxes, saving us almost $1,000 compared to what we were paying our accountant when he prepared our taxes.

So, there’s no such thing as good debt. It’s an easy way out. Yes, you can take on debt to buy a house or to go to school. If you keep your job, you can make the mortgage payments. If you get a good job out of college, you can pay off your student loans. It’s a risk-reward tradeoff. However, don’t be fooled by the narrative of “good debt” as if there were no down sides, as if you could go to school, major in 13th century Liliputian literature, rack up student loan debts, and then get a great job doing whatever you want to do and rolling in enough money to make Scrooge McDuck jealous.

The narrative is aimed straight at Monkey Brain and it works. Yes, sometimes it all works out well. But, sometimes it doesn’t, and I’m sure people who have had their homes foreclosed on or who filed for bankruptcy only to find out that Sallie Mae doesn’t go away after the bankruptcy declaration would argue that their so called “good debt” is quite the misnomer.

What do you think? Are Phillip and the PT Money crew right that there’s “good debt” or do you think that there’s only “bad debt” and “worse debt?” Let us know in the comments below.

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

4 thoughts on “There is No Such Thing As “Good Debt”

  1. Extremely good points here. I wish people would realize this situation as true. I also heard the argument about hedging debt against investment return. Like not paying off your 3% mortgage so that you can instead make 8% on the stock market. I for one wish these simple concepts about saving and personal finance were taught in public schools. Or just taught anywhere for that matter.

  2. Kevin–Thanks for dropping by! I’m a big fan of zero-based budgeting; it gives you less room for Monkey Brain to take over and keeps you on target.

    I hear the argument about mortgages and investing in the stock market too. The problem with it is that people confuse average with variance. Let’s say that you took out a mortgage on a fully paid off house in early 2008 and invested it all in the stock market. You might be back at your starting point now if you had the stomach to stick it out, but, boy, you’d have had some nerve-jangling times along the way. People also generally overestimate their risk tolerance. It’s one thing to say you won’t hit the panic button when the strategy goes against you; it’s entirely another to not do so when your investments are plummeting.

    I agree that we could probably all use some more education, but, at the same time, the basic subject of personal finance is not all that difficult. For many people, it’s actually doing what they know they should do rather than being subjected to the umpteenth discussion about asset allocation.

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