The Myth of “Good Debt”:

The Myth of “Good Debt”:

In America, debt has become the norm. Borrowing money is frequently viewed as a normal—if not essential—aspect of financial development, from credit cards and auto payments to mortgages and college loans. We are constantly reassured by economists, banks, and even personal finance specialists that “good debt” exists.

The reasoning makes sense: while some debts just deplete your finances, others help you accumulate wealth or improve your earning capacity. Taking out a mortgage to purchase a home? “Good debt” is what that is. Getting a college degree by taking out a student loan? regarded as “good debt” as well. On the other hand, using credit cards to indulge in luxuries is regarded as “bad debt.”

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The Origins of the “Good Debt” Idea

The term “good debt” didn’t emerge out of thin air. It’s part of a broader narrative promoted by financial institutions and educators to encourage borrowing under the promise of long-term benefits.

• Mortgage debt was marketed as the American Dream: own a home, build equity, and secure your financial future.
• Student loan debt was presented as an investment in human capital, giving access to higher wages and career stability.
• Business loans were hailed as fuel for entrepreneurship and economic growth.

Banks, lenders, and policymakers reinforced these ideas, framing certain debts as “strategic investments” rather than liabilities. While it’s true that some debts can lead to opportunities, the blanket label of “good debt” oversimplifies the risks and realities.

The Problem With the “Good Debt” Narrative

• Assumes Guaranteed Returns

Not all investments pay off. A college degree may not lead to a high-paying job. A house may not appreciate in value. Businesses fail every day. Debt tied to uncertain returns can quickly become a financial trap.

• Ignores Interest and Opportunity Cost

Even “low-interest” loans add up over decades. Paying thousands—or even hundreds of thousands—in interest erodes potential gains. Money used for debt payments could have been invested elsewhere with less risk.

• Exploits Optimism Bias

People tend to overestimate future earnings and underestimate risks. Lenders count on this optimism when approving loans. The idea of “good debt” feeds into our hope for upward mobility, even when reality doesn’t match the dream.

• Shifts Risk to the Borrower

Lenders profit regardless of whether borrowers succeed. If a student loan borrower drops out of college or struggles to find work, the lender still gets paid. In this sense, “good debt” mainly benefits the institutions, not the individuals.

The Most Common Type of “Good Debt” is Student Loans

Student loans are arguably the most commonly recognized type of so-called “good debt.” Since college graduates usually earn more than non-graduates, generations of Americans have been convinced that borrowing money for education is a smart move.

The Check of Reality:

• Increasing Costs: Over the past 40 years, the average cost of college tuition has increased dramatically, exceeding both inflation and income growth.
• Burden of Debt: The total amount of student loan debt owed by Americans as of 2025 is more than $1.7 trillion.
• Uncertain ROI: Not all degrees result in well-paying jobs. In addition to being saddled with enormous debt, many recent graduates end up in low-paying positions unrelated to their field of study.
• Millions of borrowers never complete their degrees yet are still saddled with debt due to the non-completion dilemma.

Mortgages: The Debt of the “American Dream”

Owning a home is often cited as the hallmark of financial success. Mortgages are portrayed as good debt because real estate “always goes up in value.” But history tells a different story.

The Reality Check:

• Housing Crashes: The 2008 financial crisis proved that housing markets can collapse, leaving millions underwater on their mortgages.
• Hidden Costs: Homeownership comes with property taxes, insurance, repairs, and maintenance—expenses that are rarely factored into the “good debt” equation.
• Mobility Limitation: Being tied to a mortgage can reduce flexibility. In a volatile job market, the inability to move quickly can limit opportunities.

While many families have built wealth through real estate, many others have lost everything when housing bubbles burst.

High Risk, High Reward Business Loans

Due to the numerous success tales of people who took out loans and created billion-dollar businesses, entrepreneurship is frequently romanticized in America. However, there are innumerable failures for every success tale.

