<p>[ul]
[li] I'm a high school senior currently planning on attending my local state university this fall, which is relatively cheap for a variety of reasons. Total cost will be approximately $60k for all four years.</p>[/li]
<p>[li] My parents have a college fund for me, which has 30k. They will be contributing more to it while I am in college, with the idea that by the time I graduate this total amount will reach 60k and I will have no student loans.</p>[/li]
<p>[li] I'm a finance major, and have been actively investing my own personal savings (several thousand dollars, but not the college fund). I have almost two years of college credit already, and I've done extensive reading on my own (Intelligent Investor, Securities Analysis, The Wealth of Nations, just for the most prominent examples) and I follow traditional value investing principles. Over the last two years I've beat the S&P by almost 5% compounded annually.</p>[/li]
<p>[li] Knowing about the attractiveness of student loans in comparison to other loans (such as loans for a house, or a car) it has occurred to me that perhaps I have better options than simply paying my college the money each year without taking out loans.</p>[/li]
<p>[li] What if I take out student loans with low interest rates and relatively little accrual during my time at college, and use my college fund to invest? At the very least, I believe I could easily make more money on this college fund than the accrual in interest (the "cost of money" - call it 8% a year, erring on the safe side) and thus come out ahead at the end of my time at college. On top of that, I'll be accumulating even more experience managing money in the stock market (I intend to do this as a profession.) When I graduate, I'll immediately pay off all my loans and even get a small bonus in that my credit rating will be great.[/li][/ul]</p>
<p>I'd appreciate anyone's thoughts on this matter. I'm sure most of you have far more experience with the intricacies of financial aid/loans and can offer useful insight on this idea.</p>
<p>What you are suggesting is leveraged investing, i.e. investing with borrowed money. Student loans are not a good instrument for leveraged investing because they cannot be forgiven in bankruptcy like normal loans, in the event your leveraged investing scheme does not turn out well. If you already have an investment portfolio, you would be better off borrowing against that for leverage, if you must invest with borrowed money.</p>
<p>And what happen if there is a market correction? Can you still continue college if your investments drop 10-50%? If not, can you make enough money to pay the students loans without the degree?</p>
<p>The answer to this is, yes, you can. As a student, student you can borrow the DIrect Loans each year at about 4% interest which accrues the instant the money is released. </p>
<p>@BobWallace
Excellent point… I guess I did not think of this in terms of leveraged investment because the borrowed money would only be used to replace the college fund as it is spent towards my education. You’re absolutely correct though; it is simply investing with leverage.
If I could find non-accrual student loans, however, wouldn’t it be a better idea? There will be few times in my life when I have access to such cheap money as I do now.</p>
<p>@noname87
Also a good point. Perhaps I would simply dump half the money into 3-year CDs? At the very least, I would have safety of deposit.</p>
<p>@cptofthehouse
Thank you. Do you have any idea how much a student in a normal situation is able to borrow?</p>
<p>And wouldn’t it be nice for you to be able to get some college credit for your real world experience in finance? You are so far ahead of many of your future classmates, who most likely have never even purchased one stock. Congratulations.</p>
<p>You can borrow $5500/6500/7500/7500 on your own pretty easily most of the time as a student. Beyond that requires parental involvement. But there is a origination fee and there is also close to 4% interest, so I don’t think you are going to easily find investments that pay more that in this low interest environment without some risk involved. </p>
<p>But if you restrict your loans to those amounts and keep your worse case scenario, your losses to be no more than that, then you will not be in much worse shape than many kids who do borrow that money to pay for their college. So you do have that leeway. You can pay interest each year, and if your tax situation (doubtful) is such that you can make use of the deductions and tuition payments, you can make out. But you have to research all of the factors and see how it will work for you personally. </p>