What is Debt?

Debt is an amount that is owed to a lender for funds borrowed that must be repaid. Interest will likely be charged on the debt, which results in a higher cost of the debt for the borrower and generates a rate of return for the lender.

Not all debt is bad debt. Certain debt, such as student loans and business loans, may be considered a good investment (or good debt) if managed properly.

Loans

A loan is a way to finance purchases that you do not have the cash to pay for. It is important to understand the repayment plan before agreeing to the loan to ensure you will be able to afford future repayments. Missing payments or defaulting on your loans can damage your credit score and increase the net balance owed. A poor credit score limits your abilities to purchase other assets via credit or enter into new loans (i.e, car loans) or have a home mortgage.

Student loans are a positive way to establish good credit if payments are made timely and completely. 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.

Tips for Borrowing

• The less you borrow, the less you have to repay.
• Estimate repayment amounts before you borrow.
• Total student loan debt should be less than your starting annual salary after graduation.
• Use loans to help cover educational cost only, not to buy a car, go on vacation, etc.
• Make a budget without relying on loans as a resource. Borrow only what you need to cover remaining expenses.

Debt Distress

Signs of debt distress may not be easily recognized; however, frequent and habitual use of debt can become a problem and have long-term consequences.

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 (or “floating”) one bill to pay another overdue bill.
• Paying only the minimum due on credit card accounts.

If your spending patterns indicate debt distress, consider seeking help with managing your money and developing an effective payment plan to pay off your debts. See Spending Plan page for more useful tips.