The Debt Conversation Nobody's Having Honestly
A Nation Borrowing at Record Speed
We now owe more than we ever have, in absolute terms. Total household debt was $18.8 trillion as of the end of 2025, according to the Federal Reserve Bank of New York. That's $4.65 trillion more than we've taken on since the pandemic. The figure is so enormous that it's almost meaningless until you drill down into the types of debt we're actually using that money for.
Credit card balances hit a record of $1.28 trillion, with an average interest rate of more than 20%. At the same time, outstanding mortgage balances mean that homeowners collectively still have more than $30 trillion in home equity. Two people who both owe $300,000 are in drastically different situations based on what they borrowed the money for and the interest rate attached to it.
The financial services industry loves to talk about the difference between “good debt” and “bad debt” because it’s a way to simplify the complexity of the issue into something manageable. Mortgages and student loans are generally “good.” Credit cards and payday loans are “bad.” But the real world resists definitions that can be reduced to easy labels, and it’s just as important to understand when those labels fail to apply as when they do.
Why the Labels Matter Less Than You Think
There’s a statistical basis for the conventional wisdom on types of debt. The Federal Reserve’s Survey of Consumer Finances shows that the median homeowner has a net worth of about $400,000 while the median renter has a net worth of $10,400.
That means that for every dollar the typical renter has, the typical homeowner has 40. And it’s true that mortgages help enable that wealth-building. Bureau of Labor Statistics data shows that workers with a bachelor’s degree have a median income of about $91,300 compared to a median income of $50,600 for those whose highest level of educational attainment is a high school diploma. That’s an 80% premium for someone who holds student loan debt.
But the labels paper over a lot. If you have a mortgage on a house you can’t afford, that’s not “good” debt. If you have student loan debt for an educational pursuit that, statistically, will actually make you poorer, that’s not “good” debt either. The purpose of the debt matters much less than the terms of the debt, the interest rate on the debt, whether the debt is purchasing something that will appreciate in value or not, and whether you have a plan to actually repay the debt in a reasonable amount of time or not.
The Real Test for Any Debt
Does the Debt Build Something or Consume Something?
The distinction that actually is useful is between debt that is used to buy things that appreciate in value and debt used to buy things that consume in value. That’s the real dividing line.
And on one side of that line are debts for appreciating assets, with reasonable interest rates and reasonable repayment terms. On the other side are debts for consuming or depreciating assets at usurious rates with no plan to pay them off except making the minimum payments.
A 30-year fixed-rate mortgage at 6% on a house in a market where prices are steady is debt that builds equity. So is an SBA loan used to capitalize a business that will generate enough revenue to both service the debt and create value over time. In fiscal year 2024, the Small Business Administration supported 103,000 financings that, combined, had an annual capital impact of $56 billion, its highest volume since 2008. These are debts that are creating feedback loops between the asset and the debt.
A credit card balance of $10,000 that’s charging interest of 23% used to cover living expenses isn’t. Those purchases depreciate or simply go away while the debt compounds. If you only make minimum payments on the current average revolving balance of $10,563, at the current average APR of 23.37%, it would take you about 22 years to pay off the principal and cost you more than $18,000 just in interest, according to NerdWallet. Debts like those are completely gone. But debt like that stays.
The Interest Rate Is the Price Tag on Risk
When you borrow money, the interest rate is a reflection of how much risk the market thinks that debt poses. Mortgage rates are currently sitting around 6% because that debt is collateralized by a house the bank can take away. Federal student loans come in anywhere from 6.39% to 8.94% because they’re backed by the government. Credit cards are over 20% because the debt isn’t collateralized and, historically, credit card debt is pretty likely to default.
If you take on debt at 7% or less to buy an asset that has a long history of appreciating in value, you’ll probably come out ahead. But if you take on debt at 20% or more to buy something that you can’t sell again, you’re paying a lot to use money you don’t have. The interest rate is one of the most straightforward ways to determine whether a particular debt will work for you or against you.
