Welcome to week two of our three-part series on debt. It’s a complex issue, and finding a way to repay debt is even more difficult, which is why we’re devoting so much time to it. We’ll tackle it all over the coming weeks: student loans, mortgages, repayments plans, bankruptcy and credit cards. If you’ve got a question you’d like to see answered, please shoot an email to email@example.com. We want to tailor this space to fit your needs, so the more questions we get, the better.
Today we're tackling "good debt" aka student loans, mortgages and small business loans. These debts are seen as good because they are supposed to increase your net worth as a person.
When you take out one of these loans, you are usually put on a standard repayment plan. This means that you agree to pay back the loan within a certain number of years. For student loans, the standard for a four-year degree is 10 years, while a mortgage hovers around 30 years. Small business loans are variable and depend on your area and type of business.
Students are able to take out public loans from the federal government, or private loans from companies set up to lend money. Be careful with private loan providers! They can carry variable interest rates (higher than federal loans' typical 4% to 6%). Students are expected to begin paying for loans six months after graduating from college. If you’re struggling to make payments, reach out to your loan provider to determine whether you’re eligible for income-based loan repayment programs. If you don't pay a student loan for nine months, you can go into default, which can destroy your credit score, among other major issues. For more information, we recommend you listen to Gaby Dunn's podcast episode on student loans. Also check out this New York Times link on how to avoid major repayment traps.
Buying property is considered a major financial achievement by most, because it's an asset that appreciates — or gains value — over time. Most people, though, take out a mortgage to make this happen. It's a long-term loan that either has a fixed rate of interest (this is a fixed-rate mortgage) or that has variable interest. Fixed-rate mortgages are preferred because they're easier to understand. But a variable mortgage can be a good option if you're buying a house when prices are high. This gives your interest rate some space to fall. As always, consult with a financial planner to make the right decision for you. Mortgages are complex loans, so we suggest checking out a few resources for further education. Check out Investopedia's mortgage basicshere or Ellevest's advice on getting a better mortgage here.
Finally, small business loans are an important piece of a local economy puzzle. Taking one out can help you chase a dream, which is super exciting. But you have to be careful to choose an option that is low interest and that has a realistic repayment schedule. Check out NerdWallet's small business loan finder or the U.S. Small Business Administration for more.
- Alicia McElhaney / She Spends Issue #5