This spring marks eight years since I graduated from college – a pricy, private institution – and embarked on my professional career. Eight years since I started earning a paycheck. Eight years since I became financially independent. And, unfortunately, eight years since I began paying $140 a month on my student loans.

I’d always been told that student loans qualified as so-called “good debt.” After all, they’d helped me to finance my education. But here I am, eight years later with $55,000 paid off and $17,000 still to go, and I’m asking myself if this is truly good debt, or merely bad debt in sheep’s clothing.

Throwing Out The Old Definitions

The old definition of good debt used a black and white classification system, lumping some debts under the “good” category based simply on the type of debt, not on the various shades of gray that – no pun intended – color a transaction. A good debt was considered anything which you needed right now, but couldn’t afford to pay for in full.

Take student loans, for example. They were good debts, simply because they were considered an investment in your future. Didn’t matter if you’d consolidated to an ultra-low interest rate years ago on a relatively small sum, or were still paying six, seven, or eight percent interest on a five- or six-digit loan. In the immortal words of Bob Dylan, It’s all good. Or consider mortgage loans. As recently as ten years ago, when you purchased a home, you expected a return on your investment. After all, this is why buying a home was considered a better financial option than renting. This isn’t always the case anymore. To quote Dylan again, Times, they are a-changin’. And while you can deduct some or all of the interest you pay on your mortgage on your taxes, even Congress is considering eliminating this tax break.

Likewise, many loans were considered “bad debt” just because of how they were incurred regardless of if the money was spent on school supplies or cruises. Take $10,000 in credit card debt – that’s the average balance carried by American consumers. If you were paying the monthly minimum on that ten grand on a card with a 29 percent interest rate, that’s bad debt, right? But what if you consolidate your debt into a home equity loan with a dramatically lower interest rate? You’ve still got the original $10,000 in debt, but – aside from how you racked it up in the first place – is the new home equity debt truly bad?

Building New Definitions

It’s time to throw those old definitions of good debt and bad debt out the window. American culture – and, naturally, our financial system – is changing, and our definitions of what constitutes a wise investment should as well. My 21st century definition of good debt goes something like this:

“Look at your debt as an investment; if you can get a return on that investment, it’s good debt. If it only leaves you in the red, it’d bad debt.”

With that in mind, let’s reconsider my aforementioned student loan. My four-year undergraduate degree cost me $46,000 a year (when I said I went to a pricy school, I meant it). When I graduated from college, I was $72,000 in debt. That summer, I consolidated my student loans into a single loan with 1.75 percent interest (this was back in the days when super-low interest rates were possible on student loans; a rate this low is virtually unheard of these days). My initial monthly payments were $305; when I could, I put extra on the principle – my parents did so from time to time as well. Over time, as I paid more down on the principle, I had the option to reduce my monthly payments (the alternative being to pay off the loan early, which would have eliminated my ability to write off the interest on my taxes), which I did. That brought me down to the $140 monthly payments I pay today.

Over those eight intervening years, I’ve paid down $55,000 in debt – that’s an average of nearly $4,600 a year. Not too shabby. But consider this: because of my career choice – journalism, which is notoriously stingy when it comes to paychecks – I earned just $206,750, an average of $25,800 a year.

Now, let’s look at the facts:

  • $46,000 a year for my undergraduate degree
  • $25,800 in average yearly earnings for my first eight years post-graduation

Does that sound like an investment that’s bringing in solid returns? Not really. What does that say about my debt? In my opinion, I think it makes my student loans a bad debt, rather than a good one.

Do you have any debts that fall into this “grey” category between good debt and bad debt? What are they, and how do you measure whether or not they’re working for you?

Libby Balke

Libby Balke