Consumer debt

Even 'good' debt isn't free

March 4, 2014: 5:00 AM ET

School and home loans may be an investment in your future, but hold on! It still costs you.

By Jean Chatzky

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FORTUNE -- In the last two days, I have read two newspaper stories that have me worried.

The first, from Washington Post syndicated columnist Kenneth Harney, pointed to a huge rise in the amount of debt being taken out in the form of home equity lines of credit. "New home equity credit line borrowings soared by 42% in the final three months of 2013 and were up sharply for the entire year, to $111 billion," he wrote. As for the reasons behind the increase, Harney singled out the comeback in home prices in the last couple of years that sent equity soaring, combined with the fact that teaser rates on HELOCs make them more attractive than a cash-out refi (and that's before you consider a refi's closing costs).

The second story, in Monday's Wall Street Journal, focused on the rise in people taking out student loans not because they want to earn a degree, but because they need the money -- and student debt is cheaper and easier (i.e. no credit check) than getting a loan from a bank or leaning hard on your credit card. "College officials and federal watchdogs can't say exactly how much of the U.S.'s swelling $1.1 trillion in student-loan debt has gone to living expenses," wrote reporter Josh Mitchell. "[A report from the Education Department's inspector general] also found the schools disbursed an average of $5,285 in loans each to more than 42,000 students who didn't log any credits at the time.

Factor in that recent across-the-board gains in stocks tend to make people feel richer (and therefore likely to spend) even if those gains have not been realized -- not to mention the fact that consumer debt across the board rose more last quarter than it has in the past six years -- and I smell trouble. This, I feel I should tell you, has happened before. And although I was very early to the party, I was also very right.

In January of 2001, Louis Uchitelle of the New York Times wrote a piece on the "shriveling" equity of the American homeowner. This was the paragraph that got me:

"Now a slowing economy catches the average household owning less of a stake in its home than in any economic slowdown since the advent of the modern mortgage in the 1930s. If a recession develops and people start worrying that they have too little equity left to continue borrowing safely against their homes, the blow to spending could turn a mild recession into a prolonged one. That would certainly happen, economists say, if a downturn causes home prices to fall, shrinking even more the equity stake that households still have in their homes."

The guy could have had a crystal ball.

At the time, I dug further into the numbers and learned, it wasn't just homes. It was cars and educations in which we had less of a stake. I reacted by writing a get-out-of-debt book called Pay It Down. It became the basis for The Debt Diet on Oprah and continues to work for people to this day. And while it was a bestseller, I'm totally aware of the fact that had it been published a half decade later, it likely would have done even better.

That's okay. The people who got the message early were spared a huge amount of financial pain in the past five years. And, since it's one we seem to need to hear again today here we go:

Good debt (mortgages, student loans, debt for the car that gets you back to work) is better than bad debt. But even good debt isn't free.

More from Jean Chatzky:

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