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This chapter is from the book

When “Good Debt” Isn’t

Debt clearly has a place in our economy and in our lives. That’s what many financial gurus are trying to get across when they divide debt into “good” and “bad” categories. Typically, mortgages, student loans, and borrowing to start a business are considered good; most other borrowing is considered bad.

But that leads to another problem with typical debt advice because too much “good” debt can sink you just as deep as too much “bad” debt.

That became obvious during the mortgage mess. Lenders loosened their standards to a shocking extent, offering massive loans to people with modest incomes—sometimes without requiring any proof of those incomes. Lenders made money selling the mortgages to investors, who wanted ever-higher returns. That led to lenders pushing ever-riskier loans, until the whole card game collapsed.

As a result, millions of people have lost their homes, and millions more are underwater, owing more on their suddenly devalued homes than those properties are worth.

Some warn that a similar bubble is building with student loan debt, which totals $1 trillion as of this writing—more than what’s owed on credit cards.

I’ve received countless e-mails from people who borrowed $20,000, $50,000, and even more to attend college, only to find that they can’t get a job in their field or make even the minimum payments on what they owe. One poor soul borrowed every penny it took to attend an expensive private college; her bachelor’s degree left her nearly a quarter of a million dollars in debt. Many who signed up for student loans, particularly private student loans, had no clear idea of how much their borrowing would cost them when they graduated; they just knew that lenders were eager to give them the cash and that their educations were supposed to help them get ahead.

Furthermore, student loans are almost never wiped out in bankruptcy court, so they can be an albatross that hangs around your neck for life.

Charles borrowed more than $100,000 for his education, but a divorce caused him to drop out of his doctoral program before he got his PhD. He found a job paying $40,000 a year, and his lender agreed to reduce payments based on his income. But his debt is still accruing interest.

“My loan just keeps getting bigger and bigger,” he wrote. “I have no hope of paying [it off] unless I win the lottery.”

These horror stories make it clear that you can’t depend on a lender to tell you what you can or can’t afford. You need to set your own limits, and they must be limits you can live with.

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