Anyone considering investing student loans?

[JohnMadden]

Just wondering if anyone has done this or plans to do so during medical school?

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[alwaysaangel]

Just wondering if anyone has done this or plans to do so during medical school?

Isn't it illegal to put them into anything high risk? And a 5% savings account isn't going to do anything for you since federal loans are currently at a 6.8% interest rate.

I do however, wish I had taken out all my allowable subsidized Stafford loans throughout undergrad and put them in savings accounts. Then I could take out less unsubsidized loans for medical school.

 

[Sol Rosenberg]

Nice Avatar.

Investing student loans is most likely forbidden by your student loan agreement, though I honestly don't know how they would catch you, and what the penalties would be.

Ignoring all that "whether it violates your agreement" stuff, this might not be the best way to invest on margin as student loan interest rates are 6.8% Check with your broker to see what their own margin rates are. But, obviously, you'd need to earn at least 6.8% to make not borrowing that extra money worthwhile.

I probably wouldn't take that risk, but that's just me (for the record, I'm a pretty "liberal" investor.)

 

[JohnMadden]

Nice Avatar.

Investing student loans is most likely forbidden by your student loan agreement, though I honestly don't know how they would catch you, and what the penalties would be.

Ignoring all that "whether it violates your agreement" stuff, this might not be the best way to invest on margin as student loan interest rates are 6.8% Check with your broker to see what their own margin rates are. But, obviously, you'd need to earn at least 6.8% to make not borrowing that extra money worthwhile.

I probably wouldn't take that risk, but that's just me (for the record, I'm a pretty "liberal" investor.)

Are we just assuming it's forbidden? Even if it is, in theory couldn't someone apply all student loans to their education and invest their own money (For those who have a source of income).

Can someone post a reference that supports the notion that investing student loan money is in fact illegal? I'm just not sure how the government would identify risky investments.

Personally, I don't think it's that risky to invest student loan money, especially for those who plan on completing a loan repayment program (NIH,HHS, etc).

I know someone who was very frugal in medical school, worked odd jobs, etc and ended up with lower than average debt. In residency, she again lived like a miser, spent every extra dime towards loan repayment. When leaving residency, she had effectively no debt. Then she takes a job with a hospital-based practice that offered to pay a signficant portion of her educational loans for three years (~60K). However, she couldn't take advantage of the benefit because she didn't have any debt to apply the repayment to... In other words, she missed out on free money.

I don't think it's that risky to have a hurdle rate of 6.8% simple interest over four years. It actually equates to approx 6.2% Annualized APR (Using CAGR method). The cheapest margin rates I know of are 8.25%, and those are for people with debit balances in excess of $1 M.

 

[alwaysaangel]

Are we just assuming it's forbidden? Even if it is, in theory couldn't someone apply all student loans to their education and invest their own money (For those who have a source of income).

If you had that much income then the you would probably no longer qualify for Stafford loans.

On the federal stafford loan master promissory note you sign that you
-"will immediately repay any loan proceeds that cannot be attributed to educational expenses for attendance on at least a half-time basis at theschool that certified my loan eligibility"
-"Use of Loan Money: I must use the loan money for authorized educational expenses for attendance at the school that certified my elibility for the time period shown on my disclosure statemet. Authorized expenses include the following: tuition, room, board, institutional fees, books, supplies, equipment, dependent child care, transportation, commuting expenses, rental or purchase of a personal computer, orgination fee and guarantee fee."

I don't see "investment" anywhere in that list. I'm fairly certain that if you had enough money to pay for medical school you wouldn't be getting the gov't loans in the first place, and if you did and got them and the bank found out what you were doing with the money you would be going against your contract and they could immediately force you to repay the full amount.

Not really a risk many of us are willing to take.

 

[Trepp]

If you are getting student loans, then you usually get a lump sum twice a year. What I do is take that money and put it in an online savings account that earns 5.05 %. I use www.emigrantdirect.com but there are several others that work. Having $5000 in there for month will earn you an extra $20. Its not huge, but its an extra 300 or so a year. More if your account is larger. At the end of each months I transfer back to my checking account what I need for rent, food, etc.

I also took around $1000 that I had saved and put that in an index fund which has generated a bit more then 5%. Of course, I wouldn't use any money that I needed to live on for anything that has risk!

