When It's OK (and Not OK) to Get Into Debt

By Markets Fool.com

Most debt is costly and potentially ruinous to your financial future (looking at you, credit cards!), but there are times when going into debt allows you to attain financial goals that you'd otherwise be unable to reach. For example, taking on debt to pay for college, buy a home, or lower the interest rate on existing debt can make a lot of financial sense.

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Our Foolish writers take a closer look at all three situations.

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Financing an education

Todd Campbell: According to the College Board, it can cost $24,000 to attend a "moderate" state school and $48,000 to attend a moderate private school. Some students families' will be able to chip in toward educational expenses, such as tuition, fees, and room and board, but a lot of college's financial burden still rests on the student, and that often makes it necessary to take out student loans.

According to Experian, seven out of 10 graduates in 2014 entered the working world saddled with an average student loan burden of $28,950. That's undeniably a big and worrisome number, but college remains a solid investment, despite its high cost. According to Bureau of Labor Statistics data, a person with a bachelor's degree earns a median 67% more per week than someone with a high school diploma.

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The income advantage provided by post-secondary education makes student loans one of the few forms of debt that can pay off for the borrower over time. Additionally, interest on dederal student loans is relatively low, and often, that interest can be deducted on your taxes. Student loans are among the most flexible forms of debt, too. Payments can be renegotiated based on your income, or they can be temporarily halted during a financial emergency, such as a job loss. There are even some scenarios that allow student loans to be forgiven, such as working in certain public-service occupations.

Debt can be OK when you want to buy a home

Selena Maranjian: One of the best reasons you might get in debt is in order to buy a home. After all, the recentmedian sale price for a U.S. home was $244,100 -- and not many of us have that kind of cash available. Securing a mortgage has long been necessary for most people to be able to buy a roof over their heads. It's not a simple matter, though. The more you learn about mortgages, the more you can save -- spending less on interest and perhaps even being able to buy a bigger or better home.

For starters, know that the better your credit score, the better the interest rates you'll be offered -- and, thus, the less interest you'll have to pay over the long run. The folks at MyFICO.com recently pointedout that a top credit score of between 760 and 850 would get you an average interest rate of 3.11% for a 30-year fixed-rate loan -- while a much worse score, between 620 and 639, would get you 4.70%. With a $160,000 loan for a $200,000 home, that works out to respective monthly payments of $684 vs. $830 and total interest paid of $86,274 vs. $138,701 -- quite a difference! Look into your credit score before house-hunting and spend some time improving it, if need be.

The kind of mortgage you get matters, too. If you can swing the higher payments of a 15-year loan, you'll pay less in interest and will own your home sooner. If not, maybe get a 30-year loan with no prepayment penalty, and aim to make some extra payments if you're able. If you know you won't be in the home long, an adjustable-rate mortgage can get you a lower interest rate. If you may stay for decades, a fixed rate can be smarter, especially in our current low-interest rate environment.

Go ahead and get in debt with a mortgage, but be financially smart about it.

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Replacing bad debt with good (for good)

Dan Caplinger: One of the best reasons to borrow against new sources of credit is to consolidate other loans and get more favorable terms. For instance, if you have a lot of high-interest debt in the form of outstanding balances on credit cards, then one option you might have is to take out a home equity loan to pay off the cards. There's a downside involved in that putting your home up as collateral introduces new risk, but the much lower interest rates you can usually get compensate for that risk. Another option involves taking advantage of credit card introductory offers that offer 0% interest for a limited time.

However, there's a caveat with debt consolidation: It only works if you have the discipline not to get yourself back into trouble with high-interest debt. Too often, people consolidate credit card balances into a single loan, only to run their card balances back up again. If you don't have the will power to avoid getting yourself into even worse debt trouble, then consolidation isn't a good idea. But for those who can cut up their cards and pretend that they don't exist, the interest savings makes using new debt at low interest rates to pay off higher-rate debt a smart move to consider.

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