The Check of Reality:

• High Failure Rate: Approximately half of small enterprises fail within five years, and 20% fail in their first year.
• Debt Burden: In the event that their business fails, entrepreneurs who take out business loans frequently face personal liability.
• Unequal Access: Those with strong credit and existing resources benefit most, while struggling entrepreneurs may face predatory loan terms.

Business debt can change a person’s life. It’s a risk that doesn’t pay off for many.

The blatant “bad debt” is credit card debt.

If mortgages and student loans are considered good debt, credit card debt is almost universally viewed as bad. With high interest rates, penalties, and compounding balances, credit cards represent one of the fastest ways to financial ruin.

But even here, the “good debt vs bad debt” narrative simplifies a complex issue. For some, credit cards serve as a lifeline during emergencies, especially in a country where healthcare costs and living expenses can be crushing. The line between survival and irresponsibility often blurs.

The Reasons Behind the Myth of “Good Debt”

The idea of good debt still dominates financial discourse in spite of the dangers and drawbacks. Why?

1. It stimulates economic expansion. GDP growth, investment, and expenditure are all fueled by borrowing.
2. Lenders gain from it. Banks and other financial entities make enormous profits from interest payments.
3. It keeps the social order intact. Promoting debt keeps individuals striving for upward mobility, even when it becomes more and more unattainable.
4. It makes financial advice easier to understand. It is simpler to distinguish between “good” and “bad” debt than to fully explain the intricacies of risk, opportunity cost, and market volatility.

The “Good Debt” Psychological Trap

The idea of good debt has significant psychological repercussions that go beyond economics:

• Guilt Reduction: When borrowing is described as “good,” people feel less guilty about it.
• Social Pressure: Cultural narratives portray avoiding certain debts, such as student loans or mortgages, as reckless.
• Debt Normalization: Society normalizes lifetime debt as a necessary component of responsible maturity by deeming some types of debt to be beneficial.

The Bigger Picture: America’s Debt Culture

The idea of “good debt” doesn’t exist in isolation—it’s part of a broader American debt culture. From government deficits to household borrowing, debt is the engine that keeps the economy moving.

• National Debt: The U.S. federal debt has surpassed $34 trillion, with little political will to reduce it.
• Household Debt: Mortgages, auto loans, student debt, and credit card balances have reached historic highs.
• Generational Divide: Younger generations face more debt with fewer guarantees of stability compared to their parents.

This culture of normalized borrowing makes it difficult for individuals to step back and question the system.

So, Is There Ever “Good Debt”?

While the idea of universally good debt is flawed, context does matter. Some debt can be strategic if:

• The interest rate is low and fixed.
• The debt funds an investment with a high probability of return.
• The borrower has financial stability and emergency savings.
• The terms of the debt do not create undue long-term burdens.

But the key takeaway is this: debt is never inherently good. It is a tool—one that carries risks, costs, and trade-offs. Labeling it as good can mislead people into taking on more than they can handle.

So, Can “Good Debt” Ever Exist?

Context is important, even though the notion of universally beneficial debt is wrong. Certain debt may be advantageous if

• It has a fixed low interest rate.
• An investment with a high chance of return is financed by the debt.
• The borrower has emergency funds and is financially secure.
• There are no unwarranted long-term liabilities associated with the terms of the debt.

However, the most important lesson is that debt is never always a good thing. It is a tool—one with expenses, trade-offs, and hazards. People may be misled into taking on more than they can manage if it is labelled as beneficial.

In conclusion, we must dispel the myth around debt.

Generations of American financial decisions have been influenced by the myth of “good debt.” Although it’s true that some loans can lead to opportunities in housing, education, or entrepreneurship, the risks and reality are much more nuanced than the neat labels imply.

Debt is a two-edged sword that is neither intrinsically good nor evil. Understanding the trade-offs, challenging the narratives we’ve been given, and making thoughtful borrowing decisions are crucial.

The idea of good debt may be one of the most perilous delusions preventing Americans from achieving true financial independence as interest rates rise and financial turmoil looms.

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