Debt in America has always had a moral dimension. Springing from the United States’ roots in a Puritan work ethic, families and individuals have always been encouraged to not only work hard, but to be conservative in their spending and personal finances. Above all, frivolous debt was considered the product of poor judgment, or worse, loose morals. However, prior to the Great Recession, financial pundits and economists still recommended specific kinds of “good debt” that were not only considered permissible, but perhaps even necessary. After all, working class families can only accumulate so much wealth through earnings and savings, and should take advantage of opportunities to generate passive income or grow savings by putting their money to work. The bridge to the middle class is most often crossed through investment, and investment must inevitably take the form of debt, or so the story goes.
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“Good debt,” the kind that could make us feel all warm and fuzzy and virtuous on the inside, primarily fell into two categories: home loans in the form of mortgages and education expenses in the form of student loans. What these two kinds of debt had in common was that they deferred immediate gratification in favor of a long-term, noble goal. “Bad debt” reeked of just the opposite: poorly-financed seasonal toys like boats and motorcycles, big-screen televisions, and credit card debt from late night impulse purchases… all in the hopes of stroking the ego or instantly granting a fleeting wish.
While delayed-gratification can often be an indicator of the value of the object in question, it is not altogether clear that these Puritanical distinctions still hold water in post-recession America. David Francis recently suggested in US News & World Report that all debt is simply debt, and the best we can hope for is better debt and worse debt. So, has all debt lost its luster, or are there still pathways to pursue responsible loans for responsible goals?
Home Loans are for Homes, not Flips
The traditional, 30-year home mortgage was intended to settle a family in a home. By putting roots into a community, homebuyers felt good about their purchase, as it created a vested interest in local infrastructure, school and politics. However, this community-building “good” debt that was meant to appreciate slowly over time turned into something altogether different as the housing bubble swelled to its bursting point. In the push to build wealth among the middle class, the traditional mortgage became less about establishing a home, and more about finding a juicy piece of expensive real estate that could be flipped on to new owners for easy profit. Of course, not everyone who now finds themselves underwater in their mortgage purchased their home with an eye toward quick profit. Still, the anxiety that permeates the underwater homeowner crystallizes the problem: they fear they cannot sell and move on for a long, long time.
By decoupling mortgages from a sense of wealth-building and refocusing our drive to buy a house into a drive to establish a “home,” we can more comfortably and securely settle into a fixed-mortgage knowing that while the short-term market may fluctuate wildly, the 30-year commitment will almost certainly bring increased value.
Shop Education for Cost, not just Prestige
Student loans were originally intended to provide a pathway for young people of limited means to pursue an education that would lead to a career that brought satisfaction and stability. Often, this gateway was a community or state college; affordable, local and well-staffed with tenured academics that enjoyed their craft. For anyone who has set foot inside the halls of a public or private university in recent years, that characterization of idyllic academia can sound like a nostalgic fantasy.
Many universities have become slick and shiny, rec-center touting, luxury dorm fitted, sports-centric money-devouring powerhouses that expend just as much energy carefully crafting an image as they do selecting faculty. It is so easy for potential students to become swept up in the location, aesthetics and reputation of a university that they forget that at the core of a solid college education is a professor and a classroom. This tendency to get sucked in by the razzle-dazzle of college marketing machines is compounded by the straight-faced insistence by admissions officers that “anyone” can afford to go “anywhere” through complex packages of grants, scholarships, and most-worryingly, loans.
Andrew Martina and Andrew Lehren recently detailed the problem of overwhelming student debt in The New York Times, acknowledging that while student debt is still considered “good debt” the belief that “anyone” can go “anywhere” has led many students to take on crippling debt in order to attend pricey schools with name recognition. According to the article, this state of affairs has led to an average student debt of $23,300, with 10% owing more than $54,000.
The solution is to treat shopping for a college education like any other large ticket purchase: get the best performance for the best price. By keeping the core purpose of a university in view, potential students can see through the allures of flashy dining halls and winning teams to find a well-priced institution that provides a solid education. Simply leaving university with less debt will put many graduates ahead of the financial game. Also, a generation of students who choose universities based upon quality and price will force institutions to compete on cost, as well as luxury dorm suites.
In the end, the post-Recession message on “good debt” can sometimes be contradictory; after all, pundits and politicians alike encouraged able-body spenders to get out there and consume in the wake of the recession to combat economic stagnation. At the same time, folks were told that it was the grand sum of our collective debts in mortgages and credit cards that broke the veritable camel’s back. The American inclination to view personal finance through an ethical lens and to further regard some debts as “good” or “bad,” increases the trickiness of financial decision-making. Still, by reflecting on the relative value of those things we put ourselves into debt for - our homes and our education - the inherent risk of assuming even a “good” debt is diminished by assurance of good, dare one say, virtuous returns.
1. “The Myth of ‘Good’ Debt.” David Francis. US News and World Report.
2. “A Generation Hobbled by the Soaring Cost of College.” Andrew Martin and Andrew W. Lehren. The New York Times