 

[JohnMadden]

If you had that much income then the you would probably no longer qualify for Stafford loans.

On the federal stafford loan master promissory note you sign that you
-"will immediately repay any loan proceeds that cannot be attributed to educational expenses for attendance on at least a half-time basis at theschool that certified my loan eligibility"
-"Use of Loan Money: I must use the loan money for authorized educational expenses for attendance at the school that certified my elibility for the time period shown on my disclosure statemet. Authorized expenses include the following: tuition, room, board, institutional fees, books, supplies, equipment, dependent child care, transportation, commuting expenses, rental or purchase of a personal computer, orgination fee and guarantee fee."

I don't see "investment" anywhere in that list. I'm fairly certain that if you had enough money to pay for medical school you wouldn't be getting the gov't loans in the first place, and if you did and got them and the bank found out what you were doing with the money you would be going against your contract and they could immediately force you to repay the full amount.

Not really a risk many of us are willing to take.

Putting the money into a savings account is an investment, albeit a short-term one. I'm sure that most medical students put their student loan proceeds into some sort of interest bearing account. Is that illegal as well?

There are numerous ways around this. There was a kid at my undergrad who took out low interest education loans for various programs. His parents also contributed to his education. He used the refunded proceeds to invest right after 9/11. He made a LOT of money, bought a Land Rover, and now works for Bank of America as an Investment Banker...

I just want to get a sense of if anyone else has considered it and what options they may be thinking about.

 

[kypdurron5]

It's so weird that I just ran across this post....I was JUST thinking about this not 5 minutes ago. Not specifically investing all loan money, but perhaps one might end up with more loan money than is needed and invest the rest. Another way.... Let's say you're in residency making $40K/yr and are able to keep living expenses at 14K. Instead of applying the remaining $26K toward paying off your debt why not invest it instead? Obviously there will be minimum payments due, and you'll still be paying interest, but it still more than likely beats trading on margin...and even if you loose money in the deal student loans are more flexible. I'm not at all saying that anyone could/would/or should do this, but it would be worth at least checking into it.

 

[Hallm_7]

It's illegal to use the government's money to invest. If you think about it, it's not really fair. Taxpayers would be paying your interest while you made money. That being said, I don't think they'll ever catch you and probably wouldn't care if they did.

I use ING Direct as an online bank to get a ~5% return/year. While it doesn't match the 6.8% interest rate, it sure beats letting it sit in a checking account earning 0%. I link it to my local checking account and can transfer money at will. There's a lag of a couple days, but that's usually not a problem if you plan your finances right.

 

[JohnMadden]

Good feedback, but you're still making 5% on the government's money until you spend it...

Here's a hypothetical question but its very plausible. Say you take out 10K more loans that you needed. The government gives you 120 days to return the money without interest or fees. However, you let the money sit in your ING account for 90 days before writing a check back to the government. You would have made 1.25% interest or $125. Is that illegal?

 

[Xibye]

How does the interest build on government loans? I thought some of these loans don't accrue interest until after med school or, in the case of some really good ones, after residency. In this case, keeping money in a secure interest bearing savings account (5%) would be beating the interest on loans which is $0. In that case, the extra bucks roll in without losing a dime on interest and meanwhile the government's money is safe (FDIC insured).

Interest bearing savings accounts must be fair game as no one in their right mind keeps that kind of cash in their checking account. It's simple security these days because if your atm/check card is stolen, theives can clean out your checking account, but still would not be able to tap into your savings account. I'm sure the government would rather have their loans safe from theives while still being safe in the bank. Pretty much all savings accounts give you some amount of return on your money, the question is simply how much, and since the savings accounts are the same in all other ways you, you might as well grab the highest rate and get something back.

 

[alwaysaangel]

How does the interest build on government loans? I thought some of these loans don't accrue interest until after med school or, in the case of some really good ones, after residency. In this case, keeping money in a secure interest bearing savings account (5%) would be beating the interest on loans which is $0. In that case, the extra bucks roll in without losing a dime on interest and meanwhile the government's money is safe (FDIC insured).

