Is All Debt Bad? The Other Side of the Story

Good Debt versus Bad DebtHey, friends!!  So, welcome back to Debt Roundup for another fun and exciting look into the world of personal finance.  Last week, Mike wrote a great article about Good Debt vs. Bad Debt.  I’m not necessarily opposed to debt altogether, in fact, when Grayson took out a loan for his jeep, I wholeheartedly supported his decision.  But just for the fun of it, I wanted to write today about the other side of the story, and how, on at least some level, all debt can be a recipe for disaster if the circumstances are right – or wrong.  So today we’re going to look at the “good debts” that Mike wrote about, and give them a little dissection.

Student Loan Debt

While it’s absolutely true that a good education can increase your income potential, it doesn’t always increase your income.  When considering taking out loans for education, it’s crucial to weigh the cost of the education vs. the field you’re planning on going into.  For instance, $90,000 education for a job in social work that pays $30,000 can mean absolute financial disaster for a single person without another income to help cover the costs.  Another thing to consider is the borrower’s ability/willingness to pay their loan back.  A doctor might spend $150,000 on his/her education, and might soon work up to a $125,000 income.  However, is he/she willing to live like a student instead of like a doctor in order to get those loans paid off sooner rather than later?  Has the potential doctor considered other factors that will eat up their income, such as malpractice insurance?  Too many doctors and other high-paid workers increase their lifestyle along with their income, thereby eliminating the possibility of paying off those student loans in any reasonable time period, holding on to those loans for 2+ decades, and paying a massive amount of interest in the process.  These decisions that can have devastating impacts on one’s financial life, regardless of the career they choose.

Or what if the career a student has chosen, high-paying or not, suddenly becomes over-saturated, leaving jobs in that field hard to come by.  The field of law comes to mind when proposing this argument of job over-saturation.

This is not to say that student loan debt is always bad, it’s simply that before taking out a loan for college, one must weigh all options/possibilities, for the good and for the bad, before taking the plunge into student loan debt.

Real Estate

Many factors also come into play when we are deciding whether mortgage debt is good or bad.  The housing market crash of 2008 is a perfect example of this.  Housing values decreased by as much as 35%, and foreclosures increased by over 81% in the years following the 2008 crash.   People who purchased their homes in 2004-2007 suddenly saw as much as 35% of their equity disappear, and if they hadn’t put any more than the minimum down, they were suddenly underwater on their homes, by no choice of their own.  And the stock market crash that preceded the falling housing values and rising foreclosure rates contributed to the problem greatly by ushering in a great many job layoffs and/or hiring freezes, therefore decreasing incomes for many Americans.  Fault or no fault, it’s never good to be in a situation where you’re underwater on your home, no matter what the cause.  Now, I’m not necessarily saying that everyone should only buy a house after they’ve saved up the entire purchase price in cash, however, it’s wise to think seriously about borrowing such a substantial amount of cash.  A larger than normal down payment and a hefty savings account will do you good if you attain these things before you purchase your house.  And after you buy it, commit to getting it paid off ASAP, as you never know what kind of trouble life can bring.

Business Debt

As Mike pointed out in his post, business loans can go wrong, and Grayson’s story is a perfect example of this.  I had an acquaintance who went through something similar.  He got fed up with his job, quit on the spur of the moment and started his own business.  $100k later, he filed for bankruptcy and lost his house, leaving himself, his wife and kids in a boatload of trouble.  Forbes magazine tells us that 8 out of 10 new businesses fail.  With a failure rate that high, you’d be wise to think twice before borrowing to go into business.  Dave Ramsey’s story is another great example of the dangers of taking out loans to start a business.  At one point, Ramsey owned well over a million dollars in rental properties.  Within 6 months, due to a number of financial problems, many of which were not his own doing, he lost everything to foreclosure, leaving his family struggling for basic needs.  No wonder he’s not a big fan of owing money.

It is true that it often takes money to make money, but before taking out any type of a business loan, it’s crucial to think carefully about what you’re planning to do.  What is the failure/success rate of the business you’re considering borrowing for?  Do you have a rock solid plan in place to ensure your business has the best possible chance of success?  Have you looked at all of the competition for your business?  Is it really a product or service that people need and want, or are you seeing it with rose-colored glasses?  Do you have what it takes to be a business owner?  What is your backup plan for if the business fails?

