Investing Your Student Loans– What You Need To Read

by Martin

The average amount of student loan debt is far too high. According to a stat that I found online on how to eliminate student loan debt, I found that the typical person will owe $22,700 when they walk on stage to pick up their degrees.

I’ve met fellow students in some of my college classes in the past that were very ambitious and aggressive with their investment strategies. Usually I approve of this. But there’s one investment strategy I wasn’t too crazy about. This one investment strategy that I repeatedly heard of caught me off guard.

What is this investment strategy?

Using the money from college student loans for investment purposes.

As you can see this can be counter-productive when trying to figure out how to reduce student loan debt.

There are two common scenarios:

1.) Using the money left over from student loans (after paying rent & college related costs) for investment purposes.

or

2.) Your parents pay for the majority, if not all of your education, and you then apply for a student loan so that you have the money needed for investments.

Yes I know that there are many low interest rate student loans out there. In theory you can obtain a student loan at a low interest rate, invest it in the stock market, make some profit, and then payback your student loans when the time comes. You’ll be able to keep the extra money for yourself.

In theory this is the perfect plan. In application, not so perfect.

How to reduce student loan debt in college?

You have to understand that investing your student loans is a risk.

No matter what anyone tells me, investing your student loans IS a gamble. You’re essentially taking a chance (even if it’s a minor one) with money that you need to pay back.

Even if you go the conservative route and invest your student loans into an online savings account at ING Direct, the rates can change. Interest rates always fluctuate. They go up and down. Is it worth investing your student loans for a small percentage?

That’s assuming you’ll never be tempted to touch the money or spend it on something. You now have thousands of dollars available to you within a few clicks. What are the odds that you won’t want to touch this money when shit hits the fan?

The process can also be mismanaged. I have no problem admitting that there are many people reading this that know 20 times more than I do about investing money. The problem is that the best of us mess up at times.

You also don’t want to run the risk of messing up your credit score at such a young age.

Can you handle the risk-to-reward ratio with your student loans?

Let’s say you lose a portion of the money, what will will you do?

The economic down turn of late-2008 showed us all that anything can happen. One day your prospering with the student loan money you’ve invested and then the next day you’re stressing about how you’ll pay back your student loans.

I’ll be the first to admit that you can make some really solid returns from investing your student loan money into the stock market. But I don’t like that kind of risk. I’d rather put the money down on the Maple Leafs winning (that probably flew over your head if you don’t watch hockey).

My help with student loan debt…

I have a different take on investing student loans.

I can’t tell you what to do. I choose to invest money that I have. Not money that I’ve borrowed. If you’ve got your stuff figured out 100% then chances are nothing will stop you from doing it. I wish you all the best and hopefully everything works out.

Second of all, if your parents pay for all of your education-related costs, you’re better off than most college students that are struggling to pay for college. The small gains from interest/stock appreciation are alright, but is this the best utilization of your time? Could you possibly benefit more from focusing your energy on internships, starting a side business, or making the most out of your college experience?

If you want to reduce student loan debt, the trick will always be to pick up less loans for college and find other forms of funding. Investing your excess student loans is a risk.

I hope you enjoyed this piece!

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{ 4 comments… read them below or add one }

1 Ethan

This sounds like a pretty crazy practice to me. I’d make three rules. Only do this if you:

1. Pay 3% interest or lower on the student loans.

2. Can pay, and expect to be able to pay forever, the monthly loan repayments out-of-pocket.

3. Are investing with a 20-year-plus horizon.

If at all possible, earn money in side jobs throughout the school year so that you can put as much of the student loan money as possible into tax-advantaged retirement accounts. Start with $5k in a Roth IRA, since you’ll likely avoid any income tax in the year you do this.

This isn’t such a great deal dollar-for-dollar today, but the real value would come from contributing to a tax-advantaged account years before you would normally start doing so.

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2 Edwin

Interesting topic, here’s my take on it.

First off I don’t see this as a good option unless you are getting your education exclusively paid for through another source like your parents. If not then you are forcing yourself to work harder at a job during your school years which I don’t recommend.

Secondly, the problem is that you have to deal with inflation so not only are you trying to beat the rate on your student loans (depending on if they are subsidized or not) but also beat inflation. Most of my loans (I’m out of school now) sit at about 6%, so using 3% as the inflation rate I would have to be beating 9% to make it even worthwhile.

In “safe” investments such as savings accounts or index funds, you are fortunate if you beat the inflation rate let alone the rate of the loan. So you are left with the stock market, and ignoring hindsight, you would want to “actively” trade these stocks. By actively I mean pay attention to the company including their statements along with the industry, which can be a lot of extra work for a student.

The idea of using student loans to invest sounds like an offshoot of using leverage from your agent to invest more in firms. The difference is most people who use leverage are professional investors and likely know far more about what they are doing than a college student.

Personally I’m extremely glad I didn’t do this because I would have a lost a ton of money as I only recently graduated college. Well that plus I had to pay my own way through school so I would have broken my own recommendation.

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3 Jon Hall

You can write off the interest on your taxes after you graduate. This really changes the game.

However, I think it is against the law to invest student loans. Not that you would get caught, but it’s something to think about.

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4 MD

That’s a good point Jon. I just feel that someone investing their loan money isn’t worried about much else.

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