Only 8.5 k is the subsidized loans where the gov't pays your interest until graduation. Most med students will have to take out most or all of the 30k of unsubsidized loans at 6.8% interest. Which IS accruing during medical schoold (but won't capitalize until you graduate)

Interest bearing savings accounts must be fair game as no one in their right mind keeps that kind of cash in their checking account. It's simple security these days because if your atm/check card is stolen, theives can clean out your checking account, but still would not be able to tap into your savings account. I'm sure the government would rather have their loans safe from theives while still being safe in the bank. Pretty much all savings accounts give you some amount of return on your money, the question is simply how much, and since the savings accounts are the same in all other ways you, you might as well grab the highest rate and get something back.

Thats fine, but this guy is actually talking about risky investments. You can't lose everything while its sitting in a savings account.

I mean what on earth are you going to do when you lose your shirt and no longer have next semesters $30k tuition?!?

 

[Stolenspatulas]

Thats fine, but this guy is actually talking about risky investments. You can't lose everything while its sitting in a savings account.

In principle you are investing the government's money even when you have it sitting in a savings account.. risk is subjective. there has to be some clear language that states if investing loan money at all is illegal/legal.

Maybe there is a stipulation that allows only savings accounts, but i think that would probably not be true.

 

[Stolenspatulas]

I know someone who was very frugal in medical school, worked odd jobs, etc and ended up with lower than average debt. In residency, she again lived like a miser, spent every extra dime towards loan repayment. When leaving residency, she had effectively no debt. Then she takes a job with a hospital-based practice that offered to pay a signficant portion of her educational loans for three years (~60K). However, she couldn't take advantage of the benefit because she didn't have any debt to apply the repayment to... In other words, she missed out on free money..

why wouldnt the hospital just increase her salary by 60K. this is entirely unfair. there's no financial difference b/w the hospital giving you 60K up front or giving you 60K for your loans. In the end the hospital loses 60K! this is ridiuclous. Now im not sure if I should even try to limit my spending in medical school for fear of not getting a free benefit. I guess one should only limit their spending to a degree that gives them an estimated debt of about 60K when they leave? Does anyone know the ranges in these debt "benefits"? Do most residencies have this in their "package"? If so, how much do they usually give?

 

[alwaysaangel]

In principle you are investing the government's money even when you have it sitting in a savings account.. risk is subjective. there has to be some clear language that states if investing loan money at all is illegal/legal.

Maybe there is a stipulation that allows only savings accounts, but i think that would probably not be true.

Yeah I found some sites talking about day trading and risky investments and how some people do lose their student loans while trying to make money.

So apparently its done.

Incredibly stupid. But not illegal.

 

[braluk]

Moving to financial aid

 

[JohnMadden]

Only 8.5 k is the subsidized loans where the gov't pays your interest until graduation. Most med students will have to take out most or all of the 30k of unsubsidized loans at 6.8% interest. Which IS accruing during medical schoold (but won't capitalize until you graduate)


Thats fine, but this guy is actually talking about risky investments. You can't lose everything while its sitting in a savings account.

I mean what on earth are you going to do when you lose your shirt and no longer have next semesters $30k tuition?!?

Angel,

I don't think you have a good understanding of how the loan process works...

It would be impossible for someone to spend the loan money that is dedicated to tuition and fees. This is because loans are disbursed to the school first. The school will deduct all of the educational expenses that show up on your bill (tuition, lab fees, health insurance, etc). The difference will THEN be sent to you in the form of a refund check to be used for living expenses. This will be done each semester. It would be impossible to spend next semesters tuition because the school makes sure they get their money before they send it to you.

Let's say that your refund for one semester is 9K (Room, Board, transport,etc). But you decide to live like a miser, eat Ramen noodles, and use local transit and only spend 6K that semester. You would then have a few options: 1. Return the money or 2. Take a risk and invest it, hoping to get a better return on the money than 6.2 % APR (over four years). Would you object to putting the money into a money market mutual fund or bond fund?

I don't see it as much different that someone deciding to spend an extra 3K on parties, beer, and travel. However, I do understand where you're coming from and respect your opinion.