When my husband, Rick, was laid off from work in 2010, he looked seriously at several business owning opportunities, franchises, start-ups and the purchase of currently operating businesses.  For six straight months, his full-time job was researching business owning opportunities.  In the end, it was a comment from our insurance agent that helped him make his final decision.  Rick was looking at a business that would be complimentary and helpful for insurance agents and their clients, and Rick went to our agent to ask his thoughts about the concept.  While our agent didn’t disagree with the potential of the business, he gave Rick one wise piece of information.  He said, “When I started out as an agent, I spent the first 5 years knocking on doors, asking for business, for a good 8-10 hours a day.  Things are good now, but those were the hardest 5 years of my life.”.  That was what Rick needed to hear to know that, at that time, he would be much happier being an employee rather than a business owner.  All of the fantasies about owing your own business had come face-t0-face with the immense amount of work that comes with owning your own business, and it was a real eye-opener for Rick, and it enabled him to get his head out of the business-owning clouds and face up to the reality that he didn’t want to be a business owner.  He opted instead to take another job in his field, and his income and education in that field have been growing steadily ever since.

Again, not all loans are bad, and there is absolutely a difference, as Mike pointed out in his informative article, between good debt and bad debt.  All debt though, no matter the purpose, should be considered carefully and planned for in a way that considers all potential future hindrances.

Would you feel badly if you had to file bankruptcy on a business loan that didn’t affect your family?  Is business owning for you?

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Laurie is a wife, mother to 4, and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom, and to a simpler, more peaceful life.


  1. May 14, 2014 at 6:49 am — Reply

    I agree that not all debt is bad and that it needs to be considered on it’s merits. I for one quite like having a small amount of debt so that I have quick easy access to funds whenever there is a stock or currency trade that I really want to get in on. It gives me the freedom to jump in and out quickly without tying up my own money in an account.

    I also like debt when you can use it to generate more money than the interest that you have to return to the bank. Obviously this isn’t always easy to do, but if you are willing to work hard and actively manage your debt funded investments, you certainly can do it and it really can be worthwhile.

  2. May 14, 2014 at 7:16 am — Reply

    I think there are times when loaning money is appropriate – borrowing to buy a house makes sense to me because it would take SO LONG to save up cash to buy a house when in the meantime you also have to pay rent for housing anyway. It helps you accomplish a goal that would be very difficult (but not impossible) without loaning money. You’ve already mentioned Student Loan debt – it pays for itself through better employment opportunities. BUT, I wouldn’t go so far as saying the debt is GOOD. It still needs to be destroyed as soon as possible. 🙂

    • May 14, 2014 at 7:55 am — Reply

      Absolutely, Travis, and that was my take-away with this article. It’s not necessarily bad, but do yourself a favor and get rid of it anyway. 🙂

  3. May 14, 2014 at 7:34 am — Reply

    The thing abouy spme debts (vehicle/house) is that there’s as asset attached to it. Credit cards debt etc does not. Student loan debt can really go either way. I went into debt but I also now have a career with a lot of potential and make a good wage. I dont have regrets borrowing 75k for a job that pays 60+k per yeat buty friend who borrowed 40k for a fine arts degree is suffering. Ive already started to write about this but never finish the post about how I wish there was a way student loan issuers could give loans based on income potential but that opens a whole can of worms….

    • May 14, 2014 at 7:34 am — Reply

      Wow. Ignore spelling mistakes. Fat thumbs little keyboard.

      • May 14, 2014 at 7:57 am — Reply

        Funny. 🙂 But you’re right: student loan debt can be a great choice, like in your case, or a bad decision, like in your friend’s case. We need to think very carefully before taking out any loan, and weigh those types of reasons.

  4. May 14, 2014 at 7:54 am — Reply

    Good article. I generally think of good debt meeting one of two criteria:

    1) income producing – eg. rental property, business loan, etc
    2) option with debt is financially better than the alternative – eg. mortgage vs renting

    However, all debt clearly carries risk and hence for all debt, we need to consider the risk as well as the maths.

    • May 14, 2014 at 7:58 am — Reply

      Exactly, Moneystepper. As with my acquaintance with the 100k biz loan, he just hadn’t thought it through about whether or not he was a business owning type of a guy, and it screwed them financially for a good decade.

  5. May 14, 2014 at 8:16 am — Reply

    Great comeback Laurie! You make some great points and you’re right that even “good” forms of debt can lead to trouble. The cost of an education has skyrocketed and if you have trouble finding a decent paying job after school you will find repaying the loans difficult. I think the lesson is to go to a college you can afford and keep loans to a minimum, especially if you’re in a field that doesn’t pay very well.

    Business loans are dangerous too because if the business doesn’t succeed you could lose everything. But I’d still consider it a “good debt” as long as you don’t go in too deep.

    As for real estate…most people could never buy a home without a mortgage. In theory, the home will appreciate in value and you’ll gain more equity with time as you pay it off. Of course, you can get in over your head here too. I actually just posted an article on my blog where I talk about some of my most foolish purchases. Number 1 is our first house…we stretched ourselves to the max and closed on 12/31/03, right before the market crashed. DOH!

