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Good Debt or Bad Debt?

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Many advisors—personal finance, college, and other—claim that student loan debt is “good debt”. In this case, good debt is defined as debt that is worth borrowing and carrying rather than avoiding it all together or paying it off quickly.

These advisors have valid points; the most important one is that student loan debt that leads to a degree is an investment in your financial security later in life. Of course, that point relies on you only borrowing what you need and making sure your degree costs don’t exceed earnings for your chosen career..

Debt consultants often caution you to leave student loans around until all other consumer debt is paid off. They argue that the interest rates are often the lowest, and that if something were to happen to your income, it is much easier to put your student loan into deferment than it is with other debt.

What these consultants don’t take into account is that bankruptcy doesn’t erase student loan debt, nor does the borrower’s death in every case. If your financial stability changes, you will still be required to pay off your student loans, regardless of bankruptcy. If you have a co-signer on your private student loans, and you die, your co-signer will still be required to pay off those loans. Student loans are an immortal scourge—not a very “good” sounding obligation.

When it comes to getting out of debt, student loans are no better than any other consumer debt—in fact, they might be worse. If you are faced with the choice of paying off a car loan with a lower interest rate than your student loans, pay off the student loans first. Your car loan, at least, is backed up by an asset (the car) and if something does happen, it is a lot easier to discharge the car loan that it will be to ease the burden of your student loans in the long run.

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