He also shared that good debt was debt which others are paying. For instance, if one owned real estate and his/her tenants were paying down the mortgage and expenses this would be a great example of good debt.

Bad debt is what one is paying with student loans, credit card bills mortgage payments, etc. However, regarding student loans; I think its fair that many of us agree that education (in many forms) is very important for many reasons and can yield higher paid jobs, networking opportunities with other like minded individuals and skills that can be applied for life. So assuming we all agree that education is a great investment with an absolute return on investment (when properly applied) its still considered by many experts as bad debt.

Now, Just because a recently graduated borrower has extended his terms to lower his payments through student loan consolidation does not necessarily mean that he’ll be paying more interest over the long term. In fact, when a client does consolidate he/she often lowers the interest rate and fixes the rate for the life of the loan. (The loan payment terms do depend on the size of the loan, which is the main catalyst for such dramatic monthly payment reductions.) But my point is if the borrower takes the loan to full term, then yes, as Jennifer suggested he/she would unequivocally be paying more in interest than if he/she paid down the loan. Federal loan consolidation programs do NOT have any prepayment penalties like some mortgages do, so the borrower really has full control with student loan consolidation and may pay off the loan early at any time.

So, once the client has consolidated and started enjoying some debt relief we usually suggest to our clients to take the difference in payments and invest the difference. We usually like to refer our clients to real estate in stable markets because real estate is one of the easiest barriers of entry to get into and often provides high yields of return with a cash on cash return.

Finally, I think its important to realize the intent of student loan consolidation and then determine if the program fits in your plan. The program was originally designed in the 60s to provide immediate debt relief by fixing the interest rate and extending the loan terms, providing lower monthly payments for the borrower. The idea was (and still is) that the newly graduated borrower may require some time before they start earning enough money to become financial stable. Once the borrower has secured a stable job, he/she can start doubling payments (all federal loans are simple interest, meaning that doubling up on payments means the principle of the loan is paid off even faster)

Bottom line. Yes, student loan debt is an example of bad debt. But, student loan consolidation can be a great opportunity to leverage into high yielding investments that can set you free. There are also some added benefits to student loan that are much superior to other forms of bad debt. For instance, low interest rates and legal tax deductions.

Many of our wealthy clients (doctors, attorneys, etc) consolidate their student loans, reduce their payments and take the difference in payments to reinvest into high yielding investments in that order. They then legally write off the interest of the student loan and a portion that was used for tuition as legal tax deductions from their income tax. Ask your CPA for details or search for HOPE credit for more information.

Stay tuned for a full report on How to legally write off a portion of your student loans and put more money in your pocket. I’ll be happy to post the link here with Chris’ and all of your approval.

And don’t talk to me about the cost of textbooks!