Good Debt vs. Bad Debt

7th GradeIncome vs. Expenses #3

Pre-Test 1. What is a good debt?2. When credit card bills are paid off within a

month, how much interest must be paid?3. How much more is the lifetime earning

increase of a 4-year college graduate than the average 4-year college costs?

Objectives • Good Debt– Created value or has the potential to create value

• Bad Debt– Difficult paying money back or does not add

meaningful value

• Credit Card Problems • Postsecondary Education Value vs. Costs

Review Last Lesson

1. Tool on the internet that provides information about income vs. expenses

• Reality Check

2. What is the annual salary needed to cover your expenses?

• Answers will vary• Average Range: $50,000-$60,000

3. What careers of interest cover those expenses?• Answers will vary• Usually needs to be a high-skilled career

Debt

• Debt: Owing money• It is very difficult to live your life debt-free• The challenge– Which debt makes sense– Which debt does not make sense– Wisely managing and limiting the money you borrow

Good and Bad Debt

• Good Debt– Need something but do not have the money to buy it– Taking out loans: can afford the monthly payments– Creates value and provides way to earn more money

• Bad Debt– Things that can be consumed fairly quickly with no or

little cash or personal value – Buying something you really do not need– Cannot afford the monthly payments

Usually Good or Bad Debt?

• Groups agree on answers– Which of the loan items below are usually good or debts?– Give reasons why they are good or bad debts• Credit card finance charges• Buying a home• Paying for college• Buying clothes• Paying for a vacation

Groups Share With Class

• Which of the loan items are usually good or debts?• Give reasons why they are good or bad debts– Credit card finance charges– Buying a home– Paying for college– Buying clothes– Paying for a vacation

Usually Good Debt

• Buying a home– Most people need a loan to buy a home– Interest money is tax deductible– When it is bad: Monthly payments too high for income

• Paying for college– Costs are often much less than increase in income– When it is bad: High tuition with few long-term financial or

personal benefits

Usually Bad Debt• Credit Card Finance Charges

– Often very high interest, Payments primarily going to interest– When it is good: Pay balance quickly, buy something important

• Buying Clothes – Not recommended to borrow for items consumed fairly quickly– When it is good: Clothes essential for new job, pay back fast

• Paying for a vacation – When costs creates payments you cannot afford, consumed quickly– When it is good: Cost slightly over your savings, rejuvenates you

Good and Bad Debt Video• Watch the Good and Bad Debt video• Pay close attention: what is good or bad debt?• Mixed opinions on whether borrowing money to

buy a car is a good or bad debt• Discussion Point• Many Americans have a car loan• Is taking out a car loan a good or bad debt? Why?

Credit Card Interest

1. The average interest rate is 20% for credit cards

2. When credit card bills are paid off within a month, no interest is paid

3. The credit card company requires people to pay at least 3% of the principal every month

Credit Card Scenario #1

1. Mai charges $1,000 to her credit card for a vacation – Her credit card interest rate is high: 20%

2. She only pays the minimum amount per month: 3% of the principal which is $30– It takes her 25 years to pay off the debt

3. Mai pays a total of $2,224.06 – $1,000 of principal, $1,224.06 of interest– That is a major way credit card companies make money– This type of situation happens way too often in America

Credit Card Scenario #2

1. Ed has bad credit rating for not paying previous loans– His interest rate is very bad because of this: 37%

2. For the same $1,000 vacation loan – Ed paid $24,040.81 in interest– Mai paid $2,224.06 (that is still bad)

3. It took Ed 50 years to pay back the debt– This type of loan is also too common in America

Postsecondary Financial Aid

• Approximately 70% of college students• Receive financial aid they do not have to pay back• Example: Grants, Scholarships, Work Study

• Average amount of student financial aid per year • For 4-year college of annual costs of $25,000• $9,100 per year

Income by Education Level

Average Postsecondary Costs

• 2-Year Associate’s Degree: $12,000• 4-Year Bachelor’s Degree: $100,000• 6-Year Master’s Degree: $150,000• 10-Year Doctorate Degree: $250,000

High School Graduate Wage Difference

• 2-Year College Wage Difference: $514,500• $514,000 - $12,000 = $502,000

• 4-Year College Wage Difference: $1,116,000 • $1,116,000 - $100,000 = $1,016,000

• 10-Year College Wage Difference: $3,348,000• $3,348,000 - $250,000 = $3,098,000

College Loans: Usually a Good Debt

• Students usually pay much less on college costs – Than the salary increase they will make in a lifetime• Example: 4-Year Costs: $100,000, Salary Increase = $1,116,000

• Going to a postsecondary institution and borrowing money is most often a good debt– The degree has more financial value than the debt

Post-Test 1. What is a good debt?2. When credit card bills are paid off within a

month, how much interest must be paid?3. How much more is the lifetime earning

increase of a 4-year college graduate than the average 4-year college costs?

Review

• Good debt is – Something that creates value or has the potential to create value

• Amount of interest when credit card bills are paid off within a month– $0.00

• Lifetime earnings increase of a 4-year college graduate more than the average 4-year college costs– Over 1 million dollars