The Federal Student aid program has helped to make higher education more accessible to more people but it also gives more people a major obstacle to overcome very early in life. The average student graduating high school right now will, for example, likely accumulate nearly $40,000 in federal student aid, which comes in the form of loans.
This is called “good debt.” Good debt is an investment that provides you better opportunities later. A mobile phone bill, car insurance, student loans, and rent/mortgage are all examples of “good debt.” Of course, experts do not necessarily agree upon what qualifies as good debt and what qualifies as bad debt. With that in mind, though, you could argue that student loan debt is the “good” type because those who hold a degree can make upwards of 98 percent more, per hour, than those who do not have a college degree, according to a 2013 US Labor Department study.
Now, all debt carries interest. Mortgages tend to have the lowest interest rates while credit cards tend to have the highest. Student loans typically fall somewhere in the middle, though are closer to the low end. As a matter of fact, the highest student loan interest rate is still typically lower than the lowest average credit card interest rate. And for that reason, student loan debt can be a good type of debt.
However, “good debt” also needs to deliver on future promises. A mortgage is “good debt” because homes have something called “equity.” Equity is value over time, basically. When you buy a home with a mortgage, you make an investment that you can capitalize on in the future. For example, you can sell your home whenever you want and take the value your home has earned over time to apply for another house.
What can make student loans “bad debt” is using the money to pay for an education that will not net that promise of nearly double the pay of someone without a degree. Taking out loans can make sense if the degree you earn will help you pay off your loans, but if there are no jobs available, that investment suddenly becomes far less promising.
All that said, then, it is important to understand that while student loan debt can be good for your financial health, they only make sense if the investment will get you a job that pays very well once you graduate with your degree. Otherwise you end up graduating college in the same situation as someone who did not earn a degree, but saddled with $40,000 of debt.