 

[JohnMadden]

why wouldnt the hospital just increase her salary by 60K. this is entirely unfair. there's no financial difference b/w the hospital giving you 60K up front or giving you 60K for your loans. In the end the hospital loses 60K! this is ridiuclous. Now im not sure if I should even try to limit my spending in medical school for fear of not getting a free benefit. I guess one should only limit their spending to a degree that gives them an estimated debt of about 60K when they leave? Does anyone know the ranges in these debt "benefits"? Do most residencies have this in their "package"? If so, how much do they usually give?

I'm not sure about residency programs, but the NIH has some loan repayment programs that pay $35K each year for two years PLUS 39% to cover all taxes if you do certain research programs. A lot of people who do two year fellowships at academic medical centers use these loan repayment programs because a lot of their time is spent doing research, which is a program NIH requirement for the program. It's almost 100K over two years. That's HUGE. Check out the NIH website for the programs.

 

[acrunchyfrog]

The issue with borrowing any money to invest, student loans or otherwise, is that after interest (we'll say 5%), inflation (4%) and taxes on your income from the investment, the stock market track record of 8-12% return over the last 75 years is eaten up. So you end up breaking even, if not going in the hole. Not to mention the risk involved by investing in mutual funds/stock market. Keeping the money to use for school in a money market that yields 5% isn't going to really give you much since it should be leaving to pay for school at some point, and once again you break even.

It's not worth the hassle, and once you account for risking your school money in the stock market (try explaining that one to the feds), why bother.

If you're stuck on investing stick to diversified mutual funds, ones with a good5-10 year track record. And then don't even think about touching them for at least 5 years. Why? Because 97% of rolling 5 year periods in the stock market have a postive return. and 100% of any rolling 10 year(even thru the depression) periods have a positive return.

I like mutual funds because the risk is spread amongst many, many companies, and they have nerds that live and breath that stuff so I don't have to.

Just my $.06 (adjusted for inflation)

 

[sirus_virus]

Investing student loans is illegal in all 50 states.

 

[JohnMadden]

Thanks for the input. The interesting thing is that I never mentioned investing in individual stocks. I guess someone inferred that.

Secondly, I don't think the tax rate will have that much of an impact. You could shelter a decent amount in a Roth IRA and take the principal out at any time for any reason (20K over four years). Also, most med students and residents will get tax breaks for student loan interest, which will offset taxes to be paid on capital gains.

 

[JohnMadden]

Investing student loans is illegal in all 50 states.

PROVE IT. We need definitive proof please.

 

[alwaysaangel]

Angel,

I don't think you have a good understanding of how the loan process works...

It would be impossible for someone to spend the loan money that is dedicated to tuition and fees. This is because loans are disbursed to the school first. The school will deduct all of the educational expenses that show up on your bill (tuition, lab fees, health insurance, etc). The difference will THEN be sent to you in the form of a refund check to be used for living expenses. This will be done each semester. It would be impossible to spend next semesters tuition because the school makes sure they get their money before they send it to you.

Let's say that your refund for one semester is 9K (Room, Board, transport,etc). But you decide to live like a miser, eat Ramen noodles, and use local transit and only spend 6K that semester. You would then have a few options: 1. Return the money or 2. Take a risk and invest it, hoping to get a better return on the money than 6.2 % APR (over four years). Would you object to putting the money into a money market mutual fund or bond fund?

I don't see it as much different that someone deciding to spend an extra 3K on parties, beer, and travel. However, I do understand where you're coming from and respect your opinion.

Fair enough - but in that case it seems like it would make more sense to just not take the loans out in the first place. If you're gonna live like a miser take out fewer loans and owe less later.

 

[JohnMadden]

Please see my post above about my friend who lived like a miser, minimized debt, and then lost out on free money later...

 

[Sol Rosenberg]

Are we just assuming it's forbidden? Even if it is, in theory couldn't someone apply all student loans to their education and invest their own money (For those who have a source of income).

Like I said in a previous thread, I'd be happy to pull out my loan contract from my student loans, but, oh yeah, I disposed of it a few years ago when I paid them off

Of course you can apply the loans to your education and invest your savings and not violate any laws/terms of your loan agreement, but then you're not truly investing student loans, which was how you asked the question.

I don't think it's that risky to have a hurdle rate of 6.8% simple interest over four years. It actually equates to approx 6.2% Annualized APR (Using CAGR method). The cheapest margin rates I know of are 8.25%, and those are for people with debit balances in excess of $1 M.

