Is College Debt Good or Bad Debt?

The surprising economic effects of student loans

College loan debt is strangling many young people in America. There’s no debate about this.

The staggering student debt numbers

As the U.S. News & World Report says, “In its ninth annual report on student loan debt, TICAS found nearly 7 in 10 graduating seniors in 2013—69 percent—left school with an average of $28,400 in student loan debt, an increase of 2 percent from 2012.”

These are astonishing numbers. Seventy percent of students graduating have nearly $30,000 in debt before they’ve even hit the job market.

Compound that with the fact that, as Fox News reports, “For graduates with bachelor's degrees, unemployment climbed to 14.9 percent last year from 11.5 percent in 2013,” and you have the recipe for disaster.

Hear no evil; see no evil

But for many, this epidemic is far removed from everyday life and easy to ignore. After all, it has no bearing on you, right?

Turns out that’s not entirely true.

According to a recent Penn State University study as reported on by The Centre Daily Times, “…One standard deviation increase in student debt reduced small businesses by 14 percent on average between 2000 and 2010.”

The conclusion: “Entrepreneurs are so encumbered by student debt they can’t borrow more money to start a business.”

A ticking small-business time bomb?

Small businesses are the heart of the American economy, making 65 percent of the net new jobs over the last fifteen years according to the SBA Office of Advocacy. Now imagine what will happen to our economy if the rate of new small business creation drops as dramatically as the rate at which student loan debt has increased.

This goes to show that when it comes to economies, things are rarely self-contained and that systemic issues can come from anywhere—and they usually start with financial ignorance.

In this case, the ignorance is regarding debt. The conventional financial wisdom is that college debt is good debt because higher education is important for getting ahead. But how’s that working out for our nation’s graduates? Not that well.

The difference between good debt and bad debt

One of the fundamental principles of Rich Dad is understanding the difference between good debt and bad debt. In my opinion, college debt is bad debt.

A financially sophisticated person understands good debt, good expenses, and good liabilities.

I remember rich dad asking me as a young man, “How many rental houses can you afford to own where you lose $100 per month?”

“Not too many,” I answered.

Then he asked me, “How many rental houses can you afford to own where you earn $100 per month?”

The answer to that question was and is, “As many as I can find!”

This simple example illustrates the difference between good debt and bad debt. In each case, I would have bought the houses with a loan, but in one case that loan and associated expenses outweighed my cash flow income. In the other, it didn’t.

The simple definition of good debt is that it puts money in my pocket. The simple definition of bad debt is it takes money out.

So, a simple question for those thinking of taking on more student loan debt: Is it really putting money in your pocket?

The answer, unfortunately and all too often, is no.

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