What is Debt?
Debt is an amount that is owed to a person or an organization for funds borrowed, and is to be repaid – generally with interest. Not all debt is bad debt. Certain debt, like student loans and business loans, may be considered a good investment (or good debt) if managed properly.
A loan is one method for financing the different purchases or investments you make and is generally repaid with interest. Be aware that missing payments or defaulting on your loans can be extremely damaging to your credit.
Student loans can be one way to help establish good credit if payments are made on time and in full. There are several types of federal student loans that are offered through the Free Application for Federal Student Aid (FAFSA). You can also read more about federal student loan options here.
Tips for Borrowing
- The less you have to borrow, the less you have to repay.
- Estimate repayment amounts before you borrow.
- Total student loan debt should be less than starting annual salary after graduation.
- Use loans only for educational purposes—not for buying a car, going on vacation, etc.
- Make a budget without using loans as a resource. Borrow only what you need to cover remaining expenses.
Recognizing Debt Distress
Many times, signs of debt distress may not be recognized because they don’t occur daily, they might appear harmless, or people don’t connect them to any long-term consequences; however, frequent and habitual use of debt can become a problem.
Some Signs of Debt Distress
- Using credit cards to pay for living expenses
- Using the overdraft protection plan on your checking account to pay monthly bills
- Using savings to pay bills
- Taking on more debt to pay off existing debt
- Delaying one bill (or “floating”) to pay another overdue bill
- Paying only the minimum due on credit card accounts
If you find yourself in the habit of committing one or more of these, you should consider seeking help with managing your money and developing a plan to pay off your debts.