    • May 14, 2014 at 12:00 pm — Reply

      Yikes!!! That’s the kind of real estate purchase I was referring to, Mike. We saw SO many people lose houses during the crash because they’d put the minimum down and borrow to the very max in which they were approved for. Mortgages can be great, but not like that. 🙂

  6. May 14, 2014 at 8:31 am — Reply

    Nice post Laurie! We actually have a family member who had to declare bankruptcy a few years ago and it was just an absolute shame. What’s even worse is that they’re in trouble again, but that’s a different story for a different day. That said, I don’t necessarily think all debt is bad, especially if it’s income producing. However, we’ve come to the conviction that if we have to owe anyone then it’s only going to be for a house and that is going to be for as little time as possible.

    • May 14, 2014 at 12:01 pm — Reply

      That’s smart borrowing, John. We’ve had family members go through the same thing: bankruptcy, foreclosure, over and over, and they just keep getting into debt. Sad stuff!

  7. May 14, 2014 at 8:37 am — Reply

    We borrowed money to buy rental property and I don’t feel that it was a bad move at all. We did put down a large down payment though.

    Regardless, if we were ever to default somehow, the bank could sell the homes and recoup their investment. I’m sure that will never happen!

    • May 14, 2014 at 12:02 pm — Reply

      That’s the difference, Holly, between good debt and bad debt: you put a large amount down, you have a great plan for recouping your costs, and you’re committed to paying the debt and staying financially stable. That’s the way to do it!

  8. May 14, 2014 at 10:52 am — Reply

    Debt always equals risk and loss of freedom. That doesn’t mean we should all avoid debt all the time, regardless of anything. But I agree wholeheartedly with your caution that debt “should be considered carefully and planned for in a way that considers all potential future hindrances.”

  9. May 14, 2014 at 11:44 am — Reply

    I actually think student loan debt is the worst debt in this country. There is not near enough guidance and education with kids and their families before they take out thousands of dollars of debt. There are so many great calculators out there now that show you how much you will need to make vs. how much you are taking out but people make those choices more on emotion than research and thought.

    • May 14, 2014 at 12:04 pm — Reply

      “There is not near enough guidance and education for kids and their families…”. SO true, Shannon, and then kids and parents alike end up in over their heads with no way to get out.

  10. May 14, 2014 at 12:28 pm — Reply

    I am so with you on student loan debt! People need to seriously evaluate the ROI of their future careers before they dig themselves into massive debt for a job that pays next to nothing. Some of my friends that became teachers have debt that’s double or triple what they make in a year — luckily some can get it forgiven (but that’s a whole other debate…).

    • May 14, 2014 at 2:55 pm — Reply

      Ouch, Erin!!!! Yes, that would be tough to swallow, having that kind of student loan debt. If only personal finance education was viewed as important as a “regular” education.

  11. May 14, 2014 at 12:30 pm — Reply

    I find many people are under the impression that student loan debt is always good, well maybe not good, but worth it. They often fail to consider the ROI.

    • May 14, 2014 at 2:56 pm — Reply

      Exactly, Stefanie! It’s an important consideration before stepping into hefty student loans.

  12. Derek @
    May 14, 2014 at 3:14 pm — Reply

    Debt is great if it is used responsibly. If you are leveraging your money to get increased benefit out of it, then that’s a positive. If you are using it to get the newest shoes, hand bag, etc. then it really can be dangerous!

    • May 14, 2014 at 6:42 pm — Reply

      So true, Derek, but even if you are using it to get increased benefit out of it, it’s crucial to think wisely before borrowing. 🙂

  13. Davey Pockets
    May 14, 2014 at 5:35 pm — Reply

    What is your take on taking out a loan or debt to buy an asset such as buying a rental property?

    • May 14, 2014 at 8:32 pm — Reply

      I think it’s a good thing as long as it’s done wisely. I’ve watched people close to me mortgage themselves to the hilt with rental props and then lose them all. Again, borrowing isn’t necessarily a bad thing as long as you have a solid financial foundation on which to build on.

      • Davey Pockets
        May 14, 2014 at 11:30 pm — Reply

        Laurie I can see why you feel that way especially based on your experiences. Can you elaborate more as to how the people close to you lost it all? Were the properties not cash flowing? Tenants trashed it? Sued? Etc?

        • May 20, 2014 at 8:12 am — Reply

          Well, without giving away too much info, basically, they were carefree about all types of debt. The properties were cash flowing, no lawsuits, etc., but a general “que sera sera” attitude about debt, lack of tracking spending, budgeting, etc., living paycheck to paycheck each month, spending all they had, etc., and then one income was lost and that was the beginning of the end. 🙁

  14. May 14, 2014 at 7:26 pm — Reply

    When I worked for a high net worth financial planning firm, we had a lot of doctors as clients. It was interesting that most all of them had a high salary, a million dollar house, a nice retirement plan, and no money otherwise. Most of their income that didn’t get saved for retirement went towards the mortgage and living life.

