Debt is money owed to someone (like your friend or parent) or something (like a university, bank, or business). It often comes with additional terms or requirements, like interest, that means the money owed increases over time if not paid.
The Benefit of Debt
Debt can be incredibly helpful and appropriate when have need of money but don’t actually have the money. An example might be: you need a car to get to work to earn money. But in order to earn that money, you have to have enough money to buy the car. Taking out a loan to buy the car and then making monthly payments on that loan allows you to get to work and earn money, even if you didn’t have enough money to buy the car outright.
The Danger of Debt
When you take out a loan, you take on an obligation to pay the money back, with interest, through a monthly payment. You will take this debt with you when you apply for auto loans or home loans, when you enter into a marriage, and so on. Effectively, you have committed your future income to the loan. While this can be a good idea with student loans, take on too many loans and your future self will be poor, no matter how much money you make. Worse, you’ll be transferring more and more of your money to the bank through interest payments.
Things to Be Aware Of
- Compounding Interest: Compound interest is the interest you earn on interest. That is, interest that gets added to the principal of your loan. If the full balance of a loan is not paid off, interest is added to the amount owed. And then next month, you’ll be charged interest on this new balance, which includes interest from last month. Some credit cards and student loans will do this process more than once a month, increasing the amount owed rapidly.
- Future ability to pay off loans: With things like student loans, you’re banking on the degree increasing your earning potential post-graduation; you’re hoping your future-self will be able to pay the loans upon graduation. While this used to be a far more certain outcome, costs of education and earnings vary widely across universities and careers. Keeping your loan balance to a minimum now will ensure your future-self can make the payments and still create a successful future.
Student Loan Debt
Probably the biggest debt most students have is student loan debt. Management of the amount of debt and the conditions of each loan can be confusing. MSU Denver does have some resources to help you navigate Debt Management.