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Home » News Articles » Good Debt v. Bad Debt: The Rules Have Changed

You’ve heard of the old adage…there is good debt and there is bad debt, right? Well, like most things, that theory is more complicated nowadays! There are “new rules” to consider when examining good debt versus bad debt.

Let’s take a look at educational debt. This used to be considered “good” debt and still is referenced as sometimes necessary. However, the thinking behind taking on educational debt used to be this: Consider if you will have the ability to turn that bachelor’s degree into an income that outweighs the loans. Then that is good debt? Not necessarily.

The NEW rule is that you shouldn’t borrow more (in total) than you expect to earn in the first year on the job. This is premised on the notion that with salary increases over time,  you should be able to keep up with interest in your debt and pay off the loans within the standard 10 year repayment window.

Mortgages are another classical “good” debt category. The idea is that you should finance the purchase of a home with a mortgage that you can afford and expect the value of the home to increase beyond the sales price. Then that is good debt? Again, not necessarily.

The NEW rule considers it is no longer the case that prices will rise indefinitely. (As the Great Recession and subprime mortgage crisis taught us.) Don’t borrow more than you can afford now. Don’t get a mortgage with terms that you don’t understand. (i.e. ARM) Simply put: your mortgage payment should be less than 28% of your gross monthly income.

**CCCS is here to help! There are housing counselors ready to help you with a better understanding. Knowledge is power. Truly.