Ramsey or Kiyosaki doesn't matter! Getting rid of "bad" debt is important!
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
11yAs I mentioned in the other thread, when we started out we prepped ourselves for about a year saving and paying off debt so we could be in the best qualifying position as possible with the bank. Now that I have over $1 million in RE loans and in the commercial lending space (where DTI is not a factor) I find myself more ok with debt. recently we had to get a second car (when I worked in a corporate office I took public transit every day so did not have a car for over 8 years) but now I need one for our business. We bought a used car for about $15k and while we had the cash to buy it outright... that $15k to me is a down payment on a $75k duplex. So we financed it
Second City Real Estate4.821 Reviews
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- Investor/Realtor · Wentzville, MO · Member since 2014 · 846 posts · 431 votes11y
@Cal C. I agree! Use debt for making money! Most people use debt to acquire things they can not afford to pay for. This is why so many people live beyond their means.
The first step is learning the difference between good and bad debt.
Do you consider school loans bad debt or good debt???? Some would say it was a valuable investment in becoming a better person, some would say (especially those who don't financially benefit from their degree) it is bad debt. Good or bad, school loans have high interest rates compared to home loans and car loans.
@Ryan Billingsley It is only good debt if you haven't gotten your degree yet and I would do everything I could not to take out a student loan! As soon as you finish or quit school it becomes bad debt because it is not helping you obtain more RE. In fact, it is hurting your DTI.
- Investor · Richland, WA · Member since 2014 · 71 posts · 29 votes11y
@Cal C. I agree! Nice post...
@Ryan Billingsley I still think of school loans as bad debt. You'd be better off working through college, or taking it slower in order to not incur student loans.
@Sam McPeek Great point I should have said student loans are only good if you can't afford college any other way and I don't mean taking out a loan so you can afford a high cost university. I mean taking out a loan if it is the only choice between going to any college or not going to college. BTW, I'm married to an Ivy league grad and she doesn't think an IVY league education is worth it, she thinks a good state university is a much better choice.
- CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes11y
I suppose you should both define what you consider to be good debt and bad debt. Student loans are considered by many to be good debt, the reason being that it's investment debt that creates value. On average, a college degree will initially increase your earning potential by 25% compared to that of a high school graduate.
Simply saying all debt not used to acquire real estate is bad debt is illogical. I'd like to see you back up these blanket statements with solid logic that says "the increase in earnings that comes with earning a degree is not worth the monthly payments of student loans."
- Investor/Realtor · Wentzville, MO · Member since 2014 · 846 posts · 431 votes11y
I agree school loans are bad debt if you do not take advantage of the degree you earned. Most school loans come with very high interest rates compared to the other popular loans people take out. My wife and I have school loans. When I was going to college I was completely unaware of passive income, good debt vs bad debt, and all the other aspects of financial freedom. Like most people I was raised with the old fashion perspective of getting a good safe J O B and working for money to make a living.
Years later I can see the light. It is all about working smarter not harder. But there is no time better than the present for anyone to make changes. The results will only create a better future.
@Brandon Hall Please point out how taking out a student loan instead of going to a more affordable college and or working your way through college is a good idea? In other words, if you didn't do everything you could to NOT take out a student loan and yet get your degree then it is bad debt.
- Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes11y
As I mentioned in the other thread, when we started out we prepped ourselves for about a year saving and paying off debt so we could be in the best qualifying position as possible with the bank. Now that I have over $1 million in RE loans and in the commercial lending space (where DTI is not a factor) I find myself more ok with debt. recently we had to get a second car (when I worked in a corporate office I took public transit every day so did not have a car for over 8 years) but now I need one for our business. We bought a used car for about $15k and while we had the cash to buy it outright... that $15k to me is a down payment on a $75k duplex. So we financed it
Second City Real Estate4.821 Reviews - Investor/Realtor · Wentzville, MO · Member since 2014 · 846 posts · 431 votes11y
Bad debt by definition is debt that cannot be recovered. So if your degree allowed you to increase your income then it can be considered a form of good debt. It allows you to recover your school loan amount by increasing your income.
This is definitely a debatable topic!
- Flipper/Rehabber · Nashville, TN · Member since 2014 · 37 posts · 22 votes11y
After I got out of high school I spent a good 6-7 years of my life getting covered up in bad debt/decisions....then a lightbulb went off in my head....began climbing my way out...and now the only "bad" debt I have is our personal home....which Id like to pay off, but then that would limit my ability to grow on the investment side of my life for a little while.... but other than that...we use credit cards basically to gain airline points, pay them off every month......I haven't had a car loan/lease that wasn't paid by one of my businesses for many years now........any other debt i have is properly leveraged to our benefit.....and watching our net worth number grow each month has become more addictive than any other rush that you get from buying things you don't need! LOL
Re: student loans, personally I subscribe to Will Hunting's theory (from Good Will Hunting) "You wasted $150,000 on an education you coulda got for $1.50 in late fees at the public library" LOL...... I didn't go to college.....Obviously there are certain fields that absolutely require advanced learning (doctors, lawyers, etc) but unfortunately most fields don't support the investment in your degree. Whats the point of going $100k in debt, or even $50k just to come out and make $20k a year to start for a few years...... Plus I personally feel like the world changes so fast now that by the time new info hits textbooks and the classroom the world has already advanced a few years and your relearning everything anyway. And I don't know ONE single employer/business associate that ever actually asked for a copy of someones records, degree, etc while considering someone for a job.