Seems high to me, but I honestly haven't been watching rates in a while, so I don't know for sure.

But, you are underestimating the risk. First off, any brokerage house will enforce the SEC's 50% equity rule on leveraged investments. If you side-step this by securing your own borrowed $$$ you are taking on sizeable risk (even before the Great Depression, the equity rules were 10%) unless you are disciplined enough to maintain that much cash/equity on your own. No offense, but if you are that strapped for cash that you need to consider investing student loan $$$, I think you will have problems. I've been short squeezed before (generally the only time I really trade on margin is when I sell short) and it was only because of the [enforced] discipline of my broker and the gobs of cash that I had sitting around that I was able to weather the storm. With the market as volatile as it is, you could find your $$$ vaporized and you left still holding the bag for your student loans. But that's just my opinion. I think the only way you (or anyone, for that matter) will learn this stuff is to expereince it, so who am I to discourage you

 

[Sol Rosenberg]

Please see my post above about my friend who lived like a miser, minimized debt, and then lost out on free money later...

Oh yeah, I forgot to comment about that. If you seriously think that you will seek out one of those loan repayment programs (to me, they don't seem that appealing because the only ones that I am familiar with involve military service, or work in poor/underserved areas) then maybe you will come out better taking out the maximum amount of loans possible. But to me, the "cost" of the terms of the repayment agreement aren't worth the cash that you receive from those programs, but that's just me.

That being said, I would probably "invest" that extra loan money REALLY, REALLY conservatively, in case I changed my mind about the loan repayment programs, etc.

 

[JohnMadden]

Like I said in a previous thread, I'd be happy to pull out my loan contract from my student loans, but, oh yeah, I disposed of it a few years ago when I paid them off

Of course you can apply the loans to your education and invest your savings and not violate any laws/terms of your loan agreement, but then you're not truly investing student loans, which was how you asked the question.



Seems high to me, but I honestly haven't been watching rates in a while, so I don't know for sure.

But, you are underestimating the risk. First off, any brokerage house will enforce the SEC's 50% equity rule on leveraged investments. If you side-step this by securing your own borrowed $$$ you are taking on sizeable risk (even before the Great Depression, the equity rules were 10%) unless you are disciplined enough to maintain that much cash/equity on your own. No offense, but if you are that strapped for cash that you need to consider investing student loan $$$, I think you will have problems. I've been short squeezed before (generally the only time I really trade on margin is when I sell short) and it was only because of the [enforced] discipline of my broker and the gobs of cash that I had sitting around that I was able to weather the storm. With the market as volatile as it is, you could find your $$$ vaporized and you left still holding the bag for your student loans. But that's just my opinion. I think the only way you (or anyone, for that matter) will learn this stuff is to expereince it, so who am I to discourage you

Whoa, who said I was interested in investing on margin?

I never said I was going to invest in stocks and I never said I was going to buy or short on margin. Secondly, if you're strapped for cash, investing your loan money is NOT the way to go.

I only looked up the margin rates because someone else said to look up margin rates. I'm a very risky investor, but I'm not sure I would back my margin investments with student loan funds. I've been trading and investing since '97, so I've experienced the short squeeze on a number of picks over the years and taken some big hits (tech). I also shorted WorldCom back in the day...

Even if I did lose some of the student loan money, I could just do an NIH repayment program and break even.

So basically, most people who replied to this post are conservative (financially) and are not investing during medical school.

 

[NEATOMD]

Investing student loans is illegal in all 50 states.

This is true. I asked my school's financial aid officer if I could invest nearly 20k I had in the bank because of excessive loans. She said that it would be illegal and recommended canceling an interest accruing loan for the current semester and also for the summer as soon as possible.

It was a shame too, because I had a pretty good investment lined up.

 

[Sol Rosenberg]

Whoa, who said I was interested in investing on margin?

You did. Investing borrowed money = investing on margin. That's the definition. (For short sales, it's borrowed stock instead of borrowed money, but the principle is the same.)

