Is a student loan good debt or bad debt?

GlossyTundra

GlossyTundra

Tractor Detailer
I am still in college (graduating August) and recieved scholarships and grants to pay for my last year in full. However, I have the option of a federal student loan (unsubsidised) to help me pay for gas and whatever else I may need. Interest rate is 6.8%.



Now, the only other loan I have out right now is a loan for an ATV I bought a few years ago. I have been making on-time payments, and paying down the loan, but I still owe around $3k or so on it, at 19.8% interest. My credit rating is high (780 last time I checked) and I have no other loans out right now. I was considering taking the federal loan with the lower interest rate and using it to pay off my high-interest ATV loan.



What my question is, is a student loan bad debt? I know that I need to build credit, and that apparently paying off a loan makes a credit score even higher. I have also read that if someone has a student loan out, and looks to borrow money for a car or house in the future it makes getting a future loan even harder. Is this true? Would I just be better off paying down my current loan for the ATV, or using the new loan to pay it of accomplishing lower interest rates?



I realize this may be a trivial question for some, but I am still extremely new to the finance thing, and I am trying to make smart decisions along the way.
 
The bad thing about student loans is if the poop hits the fan, you can't walk away from them. With your credit score, it should be very easy to get a personal loan on that 3k amount for something similar to the student loan rate. You could even do better by getting a credit card with a promotional interest rate.
 
Brandon1- IMO any debt that isn't absolutely necessary is "bad", but I'm a bit of a fanatic about the subject.



I'd want to get rid of that 19.8% on the ATV and yeah, the math does work, but I would wonder about any stipulated repayment schedules for the student loan; don't get yourself into something that's not as good long-term as you'd expect.



On the "build up the credit score", I'd be more concerned with not going into additional debt, period...cars and such, I'd rather wait until it's possible to pay cash.
 
Accumulator said:
Brandon1- IMO any debt that isn't absolutely necessary is "bad", but I'm a bit of a fanatic about the subject.



I'd want to get rid of that 19.8% on the ATV and yeah, the math does work, but I would wonder about any stipulated repayment schedules for the student loan; don't get yourself into something that's not as good long-term as you'd expect.



On the "build up the credit score", I'd be more concerned with not going into additional debt, period...cars and such, I'd rather wait until it's possible to pay cash.
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Agreed!





Now as my old man always said...do what I say and not what I do. :D
 
Accumulator said:
Brandon1- IMO any debt that isn't absolutely necessary is "bad", but I'm a bit of a fanatic about the subject.
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+1. Any debt is "bad", because it costs you money to borrow. That said, there are certain things, like a new car, or a home, that are nearly impossible to buy without borrowing.



Anyways, that said, I agree with going to a low interest credit card and using it to pay off the ATV loan. Your loan will be paid, which results in additional good credit, and your also now build credit with your credit card, assuming you always pay that on time as well.
 
Ok guys, thanks for the advice.



When you guys say get a credit card, how does that work? Do I go search for one, and then use that to pay off the atv? Then what happens, how long do I have to pay that off?
 
Brandon1 said:
Ok guys, thanks for the advice.



When you guys say get a credit card, how does that work? Do I go search for one, and then use that to pay off the atv? Then what happens, how long do I have to pay that off?
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A lot of credit card companies offer 0% interest on balance transfers for 12-18 months. Simply apply online and go from there. Transfer your ATV balance and then pay the card off ASAP!



Browse the offers online and apply for the one that best suites you. I'd check with the big ones like Capitol One, Bank of America, Citi-Bank, and Chase.



Avoid the urge to use the card for anything else! Credit Cards are very bad, but in your case it could save you some money on interest and establish some more credit.
 
Absolutely not bad debt. School debt can help serve as an adults 1st brush with debt and can quickly teach a new grad the virtue's of saving and paying down debt. Debt is unavoidable for almost everyone in current society. I find too often people who graduate without debt have a false sense of what earnings mean and quickly blow through a tonne of cash and find themselves in later years rattled by overspending.