    • May 14, 2014 at 8:36 pm — Reply

      Jon, when I was in mortgage and personal banking, I saw the same exact thing. People making a boatload of cash and having nothing but stuff to show for it. Then they’d hit 55 and panic because they wanted to start thinking about retirement, had no retirement savings and a mountain of debt. SO many sad stories, or stories of people losing everything because they had too much debt, or debt period. If you’ve got no debt, you’ve got very few obligations, and you can meet them easily even if trouble comes.

  15. May 14, 2014 at 7:49 pm — Reply

    There is definitely “good and bad” debt, as debt can be a great tool but can also cause you to sink very low in your finances! If the rental market in your area is high and you plan on staying in the area for 5+ years, getting a mortgage can very well be good debt. Especially if you have a low interest rate and put the extra money somewhere that gets you higher returns than your mortgage rate.

    For student loans, it’s the same idea. You have to factor in what the starting salaries in your field are going to be and just how much you are willing to take out. You can boost your future earnings potential without drowning yourself in debt at an expensive private school. Wish I had more knowledge about debt and finances in general BEFORE going to college.

    • May 14, 2014 at 8:39 pm — Reply

      That’s the problem I see with debt (and again, it’s not about the debt itself but about the borrower) is that people don’t factor in all of that stuff. They just figure that if they can get approved for it, it’ll all be good, but then trouble comes, like a job loss, declining housing market or whatever, and then they’re all stunned and wonderful what the heck they’re going to do. Been there, done that, and it sucks. Not the debt’s fault, but we sure wish would’ve been more wise with our debt and paid it off ASAP as opposed to being so comfortable owing people.

  16. May 15, 2014 at 6:18 am — Reply

    I’m definitely an own my own business kind of guy, and I wouldn’t be upset. I hate not paying back money I owe, but when it comes to business, lenders know they are generally taking on a different type of risk. If it affected my family to pay back the business debt, but didn’t affect us if I didn’t…I don’t think it would bother me at all to let it slide.

  17. May 15, 2014 at 8:50 am — Reply

    Instead of focusing on whether debt is good or bad, perhaps the conversation needs to shift to the risk all debt creates. Yes, a school loan for college could help you get to that career you want. Yes, a car loan could get you a reliable vehicle. Yes, a home loan can build equity and the house could appreciate over time. But all debt brings risk into our lives. That risk is exacerbated when life throws us in a direction we are not expecting. I’d rather reduce the risk by not taking out debt.

    • May 15, 2014 at 4:19 pm — Reply

      Great comment Brian. It is all about risk versus reward. We have to understand the risk and see if that risk is acceptable. The more risk you take on, the worse your situation can become.

    • May 20, 2014 at 8:14 am — Reply

      Ditto!! Great comment, Brian!

  18. May 15, 2014 at 1:37 pm — Reply

    I know that I wont have enough money in savings to pay for my kids college by the time they get there.. We are certainly saving what we can, but my oldest is already 13.. with the cost of education in today’s world, our best won’t be enough.

    Will I encourage my kids to take out student loans to help them chase down a career? Perhaps.. But I do plan to hold their feet to the fire a bit with their choice of major. I certainly don’t think its worth taking out a $100,000 loan to get a degree in Philosophy. However, to get into the sciences, this type of investment (and the debt that comes with it) may be necessary.

    • May 20, 2014 at 8:16 am — Reply

      “But I do plan to hold their feet to the fire a bit with their choice of major.” This is exactly what I’m talking about, Jefferson. There has to be some research, thought and accountability before any kind of debt is taken out, IMHO. Too many times, people simply focus on the first benefit, as in “I want to go to college” or “I want to own a business”, and then go take out a loan. This is where the game falls apart often, I think, because they pick unprofitable businesses or realize they don’t have what it takes to make them successful, or they pick a non-income generating major, or whatever, and then 100k later, they’re like, “Oh, crap!”.

  19. May 17, 2014 at 8:05 am — Reply

    Great post, Laurie! Most debt is bad, but not all. I hate student loans, but as long as you have a very specific plan of what you’re going to do with your degree and how you plan to pay the loans back, I accept them. Business loans are probably the most necessary debt, though it’s possible to run a debt-free business. Thanks for sharing!

    • May 20, 2014 at 8:17 am — Reply

      “as long as you have a very specific plan of what you’re going to do…” That is what’s so important if debt will be taken out. Great comment, Kalen!

  20. James
    May 19, 2014 at 5:55 am — Reply

    I believe every debt is bad and keep you under immense pressure. I have taken student loan few years back but till now I haven’t able to payback much of it. With the recession, I was unable to find a job which offers good income and stability.

    • June 17, 2014 at 10:41 am — Reply

      I used to think that as well, but after some time and education, I have learned that some debt can be useful and allow you to achieve other things. Most landlords need debt in order to buy more buildings, but they are making money off that investment.

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