When Good Debt Goes Wrong
The Student Loan Trap Nobody Warns You About
Student loans sit in a special danger zone on the debt spectrum. They have the reputation of good debt, which can cause borrowers to take on more than they should without carefully considering the return on their investment. The Foundation for Research on Equal Opportunity analyzed 53,000 college programs and discovered that almost a quarter of all bachelor’s programs left graduates worse off than they would have been if they’d never enrolled in college at all.
For associate’s programs, that number is 43%. For master’s programs, it’s 49%. The ones who suffer the most are the ones who never graduate. About 40% of all student loan borrowers never finish their degrees, and those borrowers have a 45% default rate. They still have the debt but lack the degree that was supposed to make the debt worth it.
NPR profiled a 25-year-old named Chavonne who dropped out after three semesters and now works as an Uber driver between temp jobs. The government has seized her tax refund, and she can’t get federal aid to go back to school because her loans are in default.
For-profit colleges represent the most glaring systemic failure in the student loan program. They currently serve about 8% of the country’s post-secondary students, but they account for 30% of all federal student loan defaults.
Since 2021, the Department of Education has discharged $14.58 billion in student loans for more than one million borrowers who were defrauded by for-profit schools. Those loans were “good debt” on paper.
In reality, they were a financial landmine created by schools that cared more about collecting tuition than setting their students up for success.
Mortgages Are Not Automatically Safe
The 2008 financial crisis proved that even mortgage debt can be toxic if borrowers take on too much, if lenders issue loans that shouldn’t be issued, or if the housing market tanks. We’ve lost some of that knowledge in the past few years as housing prices skyrocketed during the 2020s, but it’s still true.
A mortgage becomes toxic if it costs so much that it strains the household budget, if the buyers have no savings to fall back on if they lose a job, or if the terms of the loan include an adjustable interest rate that will balloon in a few years. The asset appreciation that makes mortgages “good debt” depends entirely on the local real estate market, whether the buyers paid a fair price for the house, and whether they have the resources to ride out any downturns without needing to sell into a bad market.
There is also a third category, the type of debt no one wants.
Medical Debt Doesn’t Fit the Good vs Bad Paradigm
You can’t categorize medical debt as good or bad because it’s not something anyone wants to take on. This is debt forced on people by our healthcare system, which often sends bills that patients didn’t anticipate or can’t negotiate. In 2024, 36% of U.S. households had some medical debt, and medical bills make up 58% of debts sent to third-party collection agencies.
In a 2025 working paper for the National Bureau of Economic Research, University of Illinois researchers determined that when credit bureaus remove medical debt from credit reports, it has no measurable impact on consumers’ credit behavior or default rates. In other words, having medical debt on your report doesn’t help lenders predict your reliability.
It’s what the researchers call “junk data.” Despite that, it still hurts families. An estimated 530,000 personal bankruptcies each year are partly the result of medical expenses. Having health insurance doesn’t even protect you: 56% of insured Americans have some medical debt, not that much less than the 59% of uninsured people.
Why Medical Debt Collection Is a Favorite Among Predatory Agencies
Medical debt is ripe for abuse because patients often can’t tell what they owe, whom they owe it to, or if the bill is correct. Billing mistakes are common. Insurance payment timing can confuse the situation. And debts get sent to third-party collectors who may have incomplete or incorrect information. That confusion and fear is exactly what collectors exploit to convince consumers to pay debts they may not actually owe.
In January 2025, the Consumer Financial Protection Bureau finalized a rule that would have gotten rid of medical debt on credit reports altogether, a change that could have erased $49 billion in reported medical bills for 15 million Americans. In July 2025, a federal court threw out the rule, leaving consumers vulnerable to a system even the feds say is broken.
The Debt That Flies Under the Radar
Auto Loans Are Flying Under the Radar
Most people wouldn’t think of auto loans as being particularly problematic because, for many, monthly car payments are simply a part of life. But the numbers don’t agree. In the fourth quarter of 2024, 39% of financed vehicles were underwater, meaning their owners owed more than the cars were worth.
