The debate about debt rages hotter than a forest fire and can spread destruction quicker. People have been heavily misinformed about debt and whether there is bad debt or good debt and use debt unwisely. In this post I will explain officially what bad debt and good debt is and the line between them.
What Is Bad Debt?
The official definition of a bad debt according to the IRS is that the debt needs to be worthless. In other words, the debtor is completely incapable or unwilling to pay the loaner. The loaner cannot receive any more money from the debt. Therefore, the loaner can deduct the money lost from taxes.
Ok, so it is good that there is an official definition of bad debt for loaners, but what about debtors? The idea of defining bad debt is to determine if the debt is unprofitable by factors that are not the fault of the loaner themselves.
For debtors there is interest and fees for loans. Almost instantly the loaners lose money wise. Furthermore, debtors are almost entirely responsible for paying the loaner. There are exceptions including if they can come to an agreement involving having someone else take on the contract or where the loaner receives some collateral. Debtors have no official definition of bad debt. When they make one with a loaner, they are all but certain to pay more money than buying the product or service straight-forward. If you hate the idea of paying more for something then there probably is no such thing as good debt to you.
Not Everything You Borrow Is For Good
One of the most common loans are student loans. These are generally considered to be good loans because they are used to further people’s education. Sad part is education is not very beneficial to everyone. Some people struggle in education while others do not. To illustrate the perspective, there are students who study literally every second and cannot even get a D in class. Then there are some students where adults bet on where they will go for their PhD. Education is not useful to everyone. In fact, I have argued that traditional education is not useful to most people and most people should not go to traditional higher education much less take out loans for it. If that is not the case why does the US have over $1.6 trillion in student loans? The higher education simply did not pay out as well as many of the debtors hoped.
The Fish And The Tree
That does not mean you cannot, nor should not seek education. But you should be honest with yourself if you should seek traditional education. Einstein said “everyone is a genius, but if you judge a fish by its ability to climb a tree, it will live its whole life believing it is stupid.” People tend to take this statement to mean that you should try not to judge the fish who cannot climb trees.
My question is why does the fish not know that it should be swimming and not climbing trees? Then I realize that there are a dozen other better questions to ask before asking why the fish is trying to climb trees. I know this is a metaphor, but I think Einstein’s quote applies very well to development now. We not only judge people for not succeeding at something they probably would not, but we never try to show them where they can thrive. As a society we should try to show people what they are best at before they sign a student loan. If that alone shows you that what is generally considered “good debt” will not be good for many people, maybe student loans should not be considered generally good.
The only official definition of a bad debt only affects the loaners in the money borrowing relationship. Good or bad never truly applies to the debtor. There are two things to consider. Did you get what you wanted from the loan? Many feel like they did not, no one is ever happy taking on debt. Did the loaner have any affect on whether you got what you want from the loan? Chances are the answer is no. Should the loaner care about whether you got what you want from the loan? My short opinion is that as long as the loaner delivered on what they signed, whether the debtor got what they wanted or not is up to the debtor.
Debt may be a tool, but if it is a tool used improperly it can become incredibly dangerous. My general ideal is to avoid debt, but there are times it is helpful. A mortgage for the RIGHT HOUSE can cost less than renting in the long run. Credit cards can not only build credit, but can be used in times of emergency when either other loans are not available, or the ones that are make the double digit interest rates look laughably minute. Debt is a choice in which generally requires sacrifice of future earnings and profits for something right now. If that idea sounds wrong to you, then chances are the debt you are looking at is not a step to help you forge your wealth.