That I said.....there is a part of me that wishes that I DID go to college.....there are somethings that have seemed to take me 10 years longer to learn, that in my mind I should have learned during that time period.....it took me quite a while to realize that I could learn anything I wanted immediately if I just applied myself and "Figured it out" as I like to say.
Didn't mean to get on soap box...and hope I didn't offend anyone.....I just know very few people whose investment in college paid off for them (other than drs, lawyers, etc).....most are still in debt, and have changed fields in the long run..becase nobody knows what they are gonna do with their life at that point in their life anyhow!! LOL
How about this statement. If you have a debt that is not currently helping you to increase your net worth then it is "bad" debt. The whole point of this thread is to point out that whether you follow Dave Ramsey or Robert Kiyosaki it is important to pay off debts that aren't continuing to help you to make money.
@Brie Schmidt I apologize for misspelling your name. To me that is good debt since you use your vehicle for work and you used the money to invest.
- CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes11y
@Cal C. Now you are introducing a new tier to the argument. First you said all student loans are bad, now you are implying that student loans are bad if you don't go to an affordable college. So which is it?
Even if you picked an affordable college and worked throughout the year, you may still be required to take out loans. I went to an affordable college and many people were in that exact situation. Sure, tuition may be $7-9k per year, but you forget about additional expenses such as living, rent, technology, health, and textbooks and supplies.
Additionally, it could be argued that a student should work part-time in order to address some but not all of the costs, and instead focus on obtaining a near perfect GPA as that will likely open up more doors than their work experience throughout their college career.
A better argument for your sake would be: student loans are bad debt if an undesirable major was chosen. If you take out loans to pursue a dance major, then I wholeheartedly agree that those loans are considered bad debt, unless of course the student intends to transfer that dance knowledge into some sort of business and has a viable plan to do so.
Statistically the majors that have the highest ROI are business, engineering, and IT. If a student can yield a net positive earnings increase by taking on loans and choosing a solid major, then why not make the investment? For instance, if by my graduating with a business major increases my monthly income by $1,200 compared to that of a high school graduate who has been working for four years, and I have monthly debt service of say $300, my net increase is $900. I'd take that deal any day.
- Investor · Charlotte, NC · Member since 2014 · 117 posts · 32 votes11y
How about borrow against your RE property at a low rate to pay off high interest credit card debt?
All student loans are bad once you finish your degree or quit school. They are no longer adding to your net worth, they are instead adding to the net worth of whatever entity you are paying interest to. Yes, your educated mind is probably adding to your net worth as a result of getting a degree, but that student loan debt is not adding to your net worth. You are equating the debt to the education, but they are not the same thing.
My point was even getting a student loan is a bad debt unless you can't otherwise afford college.
- Investor/Realtor · Wentzville, MO · Member since 2014 · 846 posts · 431 votes11y
Problem with that is, those people would most likely rack up the same credit cards again! Then be in worse shape! Your almost better off cutting back and paying off the credit cards.
- Investor · Richland, WA · Member since 2014 · 71 posts · 29 votes11y
@Brandon Hall I don't consider my comment to be illogical, but it certainly contains a healthy dose of opinion. I think that bad debt would include most personal debt including credit cards, vehicle loans/leases, cell phone leases, medical debt, business loans, 401K loans and student loans. Good debt for me is a much shorter list...real estate investments, and even then I think that is only good debt if the debt service is being paid for by someone else (i.e. tenants).
It seems that my opinion you have the most issue with is calling student loan debt bad debt. Here's some of my thoughts:
- Student loans are not secured by any physical assest. (this is one reason that I consider real estate debt good debt).
- Student loans do not guarantee a degree, and a degree does not guarantee you a resulting career.
- The amount you pay for a degree is not based on the income of your resulting career. Student loan amounts are based on the tuition of the school, not the income earning potential of the degree field. Wouldn't it make more sense to say that an engineering candadite with a starting salary of $50K would be elligible for more student debt than a Elementary teaching candadite with a starting salary of $32K? (those are mine and my wife's professions, so those are real numbers) Or maybe it would make more sense that the engineering candadate pays more for his schooling compared to a teaching candadate...
- The ability to recieve student loans leads people to justify paying more for the education. It's okay to price Ivy League that much higher or state school tuition hikes of 10-15% per year or private religious college at 3 times state schools...as long as the students can get the loans. College isn't the only answer. There are trade schools that cost a lot less and still have high earning potential. In Washington State, I can get my Professional Engineer's license without a degree. But we don't talk about all that...we just push kids towards 4 year colleges no matter how much debt they have to incur.
