Profit from subsidized loans?

[Bcblazer]

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Here's a question for the financially savvy among you. I'm starting in an MD/PhD program this fall where I'll have the typical full tuition waiver coupled with the stipend. I'm single, and I'll be living in a low-cost area, so I'm sure that the stipend will be enough for me to live off.

I'm debating whether I should take out the maximum in Subsidized loans each year (pretty sure I'll qualify, because at my school the stipend doesn't count toward COE) and put the money in a CD or something similar. I would pay it all back before I had to start paying interest on it. Does this sound like a wise thing to do?

 

[gstrub]

You can do this, but calculate your actual profit after loan fees, and you're not going to make that much in a ~2% CD.

 

[Inuranic]

One of my classmates is doing this. He calculated that if you take out the max each year (I think) and leave it in a CD for all 7-8 years you can make around $2,000.

 

[Bcblazer]

Interesting.. I don't know if that would be worth it.

 

[gstrub]

Just take the money to Vegas and put it all on black, then pay the loan back right away, and you've made $8500. Duh...

 

[gstrub]

Also, don't forget you will have to pay taxes on your investments, which will cut down on your profits even further.

 

[Inuranic]

Don't be such a Debbie Downer.

 

[QofQuimica]

You should check into whether what you're proposing is even legal. Considering that you'd be leaving a paper trail a mile wide, it wouldn't be a very smart investment if Uncle Sam might come after you and charge you with a felony for loan fraud.

 

[xanthines]

Felony loan fraud? Not likely. If they caught you, you'd more than likely just have to pay back the loan with penalty.

Still, you should be aware that student loans were meant to be used education and you are taking a risk using the money for anything else. Caveat emptor or some mumbo jumbo like that... 🙂

-X

 

[Mama070609]

Another option, if you decided not to invest the money, would be to simply put it in your savings account as a 'rainy day fund'. It's always a good idea to have money put away just in case there are vehicle problems, the need for an emergency flight back home, etc.. Just don't blow it on things you don't need and then not be able to pay it back immediately.

 

[QofQuimica]

Felony loan fraud? Not likely. If they caught you, you'd more than likely just have to pay back the loan with penalty.

Still, you should be aware that student loans were meant to be used education and you are taking a risk using the money for anything else. Caveat emptor or some mumbo jumbo like that... 🙂

-X

Are you saying not likely b/c you know for sure that loan fraud is not a felony, or because you think it would be absurd for loan fraud to be a felony? If it's just because you think it's ridiculous, that's not the greatest litmus test. This *is* the government we're talking about here. Sometimes they make examples out of people because it shows they're doing something to cut back on fraud/waste/whatever else.

 

[bd4727]

You should check into whether what you're proposing is even legal. Considering that you'd be leaving a paper trail a mile wide, it wouldn't be a very smart investment if Uncle Sam might come after you and charge you with a felony for loan fraud.

This is not illegal. I have asked both student financial aid consultants at a few different medical schools, as well as a tax attorney who is a family friend. The nature of the loan, if you are at a school that will award you one (not all do this for MSTPs), is for cost of living since your tuition is waived. No one is under the impression that you are going to be paying tuition with this money, since you are being approved for a loan and all of your info is there that says you are receiving a full tuition scholarship plus stipend. What you do with your own personal loan money as part of your own personal "cost of living" is 100% up to you.

What would be illegal is to not report income made from investments.

Also, in most cases, there are no fees associated with subsidized student loans until they come due. Additionally, most of these loan repayments can be deffered through residency by what is called "hardship deferment," because of the small income you will be making as a resident. So whoever estimated making 2k total over 7-8 years and maxing out your loans is quite off. If you can take 6k each year, get 5% return, and have it for 8 years, you will make 15k in profit.

Good luck finding a 5% CD since September, though.

 

[StIGMA]

I was thinking about taking out a loan, of which $5000 per year would go to a Roth IRA. Over 7-8 years + some money added during residency, this would be in the low millions by retirement age/59.5. I am supposing that I will stop adding to this once residency is finished and income is too high to contribute anymore. Any thoughts?

 

[gbwillner]

I was thinking about taking out a loan, of which $5000 per year would go to a Roth IRA. Over 7-8 years + some money added during residency, this would be in the low millions by retirement age/59.5. I am supposing that I will stop adding to this once residency is finished and income is too high to contribute anymore. Any thoughts?

Haha... good luck with that. I put in the maximum Roth IRA contribution since my first year of grad school. Now it is worth less than half of what I put in. I'm still hoping it will be several millions of dollars by the time I retire.

