Good debt?

Parent Cafe
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<p>Someone once told me that debt that a person accumulates because of going to undergrad and grad school is called “good debt?” Is that true? What this person meant by that phrase is that creditors would not hold it against you if you have “good debt.” If you want to take out a loan for a house, your “good debt” would not be a factor in you not recieving that loan. Is all of this true?</p>

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<p>My understanding of the term “good debt” is one that I heard from Suze Orman. “Good debt” is one where you will BENEFIT from it. Home ownership & student loans are two examples.</p>

<p>Credit card/car loans would NOT fall under that term. </p>

<p>Student loans do indeed affect your credit worthiness, thus being late on payments, etc can adversely impact you. Also, student loans are not forgiven in a bankruptcy.</p>

3

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Although I have never seen a definition of “good debt,” I agree with justamom’s version. Debt for buying a lot of clothes, restaurant meals, boat, motorcycle etc. is not “good” debt. Student loans/mortgage would be good debt.</p>

<p>HOWEVER, it is emphatically NOT true that “good debt” won’t be a factor in whether/how much you can borrow for a home mortgage (sorry for the double negative). Having “good debt” will not eliminate you from consideration for a mortgage, but this is how it works:</p>

<p>Bank looks at your Gross Monthly Income. Bank looks at the PITI cost of the house you want to buy (PITI=principal and interest on the mortgage loan, property taxes and homeowner’s insurance). Bank looks at other debt you have (including “good” and “bad” debt). Bank calculates two ratios: PITI/Gross Monthly Income. PITI+debt payments/Gross Monthly Income. Bank sets limits on each of those ratios (usually something like 28%/36% for the two, respectively). If your ratios exceed those limits, you’ll have trouble getting the mortgage loan. All of this is in addition to bank considering your credit score, job history, etc.</p>

<p>So, if you need to borrow for college, that can be a wise use of debt. But you still want to keep it as low as you possibly can. Too much student debt will make it harder for you to buy a home or require you to postpone it longer.</p>