- Student loans aren't forgivable or bankruptable. It's a decision you can't undo...ever. That's unlike almost any other debt decision out there, and I think that's a problem. If your "student loan investment" goes bad...there is no recourse.
- We have created a culture that says college is the only way to success, and I think student loan availability perpetuate that culture. Some people aren't successful with college. They would be better off at a trade school, or a apprenticeship, etc.
The other reason I don't like student loans really is a bigger beef with the college education system itself (but I think the availability of easy debt perpetuates the system). Why 4 years? Why pay for general education vs. accelerated plan for your degree field? Why have a communications degree, or women's studies, etc.? Why not a trade school?
Originally posted by @Ricardo S.:
How about borrow against your RE property at a low rate to pay off high interest credit card debt?
That it is still bad debt especially since you have now put your RE property at risk.
- 11yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Student loans are not good debt...they are an expense. The loan may be considered and investment in yourself, but the degree itself doesn't make you money...the job you get with it does. Therefor, just like the cost of the floor is an expense, so is the cost of education.
Now, you are asking why I don't think the loan for the education that gets you the job is the same thing as the loan for the money that gets you the house that you hold/flip for income/profit is the same thing? The answer I have is in the form of another question.
How many times has someone gotten their degree, and never got a job in the field the degree was in? How many times have people changed careers, but are still paying off the debt on the degree they never used?
Don't get me wrong, I believe an education is a very important thing, but the student loan to acquire it isn't an investment...it's an expense. In many/most cases though, it's probably a necessary one.
- Milwaukee, WI · Member since 2014 · 32 posts · 8 votes11y
Kiwasoki is right. Education just prepares you for a job, where you pay high taxes first and then spend what is left. Also, college tuition is out of whack. The system isn't broken, its doing what it is designed to do: Keep people working for life. Now a days student loan debt is bad debt as job security and high salaries are not guaranteed.
I went school for 2 years, quit, worked for 2 years and then went back to a tech school for 2 years (graduated) where I paid mostly cash. I wish I would have NOT gone back to school and spent the $10,000 I had saved up, but rather invested it. I live pretty much debt free now, but my salary does not justify the means as I come out $400-$500 ahead every month. No complaints, but there is a better way to go through life.
- Investor · Richland, WA · Member since 2014 · 71 posts · 29 votes11y
@Joe Villeneuve I like that you used the term expense instead of 'bad debt'. That makes sense to me...
- Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes11y
Originally posted by @Grant Bublitz:
Kiwasoki is right. Education just prepares you for a job, where you pay high taxes first and then spend what is left. Also, college tuition is out of whack. The system isn't broken, its doing what it is designed to do: Keep people working for life. Now a days student loan debt is bad debt as job security and high salaries are not guaranteed.
I went school for 2 years, quit, worked for 2 years and then went back to a tech school for 2 years (graduated) where I paid mostly cash. I wish I would have NOT gone back to school and spent the $10,000 I had saved up, but rather invested it. I live pretty much debt free now, but my salary does not justify the means as I come out $400-$500 ahead every month. No complaints, but there is a better way to go through life.
If you come out 400-500 a month ahead as a result of your degree, that is absolutely worth a $10,000 investment.
- Milwaukee, WI · Member since 2014 · 32 posts · 8 votes11y
Originally posted by @Richard C.:
Originally posted by @Grant Bublitz:
Kiwasoki is right. Education just prepares you for a job, where you pay high taxes first and then spend what is left. Also, college tuition is out of whack. The system isn't broken, its doing what it is designed to do: Keep people working for life. Now a days student loan debt is bad debt as job security and high salaries are not guaranteed.
I went school for 2 years, quit, worked for 2 years and then went back to a tech school for 2 years (graduated) where I paid mostly cash. I wish I would have NOT gone back to school and spent the $10,000 I had saved up, but rather invested it. I live pretty much debt free now, but my salary does not justify the means as I come out $400-$500 ahead every month. No complaints, but there is a better way to go through life.
If you come out 400-500 a month ahead as a result of your degree, that is absolutely worth a $10,000 investment.
The $400-$500 is my income less my necessary expenses. I also live below my means and work as my landlords care keeper to knock off rent $ every month.
- Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes11y
Why is it that all of these gurus oversimplify the entire issue by having either good debt or bad debt?
All debt, credit cards, student loans, mortgages, investment loans, car loans, IOUs, etc., are all bad. However, certain ones are worse than others...Credit cards probably taking top spot and mortgages and investment loans being the least bad. Unless you consider a debt to a bookie legitimate :) that's probably the worst one
Originally posted by @Patrick Britton:
All debt, credit cards, student loans, mortgages, investment loans, car loans, IOUs, etc., are all bad.
This is one opinion (not fact), and there are a lot of people who would completely disagree with this statement (i.e., who have a different opinion)...
I'm one of them.
In my opinion, any debt used to get you closer to your financial goals is good debt. My financial goals involved generating MORE income and higher returns, so any debt that allows me to do that is good debt to me. Specifically, any debt that allows me to generate positive leverage (within my risk profile) and any debt that provides an opportunity for pure arbitrage is debt that is furthering my ability to hit my goals.
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