The concept of “good debt” — borrowing for assets like homes or education — masks significant financial risks that can trap borrowers in unsustainable payment obligations, according to financial experts and academics.
Bryanna Hambrick’s experience purchasing a home in Columbus, Ohio illustrates the problem. Her monthly mortgage payment exceeded expectations by approximately $200 due to a property tax reassessment and higher-than-anticipated interest rates. Unexpected repairs and closing costs depleted her savings, leaving her financially vulnerable despite what seemed like a sound investment in homeownership. Experts note that such situations are common because debt labeled as “good” — including mortgages and student loans — is often presumed safe based on the premise that it builds wealth or increases earning potential, whereas “bad debt” like credit card balances finances depreciating assets.
Financial experts caution that the “good debt” framing can mislead borrowers into overcommitting financially. Sheila Bair, former chair of the Federal Deposit Insurance Corporation, recommends viewing all debt with skepticism and evaluating whether taking on obligations will genuinely improve one’s financial situation. Critical factors include assessing whether a mortgage payment fits comfortably within a budget, maintaining financial reserves, and committing to remain in a home for an extended period to offset transaction costs and account for property value fluctuations. The 2008 financial crisis demonstrated how widespread the risks can be: between 2007 and 2010, approximately 3.8 million foreclosures occurred when homeowners with subprime mortgages found themselves unable to sustain payments as home values declined and adjustable rates increased.
Beyond mathematical calculations, financial psychologist Brad Klontz emphasizes the psychological dimensions of borrowing decisions. Common pitfalls include impulse borrowing, tying self-worth to purchases, and harboring unrealistic expectations about future income. Klontz recommends treating debt decisions as business investments, researching actual career outcomes before borrowing for education, and avoiding emotionally motivated spending for experiences or lifestyle enhancement. He specifically cautions against purchasing the maximum home one can technically afford, noting that buyers often overestimate future earning potential while underestimating maintenance and repair expenses.
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