Thursday, June 17, 2010

Bad Debt v. "Good" Debt?

A BIDER tipster sent me a funny story about debt.  The question addressed in this fluffy "news" article by Jeff Brown is "when is it okay to carry debt?"  It makes some good points:
Don't use an 18% credit card to fund a home addition that will take years to pay off. If you must borrow for that, take out a home-equity loan. The rate is likely to be half as much. Installment loans average about 8%, according to the BankingMyWay survey...

In a real emergency, you can justify almost anything. A legitimate emergency is a serious illness, or a car problem that will keep you from getting to work, a leaky roof that will ruin your home.
The need for a vacation is not an emergency. Basically, an emergency is something that will seriously undermine your life for years, not something that will put a little damper on your lifestyle.
Very good points, Jeff.  My parents raised me to think of credit card debt as evil.  Unfortunately, I didn't listen.  But my debt exists primarily because of my emergency situation, being laid off.  When you have to support yourself with credit card debt, is that a justifiable emergency?  But then Jeff totally loses me with this next line:
The best policy: borrow only for a home and an education, two purposes with benefits outweighing the costs. If necessary, borrow to get basic, essential transportation, not to get luxuries like leather seats and navigation systems. 
I bolded 'education' so you'd see that our message has not spread far enough.  There are so many contingencies that need to be mentioned before one makes a bold statement like 'borrow only for an education because the benefits outweigh the costs.'  It depends on where you go to school, how much of it is financed by your parents, whether you major in something worthwhile, etc., etc.  You cannot make an absolute statement about education being worth something.  Sometimes, it's utterly worthless.  Irresponsible journalism such as this fluff piece by Jeff Brown is responsible for many dumb 18 year olds  feeling safe about borrowing $25K to attend an expensive private school to major in Art History.  Where is the disconnect?  Sometimes, it is worth it not to get an education, so that working at the local Walgreens can sustain your lifestyle.  Sometimes that is the more intelligent choice.  When you have no debt, life is freeing.  You can work a job that actually sustains your lifestyle.
A home may be worthwhile, because you can live in and will always be able to live in it... and one day, you will own it free and clear.  But an education may make you overqualified and underpaid from the second you get your diploma.  It's almost as bad as the notoriously depreciating asset, the brand new car.

Try again, Jeff.  Most debt isn't "okay."  I wish I could get him to read our blog where thousands of educated people could tell him that he's wrong unless he qualifies his statement.  Oh yah, the federal deficit is wrong too.  I wish we could have crowned Clinton king.  Oh well...


  1. Honestly, I wonder if I had funded most of my law school tuition, books, etc on a credit card, then, could I have discharged it in bankruptcy? If so, then I should've gone that route! Instead, I'm stuck with loans.

    Thanks for posting, Angel!

  2. Once I paid off my student loans life got really, really good. I spent years living well below my means in order to get those bastards paid off. Well friends were out buying new cars and houses I was throwing everything I could at the debt. I rarely ate out. In short, my lifestyle was not what some would call fabulous.

    Now I maintain the same lifestyle - I am used to it - and invest the extra money. My family always discouraged debt. When I read the Millionaire Next Door the advice was nothing new. It is what I had been told since I was a wee youngster.

    I chose my law school based on cost, not prestige. Prestige doesn't pay the bills. Heck, prestige does not do much for anyone except the school selling it.

  3. As a philosophy, there is nothing wrong with his assertion (or the assertion of my parents years ago) that debt for education and opportunity is reasonable. The problem is that education doesn't actually improve opportunities for a lot of Americans at present, and there isn't an effort to funnel people into educational programs that actually will benefit them in terms of creating more (read: better) opportunities after graduation. I think there are very few people who are in a position to reach a national audience who understand that, because it's quite possible that they were so ambitious that credentials wouldn't have mattered anyway.

  4. Sounds like my clueless dad.

    "Don't worry about the debt for law school. You will get a great job and pay it off! It's an investment in yourself! You can't find a better thing to borrow money for."

  5. Spengler's Shop RatJune 17, 2010 at 5:52 PM

    Nice post, but do you really think it's possible to work at a Walgreen's and achieve any kind of independent lifestyle? Indebted or not, $7 hourly is like having your employer piss in your face. There's no way to afford food, rent, and unforeseen emergencies like hospital stays and auto repairs. From the land of burgers and fries, $15 hourly for doc review can look like a king's ransom (which it of course is not). Welcome to America.

    As an aside to Angel, this blog has served its intended purpose. I won't be going to law school unless it is free or very well near it. The odds on me receiving that sort of scholarship or financial aid are very small.

  6. Yes. I do think that Walgreens will sustain you. Work your way up as a pharmacy assistant or to manager, and you'd be making more than I do now.

    Anon at 5:52, another success story. I hope you get that full scholarship or find something better in another field.

  7. In some countries (like my mother's), education is free; but in those countries, it's not easy to get into a university.

    Here, anyone can go to university. The university will charge any price. The creditors make sure that the university parasites get paid. The government makes sure that the creditors get paid. The student gets fucked.

    The Obama Democrats have it wrong: not everyone should be going to university when the economic situation of the country does not warrant it.

    The Republicans have it wrong: the nation has an interest in subsidizing the education of the gifted and directing them towards a socially beneficial outcome.

    Our system takes the worst element of the free market (tens of thousands of degrees that society does not need; sky-high tuition; leaving everything to the personal desires of the student as if choosing an education were like choosing a pair of shoes at the mall) with the worst aspect of bureaucratic parasitism (guaranteeing large cash flows for useless professors and rentier creditors).

    God bless America!

  8. If there is anyone defending post-graduate lending, you need to watch FRONTLINE's "College, Inc." Period. Then, we can talk. What millions (and that's not an over-exaggeration) don't realize is that they're nothing more than raw resources to be mined and flipped for profit. You are what the schools and banks need to get at if they want to get their hands on federally-guaranteed loan dollars. A lot of the documentary does have to do with for-profit institutions like the University of Phoenix. But, when you realize that law schools have been publishing fraudulent employment statistic for years, you realize that the problem runs much, much deeper and is much more institutionalized. If you thought your education had anything to do with you, you're wrong. There is no one who is looking out for you, despite the fact that they have career offices and financial aid officers ostensibly on-site to guide you. The entire thing is rotten, top to bottom and back up to the top.

  9. I am somehow not convinced how you will lead an independent lifestyle with such a shoestring monthly budget?

  10. Well, I have had the same costs of living since I graduated. I have a cheap apt and won't move until I get married... I don't have a car and haven't since law school. I don't shop, but lots of my friends give me clothes. What else? I don't go out. I don't do drugs, I don't drink... unless my bf takes me, but he has taken to my austere lifestyle so that he can save money. So, we don't do much of anything unless it's free. I also worked in big law and managed to save some money before getting kicked to the curb. Without that, I'd be screwed.

  11. Great piece. Sent a shout out to you on Facebook yesterday!

    -Cryn Johannsen, Founder of Education Matters

  12. It has been obvious since around 1980 (when the surge of lawyers who went to law school to avoid the draft were maturing), that there are too many lawyers. Apparently, 25 years later, some people still don't believe it.



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