Question about student loans

[DeathDonkey]

I'm just starting grad school and was offered student loans of around $20,000 to cover food/rent/miscellaneous expenses. I declined as I don't need the money, but at the same time I will be eating into savings to live through the school year. I had a genius moment where I thought I could take the loans anyway, invest them in something, and by the time I have to pay them back have made some decent money in interest, returns, or whatever. Where is the hole in my reasoning? I think it has something to do with needing to pay taxes on the loans as if they were income for the year? Will I make money with this plan or am I being shortsighted?

Thanks,
DeathDonkey

[cdxx]

student loans are not income. (quite possibly no loan is income). OTOH, student loan interest is sometimes tax deductible and sometimes defered. so, it's a good idea to load up on low-interest and possibly fixed debt over a long time, such as a student loan and mortgage. it is a bad idea to load up on debt and gamble with it. if your fixed loan rate is <3% (unlikely but possible), you can make money by just taking the loan and putting it into a money market account, or a CD, with no risk. putting it into a stock would involve risk, so i would call that gambling.

having said that, your mileage may vary... do you have any undergrad loans? do you have any other loans, car/credit card that you can pay off with this low-interest loan? how long are you in grad school for (1 year or 5 years)? how long do you have to repay the loan? is it private or federal, subsidized or unsubsidized? will you be able to consolidate it via a federal program?

[DeathDonkey]

Thank you for the information. I misread the IRS publication and thought that since scholarships that would cover out of school expenses (like rent) are taxable income, loans would be as well. I now see that not only are they tax free, I believe I would be eligible for a student loan interest deduction eventually.

I have no debt currently, I rent an apartment, own a car, no credit card debt, no old student loans. I am just beginning a 2 year master's program. I don't have the answers to some of your detailed questions about the student loans but will find out.

I'm curious why you don't think "gambling" with that money is a good idea, as that is precisely what I had in mind. I also believe I could beat the interest I will owe with a CD or bonds. In short, I'm having a hard time finding any reason not to take the loans, other than I never have had any debt before. I guess this is the best kind of debt one could have though.

-DeathDonkey

[Sniper]

[ QUOTE ]
I'm curious why you don't think "gambling" with that money is a good idea, as that is precisely what I had in mind. I also believe I could beat the interest I will owe with a CD or bonds. In short, I'm having a hard time finding any reason not to take the loans, other than I never have had any debt before. I guess this is the best kind of debt one could have though.

[/ QUOTE ]

Student loan debt is usually at a very low interest rate. If you can do something with the money that will earn more than the cost, then it is alway a good idea. The risk is that you won't be able to beat the borrowing costs.

The only problem I have with your question is the use of the word "gambling". If your intent is to put 20K on black or 1 hand of blackjack... don't do it. If your intent is to make smart "investments"... then do it.

Its probably worth noting that while 20K may sound like alot to you today, when you graduate and get a good job (that is the plan, right?), it won't seem like all that much any more!

A side benefit of taking the student loans, is that you will strengthen your credit history!

[DeathDonkey]

Hi Sniper,

[ QUOTE ]
The risk is that you won't be able to beat the borrowing costs.

[/ QUOTE ]

Could you please elaborate on this, I don't understand what you mean.

I used the word "gambling" in response to another poster who used it to mean "any investment where there is the potential for loss". Of course I will not be doing any -EV gambling on borrowed money.

20K doesn't sound like that much to me, but the opportunity to add to my "life bankroll" at such a good interest rate with very little risk of losing any money has piqued my interest. Also note that I am in grad school to avoid working - as I've already had a well paid engineering job and hated it. I realize that is an issue yet to be dealt with.

Thanks,
DeathDonkey

[cdxx]

[ QUOTE ]
The only problem I have with your question is the use of the word "gambling". If your intent is to put 20K on black or 1 hand of blackjack... don't do it. If your intent is to make smart "investments"... then do it.

[/ QUOTE ]

investing is fine, but you should realize that if a buddy of yours tells you "YO! stock XXX is going through the roof, put all the money you have into XXX NOW!" or EVEN splitting the money between MSFT, IBM, and ORCL is essentially gambling.

i would NEVER put $20k of borrowed money into a single stock or sector, no matter how it's chosen. i would probably put the $15k into a good blended fund at fidelity, with $4-$5k in a sector fund i expect to do well (for example energy would have been an incredible pick 6 months ago), using it for emergencies and big purchases (which you would normally finance at a high rate), and in 2.5-3 years, when your school and grace period is over start paying it off, either from a paycheck or simply making automatic payments from the fidelity account.

you are correct that there's little reason not to take the loan. you just have to be responsible with it. you should be looking to make (loan rate)+(5-10)% annually on the money that amounts for essentially all your money. don't worry if you missed out on a sector that shot up 60%. be thankful you came out ahead.

[Sniper]

[ QUOTE ]
Could you please elaborate on this, I don't understand what you mean.

[/ QUOTE ]

If your intention is to "invest" borrowed money... your cost is the interest rate on the loan... your risk is not being able to earn more on your investment of that borrowed money, than the interest rate you are paying.