Some Say Pay Off ‘Bad Debt’ First. But Why?

  • Share
  • Read Later
Photodisc / Getty Images

There’s a lot of personal finance advice in the blogosphere that I wish didn’t exist. And one of the most annoying pieces of advice is the constant yammering about “good debt” and “bad debt” and how that bad debt must be paid off first.

LearnVest.com notes that bad debt — debt to buy things like cars and lattes — is worse than “good debt,” which is money you borrow for things like college or a house, and advises readers to pay off “bad debt” first.

Even the Texas District & County Attorneys Association gets in on the act: “Good debt is an investment in your future; examples are a mortgage and student loans. … Bad debt, on the other hand, doesn’t leave anything to show for itself. … Retiring bad debt first is key to digging out from under its load.”

Here’s the thing: The good debt/bad debt dichotomy is useful for thinking about what things are and aren’t worth going into debt for. But once you’ve made the purchase and accumulated the debt, it doesn’t matter anymore. It all just becomes debt, and what matters is the interest rate, the repayment terms, and most importantly, the often ignored question of the consequences of default.
[time-link title=”(Why you should be skeptical of colleges that provide student loan assistance)” url=http://moneyland.time.com/2011/06/14/be-skeptical-of-colleges-providing-student-loan-assistance/]

Given this, student loan debt, which most experts say is good debt, should be among your top priorities for paying off because if you fall behind on it, the consequences can be absolutely devastating. There’s no statute of limitations on collections, it can’t be discharged in bankruptcy, and your Social Security can be garnished.

Bottom line: The good debt/bad debt question matters when you’re thinking about whether to take out a loan. But once you have borrowed the money, the focus should shift to the numbers and the conditions of repayment. A 9 percent interest rate on a loan that can’t be discharged in bankruptcy is bad debt, whether you took out the loan to pay for a college degree or to buy drugs.

1 comments
SeaMercintile
SeaMercintile

House and car always come first IMO. You have to get to work, and you must have a roof over your head, after that move on to paying down revolving, and/or any student loans.