<p>I'm going to need to take out about 12k/year in student loans for the next four years. But I've had quite a few people tell me that I should take out the maximum allowed amount and invest it in CD's or some other low-risk stocks/bonds. There seem to be two lines of reasoning behind this -- the first being that the dollar is going to lose quite a bit of value and fiat money isn't "safe" to own in large amounts (the "invest in metal" argument); the second ("invest in CDs" argument) being that we're destined for inflation, which is always good for the debtor (especially since I won't be paying any interest). Any thoughts? Has anyone had any success with this?</p>
<p>It only makes sense if the after-tax return on your investment is greater than the interest rate you’d be paying on the loan. If your loan’s interest rate is 5%, you’d need an after-tax return on your investment of greater than 5% in order to make the investment worthwhile. There are very few investments where the risk/reward calculation would give you a low-risk return of more than 5%. You could invest in the stock market and make 8%/year, or you could lose 8%/year. You could buy gold; also a high risk/reward ratio. I think a more likely scenario is that we’ll enter an inflationary period where interest rates zoom, similar to the 80s when short-term rates were well over 10%. Assuming the rate on your loan remains fixed at the current federally-mandated rate, then investing the loan in a money market fund or other short-term interest-bearing account would indeed be a wise move to make. We’re not there yet though.</p>
<p>And finally, if you’re taking out 12K in loans, don’t you actually need this money to pay for college?</p>
<p>^^ The Uni at which I’ve matriculated has “in-school” loans, which have no interest payments associated with them until after you’ve graduated; I can take up to 20k/year in loans even though I only need 12k. Plus I have the wonderful benefit of being financially supported by my parents if I should ever need to fall back on something (or pay them back the 12k/year after my CDs/stocks have increased in value). </p>
<p>With that in mind, would CDs be the way to go?</p>
<p>Even it it was a good idea to take on debt that you don’t need, investing that debt in CDs is not going to get you anywhere. Short-term CDs are paying around 1% right now. Even 30-year Treasuries are under 5%. On $8000 in principal, a CD would earn you $80 in a year. After taxes, maybe $72. Worth it? I don’t think so.</p>
<p>Bingo Vball mom. Have you looked at rates on CDs? Have you read about all of the continuing financial woes around the world that make many believe markets could easily fall. Have a look at what’s going on in Europe.</p>
<p>Pros are extremely divided about where to put money now. Honestly? You’d be nuts to do this.</p>
<p>^^ Yes, I’m very aware of what is happening around the world (although I’m certianly no finance expert). It looks like at the very least US inflation will screw my generation over and (worst case) fiat money all together is going to collapse, in which case I’d much rather own silver or something than worthless paper money. Especially US paper money since we have no production to fall back on. </p>
<p>That being said, I have no idea what the wise finanical move would be. Like you said, the “experts” are very divided.</p>
<p>I’m pretty conservative with money, but I have to admit I’m dumbfounded by the responses you’re getting here. Let me get this straight, your parents are paying for school, but the school will still lend you $20K / yr. interest free until you get out of school? (Not sure I’ve got this right, but you talk about paying your parents back $12K per year). And everybody here is advising you not to do it? That makes no sense to me at all. Take the money! Stick the first year $20K in a 4 yr CD at 2.75% or so, the next $20K in a 3 yr. CD, etc. Pay off the debt as soon as the interest begins to accrue after graduation. Keep the $4K or so you’ve earned in interest for grad school or a start to your career. </p>
<p>Or better yet, offer your parents the option to invest the money they’re intending to spend now for your COA, and they’d pay off that debt when you graduate. </p>
<p>The use of someone else’s money is seldom truly free. When it is, it can be a good opportunity if you’re disciplined enough to handle wisely. I do agree that for your circumstance, the instability in the economy makes this a poor time to gamble on anything other than a sure thing.</p>
<p>Unless they are subsidized Stafford Loans, interest WILL accrue as soon as the loan is disbursed. It just may not have to be paid back until after graduation…but will capitalize into the loan principle. The $20,000 loan will GROW into a larger loan by graduation. There is no such thing as an interest-free student loan of $20K per year.</p>
<p>Of course there are such things as interest free loans of $20K / yr., but no Federal student loan programs, which I think is what you mean. The OP refers to “in-school” loans. It does seem improbable that a school would offer interest deferred loans regardless of need, but if they do, it’s almost a no-brainer. Of course there may be other things to consider, such as impact to FA.</p>
<p>Well the loan isn’t entirely regardless of need. My family pays 2 mortages which is the something FAFSA wouldn’t take into account but the university did. I think if you are completely broke they will loan you up to full tuition (45k), but I only qualified for 20 (which isn’t bad at all). And yes, it is interest free for the first four years. Also, a significant amount of my aid money comes from scholarships outside of the university, so while the school has me down as needing to pay 20k/year, I have 8k covered in private scholarships which makes the per-year cost seem artifically high, thus the 20k/year loan instead of 12k/year. If that makes sense. </p>
<p>@tdj, thank you for your thoughtful advice, it is very much appreciated. I think I need to talk this over some more with my parents, but the 4-year CD option sounds like a no-lose situation.</p>
<p>Don’t forget that the money you have in CDs will be reportable on the FAFSA and CSS Profile next year as part of your personal savings.</p>
<p>Run the numbers again with that in your calculations. You may find that a series of one year CDs or even a Money Market account might make more sense because you’d have cash available to cover your increased EFC due to the increased savings.</p>