After four years of undergraduate education and another three at law school, Sarah Spitz landed a job she loves — and a debt load she resents.
A new hire at a boutique law firm in Toronto, Spitz has $60,000 owing on an $80,000 line of credit, and another $11,000 in provincial student loans.
"I'm very happy with where I ended up, but I'm not going to sit here and pretend that debt didn't have a huge impact on what firms I applied to, what career choices I made, where I was willing to work, the kind of work I was willing to do."
Spitz is among the ranks of people who have grown resentful of their "good debt" — debt we are told is good for us in the long run.
The notions of "good debt" and "bad debt" are a kind of investors' shorthand for understanding whether the kind of borrowing they're doing is likely to pay off in the longer term.
Student debt is generally considered "good" debt: it allows borrowers to increase their income in the long run. But as countless former students struggling with debt can tell you, paying down even a "good" debt can be a source of stress and financial difficulty.
"Sure, I'm increasing my earning potential by a lot, but it also really affected my 20s," Spitz told HuffPost Canada. "And it's really anxiety-inducing to look at your bank statement and the column that's negative $80,000 — you're like, oh my God, that's soul-crushing."
THE TRADITIONAL CONCEPT OF GOOD AND BAD DEBT
Traditionally, "good debt" is the sort that helps you gain wealth or income, while bad debt is money spent on goods that are consumed over time.
Here's a breakdown of what is generally considered "good" debt and "bad" debt:
- Mortgages help you build equity in real estate, making you wealthier over time
- Student loans help you increase your earning power
- Business/investment loans make starting up and running businesses possible — they're crucial to business growth.
- Auto loans for vehicles that lose value the moment you drive them off the lot
- Credit cards have very high interest rates and are largely used to finance consumption
- Payday loans have high interest rates, high fees and contribute to keeping many low-income people in a cycle of debt
In Canada, as in most of the developed world, the largest source of "good" debt is the mortgage.
Canadians are almost unequivocal in their support of mortgages. In a 2013 poll from the Canadian Association of Accredited Mortgage Professionals, 80 per cent of Canadians agreed that mortgages are "good debt."
But a recent survey from Angus Reid found half of Canada's home-owning young adults are experiencing buyer's remorse, with the high cost of servicing that debt as the single largest reason.
In other words, "good debt" can go bad, especially if you have more of it than you can handle — financially, or psychologically.
"There's no such thing as good or bad debt," says Doug Hoyes, co-founder of debt management firm Hoyes, Michalos & Associates.
Asking whether debt is bad or good "is like asking 'Is bread good or bad,'" he says. "That's a silly question. What matters is, what's good for you?"
You may think that borrowing on a credit card to pay for a vacation is bad debt, "but maybe a vacation is very important for your mental health," he says.
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Hoyes warns that there is risk in taking to heart the notion that some types of debt are "good" — it can lead to irresponsible borrowing.
"If you believe a mortgage is good debt, you might spend as much as you can on a house," he said in an interview with HuffPost Canada.
Could that be part of the reason why Canadians have been willing to take on so much mortgage debt? With around $1.67 in debt for every dollar of disposable income, households here are the most indebted of any G7 country. And the Bank of Canada has been raising the alarm about the growing ranks of "highly indebted" consumers — those whose debt exceeds their annual income by more than 450 per cent.
"Households carrying high levels of debt could find it more difficult to adjust to a loss in income or other financial shock," the bank warned in December. "They may be forced to sharply cut back on their spending and, in severe cases, may default on loans. The consequences for the economy and the financial system could be significant."
So there you have it: you could even harm the economy taking on too much "good debt."
Determining the "right" amount of debt
But how do you know when if your "good" debt is actually bad?
"When it edges into your lifestyle, you have too much debt," says Avraham Byers, a personal finance trainer and blogger.
His definition of good debt is different from the traditional model. For him, it's "a balance you can comfortably pay every month, at a reasonable rate."
He says there are many "grey areas" when it comes to debt. For instance, a car loan may be considered bad debt because vehicles depreciate in value (often losing a quarter to a third the moment you drive it off the lot), but what if a car is your only option for getting to work, and you don't have enough to buy in cash? Then, suddenly, an auto loan can look like good debt.
Or borrowing money for home renovations. Many argue it's good debt because it increases the value of your home.
"I don't know if that's true, especially if you plan to continue living there in the future," says Byers.
He suggests a rule of thumb for debt: Your monthly payments should be no more than 25 per cent of your monthly income before taxes.
"When it edges into your lifestyle, you have too much debt."Avraham Byers, personal finance trainer
Banks are often willing to lend you up to 36 per cent of your income, but he suggests not leaving it to them to decide.
"Banks might think you can handle it but it might not be true," Byers says. "You've got to be realistic with what you can afford."
For her part, Spitz says her experience with student debt will make her more cautious taking on debt in the future.
"I'm definitely more apprehensive than I would have been," she said. "It's one thing to think about being in debt in the abstract, and a very different thing to experience it."
— With additional reporting by Jessica Chin
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