The simple way I look at it.. school debt is simply the 1st mortgage in your life. The equity is in yourself to get yourself a career of your choice or a higher paying job etc. It's an investment in your self that will hopefully have a positive return 5..10..15 years down the road like owning a house would. Own a home has maintenance costs.. just like yourself.. taking additional courses, adding conferences etc. Investing in yourself to better yourself especially after high school is ONE OF THE SOUNDEST financial practices you can make. 3-5 years of investment for 50+ years of return.



As for those that would say owning a house these days wasn't the wisest decision. Historically it's still a wise decision to invest in a roof over your head. Just make sure the roof isn't too large for your income level.



NO ONE should get more then a 25yr mortgage.

No one should be buying a house if they don't have 5% down.

No one should be spending more then 25% of their net income towards their mortgage.



If you are.. then you're not looking at your finances to ensure long term prosperity.



Spending .. 25, 50 or even a 100,000 on your education and taking a loan is fine. It should yield a return 2-10x over a 10 year period. AND IF.. you can't keep up and pay it back. It's probably best to file bankrupcy before the age of 30 so you have time to rebuild you credit history before your 40 so you can start effectively managing your financial situation for your retirement.



It's much worse to file bankrupcy at 40.. and trying to start over and learn proper financial mgmt.
 
Honestly, the best way to get a credit card is to take out a bank loan (say $1000-1500) and be making on time payments. After 4-5 months the pre-approved credit card offers start rolling in.
 
paco said:
Spending .. 25, 50 or even a 100,000 on your education and taking a loan is fine. It should yield a return 2-10x over a 10 year period. AND IF.. you can't keep up and pay it back. It's probably best to file bankrupcy before the age of 30 so you have time to rebuild you credit history before your 40 so you can start effectively managing your financial situation for your retirement.



It's much worse to file bankrupcy at 40.. and trying to start over and learn proper financial mgmt.
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K, am I missing something here, or are you actually advocating accumulating as much student debt as you can, and then claiming bankruptcy if you can't pay it ??? THAT'S your financial advice ?
 
There's good and bad debt.



Good debt: Investing in educating yourself, investing in a house.. things that in the long run (10+ years) should increase in value and have a positive return.



Bad debt: Wasteful spending on accumulation of things. i.e. credit card, financed cars (not leased), lines of credit not used on home/schooling assests. as for the car lease position, the pro`s and con`s in my opinion weight positively on leasing vehicles unless you can pay for the car outright and not financing it (even at 0%). RE: Smaller payments when leasing, use the extra amount (finance pymt amt - lease amt) to pay down high interest debt and you`ll be ahead. Especially since cars have very little value after 8 years and the cost of maintaining them outweight any assest value assigned to it. But that`s simply a matter of opinion and there are pro`s and con`s to both positions.



So if one is to accumulate debt (house, schooling), ensuring the debt is being used for improving ones education for either a high earning career, promotion at work etc. or when used at a responsible level to buy a house. Then going into debt is a good thing as almost no one has sufficient cash reserves to cover the expense in it`s entirity up front. The cost of borrowing for such actitives are typically low (2-3x lower then credit cards and loc`s) and have good payment terms (6 months interest free etc.)



I personal am very opposed of students using their parents money to pay for their schooling. I believe parents should allow their children to understand and comprehend the full cost of their schooling and appreciate how difficult it is to pay for it. Post grad struggles are fine and if the child gets into tooo much of a hole and can`t make ends meet, then the parents should use their funds to `help`. It`s more important that the parents be financial stable and a strong portofolio for their retirement and assisted living if require in their later years. There is nothing wrong with struggling even harsely post graduation!



As for the bankrupcy comment, it was simply a matter of it`s better the child to file it then the parents covering their kids schooling, adversing affecting their marriage due to financial hardships etc. Bankrupcy should be an absolute last option once working 2 jobs etc. has been and you`re incapable of meeting your obligations. It`s definitely not a matter to be taken likely but too often parents are shielding their children from how draining scholastic fees are its long term impact on them whereas, the child should have just accumlated the debt and then ask for any assistance need to help pay it down. I personally believe it`s important that you cover your own expenses and only turn to your parents when no other options are then.. and not as a given. So if it means you filing bankrupcy to cover ones own obligations, then so be it.
 
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