For vehicles purchased since 2022, that number jumps to 44%. Subprime auto loan delinquencies hit a record 6.6% at 60 or more days past due in January 2025, the highest level since Fitch began tracking the figure in 1994. In 2024, 1.73 million vehicles were repossessed, the highest number since the years following the Great Recession. And the average monthly payment on a new car is now $748, according to data for the third quarter of 2025, with almost one in five new car buyers committing to monthly payments of over $1,000.
The minute you drive a new car off a dealer’s lot, it depreciates.
So, taking out a loan at a high rate and a long term to finance an asset that rapidly loses value is a path to negative equity. It’s also one of the most popular types of borrowing in America, which is why it needs more of our attention.
BNPL and the Phantom Debt
Buy-now-pay-later transactions exceeded $100 billion in 2024, with an estimated 86.5 million Americans using such services. Wells Fargo senior economist Tim Quinlan has called it “phantom debt” because most BNPL spending doesn’t show up on credit reports or in our traditional measures of household debt. Twenty-one percent of BNPL users have missed or made late payments. About one in three had to borrow from another loan to make those payments.
But most tellingly, 25% of BNPL users are now using the service to buy groceries, compared with 14% last year. If people need installment loans to purchase groceries, that “convenience” argument starts to feel more like a red flag.
A Better Way to Think About Debt Risk Management Over Labels
Economist Allison Schrager, a senior fellow at the Manhattan Institute, wrote in a December 2024 Bloomberg Opinion piece: “As long as the world is uncertain, there is no such thing as good debt or bad debt. There is only good risk management and bad risk management.” That is a far more useful way of looking at the issue.
Good risk management means borrowing at reasonable rates for appreciating assets, having an emergency fund in case you lose your job and can’t make payments, knowing the full cost of the loan, including interest, over its term, and knowing how you’ll make the payments before you sign on the dotted line. Bad risk management means borrowing to consume, ignoring interest rate math, and assuming that because you categorize a debt as “good,” you’ll be insulated from the downsides.
Questions to Ask Before Taking on Any Debt
Before taking out a loan, you should ask yourself if the debt will be used to purchase an asset that appreciates or produces income. You should ask how much you will repay in total, including the interest. You should ask if you would be able to afford the payments if your income declined by 20%. You should ask if the interest rate matches a risk level you are comfortable with.
If you find the answers to those questions uncomfortable, you should not take on the debt, no matter what category the financial services industry tries to place it in. The distinction between good and bad debt isn’t about the name of the loan, it’s about whether the decision to take on debt reflects a realistic understanding of the risks involved or a prayer that everything will work out.
Debt Is a Tool, Not a Verdict
The Line Is Personal, Not Universal
The good-debt-bad-debt framework is useful as a general guide, but not as an absolute set of rules.
Generally, it is true that borrowing for appreciating assets at low interest rates can help build wealth, while borrowing for consumption at high interest rates can lead to financial ruin. But it can also be counterproductive, if it lulls people into making borrowing decisions without thinking carefully about their circumstances.
The decision to take on debt always involves a personal risk calculation based on the stability of your income, your other commitments, the interest rate being offered, and the realistic value of whatever it is you are borrowing to buy.
The best debt is debt that you entered into with full information, good terms, and a solid repayment plan. The worst debt is debt you didn’t understand until the collection agency started calling.
Know Your Rights When Debt Goes Sideways
If you already have debt in collections, it’s worth remembering that collection agencies are subject to a variety of federal and state laws, many of which they routinely break. They cannot threaten to arrest you. They cannot call you at 6 am. They cannot misrepresent the amount you owe. They cannot misrepresent that information to credit reporting agencies, either.
At FightCollections.com, we help consumers challenge and dispute inaccurate and unverifiable items on their credit reports. Whether you are facing medical debt you never signed up for, credit card accounts with bloated balances, or debt collections that should have been removed from your credit report years ago, you have options under the law.
Understanding the difference between good and bad debt is the first step. Learning how to push back when the system fails you is the second step.
