maxing out stafford loans and investing?

[vietcongs]

I have a friend who, with the advise of her financial advisor, she has maxed out stafford loans for 4 years, then consolidated at 2.-% and invested the excess loan money that she didn't use for school. She says that we will never have the opportunity again in our lifetime to borrow money for 2.?% . She's put it in low risk investments making 7-8% interest..She's profited quite well and has money to make a down payment on a house. It seems to me like abuse of the system..Do you think this is a good idea? I also have many friends that borrow to pay off credit cards, since the interest for credit card debt is extremely higher than that of student loans.

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[trouta]

Technically I believe this is illegal. Not 100% sure. Federal money is supposed to be used for expenses directly related to schooling.

 

[southerndoc]

Yea it's illegal to knowingly borrow money for the intention of investing, paying off other consumer debt, etc.

 

[ForensicPath]

I don't understand why this would be illegal. Once you borrow money, aren't you free to do what you want with it, especially if it leads to smart investments? Also, I was under the impression that Stafford loans get dispersed directly to the school, so you would never really have direct access to that money anyway.

 

[Leforte]

Not only is it illegal, but also investing without actually reporting the saved $$$ is also illegal. When you fill out the FAFSA each year (as well as any other documents that the school has you complete) you are required to list any other funds which are saved/invested - a good portion of this is then deemed as available for tuition and included in the expected contribution for next year - and not reporting it is fraud.

Also, I'm not sure about your school, but ours would only allow the stafford loans upto the amount of tuition and living expenses. I should say, however, that I knew of several people who had parents with greater means who paid a good portion of their tuition, and then went to the financial aid office and took out loans for the money that their parents had paid in excess of the expected family contribution (I know this sounds complex) but would then use that $$$ to buy a car, vacation over spring break, etc that their parents would not otherwise spring for.

Guess its the "I want it all - and NOW" attitude.

Whatever.

 

[flighterdoc]

I have a friend who, with the advise of her financial advisor, she has maxed out stafford loans for 4 years, then consolidated at 2.-% and invested the excess loan money that she didn't use for school. She says that we will never have the opportunity again in our lifetime to borrow money for 2.?% . She's put it in low risk investments making 7-8% interest..She's profited quite well and has money to make a down payment on a house. It seems to me like abuse of the system..Do you think this is a good idea? I also have many friends that borrow to pay off credit cards, since the interest for credit card debt is extremely higher than that of student loans.

Thats fine. Its not a great strategy during med school since having cash or investments reduces your subsidized loan amount, but it's legal. You can borrow the money and use it for whatever.

 

[flighterdoc]

Yea it's illegal to knowingly borrow money for the intention of investing, paying off other consumer debt, etc.

As long as you declare your assets (cash, stocks, investments but NOT property) on the FAFSA it's fine.

You can use the money for whatever you want.

 

[southerndoc]

As long as you declare your assets (cash, stocks, investments but NOT property) on the FAFSA it's fine.

You can use the money for whatever you want.

I was under the impression that since it's a government regulated low-interest loan designed specifically for educational purposes that it would be illegal to use it for non-educational purposes, minus living expenses.

 

[flighterdoc]

I was under the impression that since it's a government regulated low-interest loan designed specifically for educational purposes that it would be illegal to use it for non-educational purposes, minus living expenses.

Basically everyone qualifies for unsubsidized stafford loans (a few exceptions, citizenship, school has to qualify, etc).

 

[Fermi]

I was under the impression that since it's a government regulated low-interest loan designed specifically for educational purposes that it would be illegal to use it for non-educational purposes, minus living expenses.

I was under the same impression, but there must be a huge gray area. I mean, students who live off government-subsidized student loans use the money to go out drinking, take vacations, etc. which fall outside the normal living expenses categories. Why can't you take some of the extra money, on which you've already paid a loan origination fee, and invest it to pay for other things later, including future tuition and eucational expenses?

Edit: I remember at our orientation a student asked the FA officer if it was OK to put excess student loan money into a money market, and the FA officer said this was fine, so I assume it's OK.

 

[labangel]

This is ILLEGAL....before you get your loan, you have to sign a promissory note, which usually states somewhere (taken from my bank's statement):

"I MUST use the loan money for authorized educational expenses for the school named on my application and for the time period shown on my application. Authorized expenses include: tuition, room, board, fees, books, supplies, equipment, dependent child care, transportation and commuting expenses. Loan proceeds may not be used to purchase or lease an automobile."

I can't believe a legit financial advisor would advise his client to do something illegal. (Unless you're Enron or something, of course)

Granted, peopel do use their loan money for other purposes than those above and the US Dept of Education hasn't broken down their doors, but that doesn't make it any less illegal.

 

[zinjanthropus]

This is ILLEGAL....before you get your loan, you have to sign a promissory note, which usually states somewhere (taken from my bank's statement):

"I MUST use the loan money for authorized educational expenses for the school named on my application and for the time period shown on my application. Authorized expenses include: tuition, room, board, fees, books, supplies, equipment, dependent child care, transportation and commuting expenses. Loan proceeds may not be used to purchase or lease an automobile."

I can't believe a legit financial advisor would advise his client to do something illegal. (Unless you're Enron or something, of course)

Granted, peopel do use their loan money for other purposes than those above and the US Dept of Education hasn't broken down their doors, but that doesn't make it any less illegal.

a money market account is far from a car loan

 

[flighterdoc]

This is ILLEGAL....before you get your loan, you have to sign a promissory note, which usually states somewhere (taken from my bank's statement):

"I MUST use the loan money for authorized educational expenses for the school named on my application and for the time period shown on my application. Authorized expenses include: tuition, room, board, fees, books, supplies, equipment, dependent child care, transportation and commuting expenses. Loan proceeds may not be used to purchase or lease an automobile."

I can't believe a legit financial advisor would advise his client to do something illegal. (Unless you're Enron or something, of course)

Granted, peopel do use their loan money for other purposes than those above and the US Dept of Education hasn't broken down their doors, but that doesn't make it any less illegal.

So, you use the loan money for school, and your other money for investments. Thats legal. Further, if you somehow don't have any money to start with, borrow and don't spend it all, there is no requirement that you give the money back.

Money is fungible, after all.

 

[labangel]

I'm just saying that it's not legal to borrow federal funds for one purpose and then use it for investments (when you're talking about thousands of dollars)...this is far different from the majority of students who take their few hundred dollars left over and stick it in a savings account. Remember, this is technically not your money, it is a gov't loan and they can put whatever restrictions on it they want. Such abuses of the system are what cause problems.

 

[flighterdoc]

I'm just saying that it's not legal to borrow federal funds for one purpose and then use it for investments (when you're talking about thousands of dollars)...this is far different from the majority of students who take their few hundred dollars left over and stick it in a savings account. Remember, this is technically not your money, it is a gov't loan and they can put whatever restrictions on it they want. Such abuses of the system are what cause problems.

And I'm saying that if you have money, and borrow money (and stafford unsubsidized loans are NOT means-tested, almost anyone can get the max), what you have is money. You can use the "stafford" money for school, and use your "bank account" money for whatever.


Doing this isn't illegal, nor does it cause problems. Lying about assets is illegal, and not paying the money back causes problems.

 

[labangel]

And I'm saying that if you have money, and borrow money (and stafford unsubsidized loans are NOT means-tested, almost anyone can get the max), what you have is money. You can use the "stafford" money for school, and use your "bank account" money for whatever.


Doing this isn't illegal, nor does it cause problems. Lying about assets is illegal, and not paying the money back causes problems.

I'm not arguing with you fighterdoc, I was merely commenting on zinjanthropus's post in reference to the OP.