 

[gbwillner]

Also, in most cases, there are no fees associated with subsidized student loans until they come due. Additionally, most of these loan repayments can be deffered through residency by what is called "hardship deferment," because of the small income you will be making as a resident. So whoever estimated making 2k total over 7-8 years and maxing out your loans is quite off. If you can take 6k each year, get 5% return, and have it for 8 years, you will make 15k in profit.

Good luck with that too. Unless you have astronomical debt/income ratio (levels you could not achieve with Stafford loans), you will never qualify for
the Hardship Deferment past your intern year. Take it from personal experience.

Furthermore, the days of low-interest loans are gone, and all of you will be stuck with the 6.8% rate. If you put a bulk of this money into your Roth IRA, you will not be able to take it out. You will be stuck paying 6.8% (possibly higher), while interest rates on the money you took out makes 1-2%.

I'm not saying there is nothing to be gained here... just that you have to be realistic.

 

[simpler2]

I'm doing something similar but my tuition is covered by a different scholarship. I plan on using the Sub loans as down payment on a house. Even if investing doesn't get you much return, you basically have a no interest loan to spend on what you please. Better to be making payments on sub loans than a car note or something you will eventually take a loan on anyway.

 

[Bcblazer]

I'm doing something similar but my tuition is covered by a different scholarship. I plan on using the Sub loans as down payment on a house. Even if investing doesn't get you much return, you basically have a no interest loan to spend on what you please. Better to be making payments on sub loans than a car note or something you will eventually take a loan on anyway.

Yeah, that's definitely the other option I was considering. I'd like to buy a house in the next few years, and I want to put at least 20% down. A few years' worth of loans should cover that.

 

[bd4727]

I was thinking about taking out a loan, of which $5000 per year would go to a Roth IRA. Over 7-8 years + some money added during residency, this would be in the low millions by retirement age/59.5. I am supposing that I will stop adding to this once residency is finished and income is too high to contribute anymore. Any thoughts?

I am under the impression that you wouldn't qualify to put money into a Roth while on an MSTP stipend. Any money you put in a Roth has to be equal to or less than an amount of money that you earned as "wages," and of course only up to a certain dollar amount per year. Anyway, loans themselves obviously don't count as wages. If your stipend counted as wages, then you could put the loan money into a Roth, but from what I am told the stipend is classified differently. I could be wrong about this, but from what I have been told and the reading I have done on Roth, I am fairly confident this is true. But gbwilner were you able to open a Roth somehow?

Secondly, about your millions. I think when most people talk about investing their loan money, they are speaking of investing it while in school and then immedietly paying off the principle when they graduate so as not to ever begin accuring 6.8% interest. I suppose historically the major indexes average 10% over the long term which gives you 3%/yr. But still I am not sure its worth taking the interest hit for 45 years.

 

[gbwillner]

I am under the impression that you wouldn't qualify to put money into a Roth while on an MSTP stipend. Any money you put in a Roth has to be equal to or less than an amount of money that you earned as "wages," and of course only up to a certain dollar amount per year. Anyway, loans themselves obviously don't count as wages. If your stipend counted as wages, then you could put the loan money into a Roth, but from what I am told the stipend is classified differently. I could be wrong about this, but from what I have been told and the reading I have done on Roth, I am fairly confident this is true. But gbwilner were you able to open a Roth somehow?

Secondly, about your millions. I think when most people talk about investing their loan money, they are speaking of investing it while in school and then immedietly paying off the principle when they graduate so as not to ever begin accuring 6.8% interest. I suppose historically the major indexes average 10% over the long term which gives you 3%/yr. But still I am not sure its worth taking the interest hit for 45 years.

According to the government your stipend is considered wages since you get taxed on it. You are free to contribute to your Roth IRA.

However, as you state and I stated earlier, approximating earnings in the millions is just retatded. First, you are assuming you are continually contributing to your Roth IRA, which you won't be able to do after residency because you will make more than 100K/Yr which is the limit for income.
Secondly, and most importantly, previous performance in NO GARANTEE of future earnings. You could put all your money in the market, and 20 years from now we go into a major depression or aliens invade or are we are invaded by a future USSR or whatever and you will have nothing. I'm not saying any of these things will happen, but there is INHERENT RISK in the market, and to assume otherwise is foolish. I will state again that my current stake in the market is roughly half of what I put in, even though it has been less than 10 years since I started. Assuming 7% growth, it will be roughly another 10 years before I even get my money back to what I put in.

Meanwhile, you will be eating 6.8% interest on your debt, which is not an average rate of interest or whatever but an absolute amount.

 

[StIGMA]

Thanks for the replies.