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Explaining the concept of “good debt”

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Debt is a four-letter word, and in many instances, a high amount of debt is perilous. However, debt isn’t always a black mark on individuals’ financial résumés.

Consumers may have heard the term “good debt” at some point and wondered just why owing money to certain creditors is more desirable than owing to others. The debt help experts at Debt.org note that there’s a simple explanation for this distinction. Debt that increases an individual’s net worth or future value is considered “good debt,” while debts that do not positively affect net worth are considered “bad debt.”

So which types of debt qualify as good debt? The following are three types of debts that generally qualify as good debt.

  1. Student loan debt: Student loan debt can be tricky, but it’s generally considered good debt. That’s because education has long been linked to a greater earning potential. Data from the U.S. Bureau of Labor Statistics indicates that individuals over 25 who were working full-time and only had a high school diploma had a median weekly income of just under $800. Individuals who had a bachelor’s degree had a median weekly income of more than $1,400. However, it’s important that individuals recognize that certain degrees do more for their earning potential than others. Taking on a high amount of student loan debt to earn a degree in a historically low-earning field could make it harder to make ends meet down the road. That won’t necessarily make the debt “bad” in the eyes of lenders, but it could force borrowers to wonder if they made the right decision.
  2. Mortgage debt: Mortgage debt is perhaps the most undeniable source of good debt. Historically, the appreciation value of real estate has made home ownership a worthwhile goal, even if home buyers have to finance their home purchases with bank loans. Perhaps nothing has more successfully illustrated the value of home ownership in recent years more than the skyrocketing value of real estate during the pandemic. The real estate research firm CoreLogic noted that home prices across the United States increased by 18 percent between July 2020 and July 2021. Individuals who already owned their homes, including those who were a long way from paying off their mortgages, saw their equity rise considerably in that time period, even if they continued to make the same monthly payments they’d been making before the pandemic. Though home prices may never again rise that much in a given year, real estate historically has increased in value on a yearly basis. That certainly qualifies mortgage debt as “good debt.”
  3. Business loans: A business loan may carry more risk than a mortgage loan, but it still can turn out to be very good debt if the business ultimately succeeds. However, that’s a big “if.” Data from the BLS indicates that 65 percent of new businesses fail within a decade of opening. Many small business owners use personal guarantees to secure business loans, meaning the debt is theirs should the business ultimately fail. But owning a successful business can be a great way to build personal wealth, which is why business loans can be considered good debt. MM21C532