I'm not sure you specifically said you would be investing in stocks, but, IMHO, you implied it by saying that you would invest in assets that paid more than 6.8%. That rules out pretty much anything besides: 1. Real estate. 2. Stocks 3. Stock-based Mutual Funds 4. Stock Options 5. Other riskier investments

I never said I was going to invest in stocks and I never said I was going to buy or short on margin. Secondly, if you're strapped for cash, investing your loan money is NOT the way to go.

I only looked up the margin rates because someone else said to look up margin rates. I'm a very risky investor, but I'm not sure I would back my margin investments with student loan funds. I've been trading and investing since '97, so I've experienced the short squeeze on a number of picks over the years and taken some big hits (tech). I also shorted WorldCom back in the day...

Even if I did lose some of the student loan money, I could just do an NIH repayment program and break even.

So basically, most people who replied to this post are conservative (financially) and are not investing during medical school.

I don't think you understand what trading on margin means, so I really don't think, as HAL said in 2001, that this conversation can serve any further purpose.

Also, I've never had anyone describe me as financially conservative. I will continue to invest during school, but not with loan money.

 

[JohnMadden]

Jota,

Ever invest or hear about tax-lien certificates? Many return 18% to 24% per annum and are backed by real property. Robert Kiyosaki talks about them in "Rich Dad, Poor Dad" although he doesn't provide a lot of details. I've invested in them in my home state with great success over the past few years securing solid 18% return. Some jurisdictions have online bidding processes which make it really easy. If you want more information about what places allow do this, PM me

Investing the loan money is NOT the same as trading on margin. First off, investing a lump sum of student loans will not be subject to maintenance requirements/margin calls from the government). A typical margin loan from a brokerage is completely different in that it increases purchasing power and risk. As you're probably aware, traditional margin trades create the opportunity for someone to lose more than the principal investment.

Taking loan money and investing it in a stock/fund/bond, etc is not the same. Worst case scenario is losing the principal investment.

 

[Sol Rosenberg]

Jota,

Ever invest or hear about tax-lien certificates? Many return 18% to 24% per annum and are backed by real property. Robert Kiyosaki talks about them in "Rich Dad, Poor Dad" although he doesn't provide a lot of details. I've invested in them in my home state with great success over the past few years securing solid 18% return. Some jurisdictions have online bidding processes which make it really easy. If you want more information about what places allow do this, PM me

No, I've honestly never heard of them.

Investing the loan money is NOT the same as trading on margin. First off, investing a lump sum of student loans will not be subject to maintenance requirements/margin calls from the government). A typical margin loan from a brokerage is completely different in that it increases purchasing power and risk. As you're probably aware, traditional margin trades create the opportunity for someone to lose more than the principal investment.

Taking loan money and investing it in a stock/fund/bond, etc is not the same. Worst case scenario is losing the principal investment.

It is the same, you just, for some reason, aren't seeing it. In both cases, you are borrowing $$$ and using it to buy stocks/securities. I'm talking about "cash to buy" types of loans from brokerage houses, not "stock to sell" (as in a short sale or selling a call, etc) types of loans (which do have the potential for infinite loss.) Your original topic (and the title of this thread) was borrowing money to invest, so that is the most apples to apples comparison.

As far as maintenence requirements go, that was my point exactly. Any loan from a brokerage house to be used for trading on margin is subject to the maintenence requirements set up by the SEC. This is done as a safeguard to try to minimize the chance of the loan going bad (if your portfolio that you bought using borrowed money (i.e. on margin) becomes worthless.) By using student loan money, you are circumventing this safeguard. The loan can never truly go bad (because you can't bankrupt student loan debt) but when you gamble away your housing payments on investing, lose, and then need more money for the year, you are up **** creek, because you have a hard limit as far as how much you can take out each year.

Again, this discussion is kind of pointless because it's obvious that you have already made up your mind, so why are we even continuing this discussion?

 

[SoxPatriots]

I am lucky enough to be in this situation, where my parents agreed to pay for medical school. However, my father wants to know if I could take out the 8500 per year accruing no interest during med school while he invested/placed his 8500 in a savings account.

Then, can he pay it all back the day I graduate in a lump sum or do they make you stick to a drawn out payment plan that accrues interest and defeats the purpose?

 

[Sol Rosenberg]

No, you can prepay any/all of your student loans.