When is Debt "Good?"

When is Debt "Good?"

Debt can be used as a moneymaking tool in certain situations; this is called leverage. It can be highly risky, but the reward can be great as well.

Consider this example: you learn of a foreclosed house that's available for sale for only $35,000. It's fairly well-kept, and it's in a nice neighborhood, and you think it's worth $110,000.

Since you don't have $35k right now, you borrow that money from the bank, pay 8% interest (that is, an additional $2800), and then mow the lawn and spruce up the appearance a little bit. Then, you list the house for sale for $120,000. You get a buyer who agrees to pay $100,000 for the house.

So in this example, your cost is $35,000 + 2800 = $37,800. Your revenue is $100,000. Your profit is therefore over $60,000. A $60,000 profit that, were it not for the short-term debt required to raise the initial $35,000, you could not have realized.

That's how leverage works, and that's how debt can be "good." Student loans can be considered the same way, IF you can be confident that a profitable job in your field will be available when you graduate.