getting a student loan with 9 months till graduation?

almostbusto · #1 01-14-2007, 02:17 AM

I am graduating this summer. I have never done the student loan thing so I really don't know how student loans work. so basically I want to know if this idea is idiotic or not.

here's the idea:

get a student loan for as much as i can. (i was thinking 10K, is that unrealistic?)

invest the money in an index fund until i graduate.

my thinking is that the index fund should appreciate at a faster rate than the loan and i will on net be making money. if that isn't the case, i could just wait until i graduate i suppose then pay off the loan entirely. or can i not do that?

anyway, i know a lot of your are thinking the risk associated with an index fund is a huge red flag. however, even if the index fund goes down by 50% or something crazy, i actually have almost 20 grand in savings. so there is pretty much no risk of me not being able to make payments.

basically, i want this loan for the above mentioned arbitrage oppurtunity and because i want to have more cash around. 20k is probably more than most college kids have around, but my income is 0 and will be 0 for long enough that by the time i have a job i will probably be broke.

Shoe · #2 01-14-2007, 01:50 PM

Assuming that you are paying around 7% interest on your student loan, the market will have to have a good year to get you any return (after taxes) that is positive. I think the market will go up this year but enough to cover your student loan interest? Who knows. Most years I don't think this would be worth doing. I'd invest about 10k of your savings, and keep all of the gains for yourself without having to share the gains with anyone else (the student loan interest).

almostbusto · #3 01-14-2007, 02:04 PM

my understanding is that with student loans you can get the interest rate pretty low. like 6 flat or lower. also my understanding is that the interest doesn't kick in until i graduate. which would make the break even point less than 6%. i was thinking that would give me enough wiggle room for it to be worthwhile

PS i already have almost all my savings invested. i am basically looking for a way to leverage myself a little further.

IdealFugacity · #4 01-14-2007, 02:10 PM

You graduate in 9 months, have 20k in savings, and expect to be broke by the time you get a job?

Either you spend too much money, have a 1.0 GPA, or both of the above?

Shoe · #5 01-14-2007, 05:37 PM

The interest starts as soon as you get the loan. You just don't have to start making any payments until after you graduate.

BloodshotX · #6 01-14-2007, 06:26 PM

I Have a related question, not to hijack this thread.

I am thinking of getting some student loans for my M.B.A. Although my company will reimburse me 50% of my tuition, i was thinking about taking the full amount out (all subsidized) and applying that to my 20% mortagage that is at a fixed rate of 9%..

What do you guys think?

Thremp · #7 01-14-2007, 06:30 PM

Bloodshot,

Likely a good idea if you can continue to save the monies and pay the loan off when needed. Can you pay these off before you get out of school?

BloodshotX · #8 01-14-2007, 06:34 PM

[ QUOTE ]
Bloodshot,

Likely a good idea if you can continue to save the monies and pay the loan off when needed. Can you pay these off before you get out of school?

[/ QUOTE ]

I could pay off these loans before I got out of school, but wouldn't the interest rate of the student loan be alot better then 9%?

Thremp · #9 01-14-2007, 06:44 PM

Yeah, thats the thing. I was almost positive the interest rate would be much better. However, if you were in a weird 3 year exec program or something... And you had to ride it out for 3 years... Then it might not be +EV.

Assuming its not fraud it seems like you just need to run the numbers on your plan and then doing the student loan type plan. Make sure to include any prepay penalties etc.