Updated: Jul 28
What is bad debt?
Bad debt is debt that does not generate income or increase in value over time. Examples of bad debt include credit card debt, payday loans, and personal loans used for non-investment purposes.
Is student loan debt considered bad debt?
Student loan debt is not typically considered bad debt. While student loans do not generate income or increase in value over time, they are generally considered to be an investment in the borrower's future earning potential.
According to the College Board, individuals with a bachelor's degree earn, on average, 66% more than those with only a high school diploma. Additionally, individuals with a graduate degree earn, on average, 28% more than those with a bachelor's degree.
Furthermore, federal student loans offer flexible repayment options, including income-driven repayment plans that allow borrowers to make payments based on their income. Private student loans may offer less flexibility, but they may still be a worthwhile investment in certain circumstances, such as when the borrower is attending a high-quality program that is likely to lead to a high-paying job.
What do the statistics say?
According to the Federal Reserve, the delinquency rate for student loan debt was 6.9% in the third quarter of 2022. This is higher than the delinquency rate for credit card debt (1.7%) and auto loans (3.3%), but lower than the delinquency rate for mortgages (2.7%).
Furthermore, a survey by the National Association of Realtors found that 83% of millennials who do not own a home cite student loan debt as a barrier to homeownership. This suggests that while student loans may not be considered bad debt in and of themselves, they can still have a significant impact on borrowers' financial well-being.
While student loan debt is not typically considered bad debt, it can still have a significant impact on borrowers' financial well-being. Student loans are generally considered to be an investment in the borrower's future earning potential, but they can still be a burden, particularly for borrowers who struggle to make their monthly payments.