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Chris Webner » Debt: When is it good? When is debt bad?

Debt: When is it good? When is debt bad?

Google Definition
noun: debt; plural noun: debts
  1. something, typically money, that is owed or due.
    "I paid off my debts"
    synonyms: billaccount, dues, arrears, charges; More
    • the state of owing money.
      "the firm is heavily in debt"
      synonyms: owing money, in arrears, behind with payments, overdrawn,overleveragedMore
    • a feeling of gratitude for a service or favor.
      "we owe them a debt of thanks"
      synonyms: indebtedness, obligationMore
Good Debt - increases your value, or has high likelihood of increasing your value in the future; examples:
  • College debt, when paid off on time each month, helps boost a person's credit score, because credit scores values are higher for larger debts that take longer periods of time to be paid off.
  • Buying something that saves you time and money, or helps you be ready for emergencies.
  • Home mortgage - homes typically increase in value over extended periods of time
Bad Debt - does not increase your total value, or has low likelihood of increasing your value in the future, examples:
  • College debt without a degree, credential, license, certificate earned or skills leaves a person with the same level of ability.
  • Buying luxuries that exceed your ability to pay - new Mercedes versus used Buick.
  • Making only minimum payments on high interest credit cards.
Loan Default is when a person cannot make the payments to their loan(s), not making payments and then communicating you cannot make your payments is called defaulting on your loan.
Loan Default happens when college graduates are unable to earn enough money for pay off their college debt.
Loan Default is a concern because the overall number of people in the U.S. defaulting on their college loans, Loan Default Rate, has grown since the U.S. recession (2007-2009).
Why are people defaulting on their college loans?
  • Blame the increase of loan defaults on for-profit-colleges, 
  • Unawareness of current skills gap - most of the jobs in Iowa, 57 are middle level/technical skills
  • Mismanagement of money by college students  - 
    • students taking maximum amount of money approved for their college loan, 
    • paying for more expensive car, apartment, clothes, entertainment, etc -  instead of avoiding debt
  • 2008-2012 (5yr) Iowa college costs increased 200 % - 300 %, but earnings only increased 87% and IA governmental financial aid monies only increased 56%.
  • 7% of IA HS grads attending college right after HS, but only 32% meet ACT college readiness (Iowa College Aid, Condition of Higher Education in Iowa, 2014 Report)
  • 40% of Iowa's students who enroll in a 4yr college drop out (so they are low skilled with college debt), IowaWorks Employer Educator Summit Sept. 2015
  • 50% of the Iowa 4yr college dropouts say they would have chosen something different but they didn't know about other options (so more intense career exploration is needed).

The consequences of defaulting on a student loan can include: (DEBT.ORG)

  • Ineligibility for additional federal aid or grants.
  • Severe damage to your credit report.
  • Garnishment of wages.
  • Seizure of savings and checking accounts.
  • Cancellation, revocation or non-renewal of a professional license.
  • Withholding of state and federal tax refunds.
While some colleges do a great job educating students so they are able to get work and pay of loans, other colleges seem to struggle educating their students in way that helps their graduates pay off loans.
An article that explains how many people create problems for themselves taking on debt - The Myth of "Good' Debt, U.S. News, By David FrancisApril 26, 2012