Author Topic: Is there any reason to take out student loans if you have money  (Read 3506 times)

CmFtns

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My friend asked me this question and the only thing I could think of is that if the interest rate was very low then you could invest the other money instead similar to reasons to take out a mortgage even though you could buy a house outright.

Does anyone else know any reason to take out student loans if you have enough money to pay for everything already?

dandarc

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Re: Is there any reason to take out student loans if you have money
« Reply #1 on: June 14, 2016, 04:52:43 PM »
That's pretty much it.  You can invest while borrowing cheaply.  Or keep some of the cash around for added flexibility.

Of course the decision for most is usually borrow or delay / forget about college.  Or borrow or work my ass off to pay for everything.

CmFtns

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Re: Is there any reason to take out student loans if you have money
« Reply #2 on: June 14, 2016, 05:19:58 PM »
My friend is going to med school and I'm not sure but I think this is his situation:

-He has basically a pot of money/trust or something set up from grandparents to pay for any schooling & graduate education that would cover part or all of med school
-Could sign up for financial aid instead if there is some tax benefit or loophole that makes more sense for some reason
« Last Edit: June 14, 2016, 05:22:14 PM by CmFtns »

ltt

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Re: Is there any reason to take out student loans if you have money
« Reply #3 on: June 14, 2016, 09:46:11 PM »
We have enough to pay for our son's education, but we're not going to pay for it all.  He needs to understand that college costs money and, therefore, will be taking out some student loans.  Some level of debt is perfectly acceptable.

rubybeth

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Re: Is there any reason to take out student loans if you have money
« Reply #4 on: June 15, 2016, 06:25:15 AM »
Well, maybe if there was some other potential large expense on the horizon, like needing to replace a car or roof on a house or something, I could see keeping some cash liquid and taking the loan instead. But if he's got a huge amount of cash anyway, it would hardly seem worth the hassle.

Keep in mind that there are generally 1% or more "origination fees" for student loans. DH and I discussed potentially taking out some loans for his graduate degree, but decided against it because of the fees and interest. Subsidized loans were not an option for him, so interest would have accrued while he was in school. So that's a reason to NOT take out loans. :)

undercover

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Re: Is there any reason to take out student loans if you have money
« Reply #5 on: June 15, 2016, 06:50:41 AM »
Similar to a mortgage: mathematically, if the interest rate borrowed is lower than the investment returns, you'll come out ahead. Anything under 4-5% is good reason to borrow and invest the rest.

plog

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Re: Is there any reason to take out student loans if you have money
« Reply #6 on: June 15, 2016, 06:54:07 AM »
Be afraid, be very afraid.  Next to Vinny's Short Term loans you guarantee with your kneecaps, student loans are the absolute worse kind of debt to try to arbitrage in America.  Student loans are non-bankruptable.   

AlwaysLearningToSave

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Re: Is there any reason to take out student loans if you have money
« Reply #7 on: June 15, 2016, 06:56:26 AM »
Yes. I took out student loans because I plan to work where they will pay some back as a hiring bonus. If I didn't have loans, they would not give me the cash.
And I maxed the loans because the loan balance is a factor in how much they will pay back.

So I plan to pay the minimums until I'm hired, have the new employer pay a bunch as the hiring bonus and then pay them off out of the investment portfolio.

Well played. 

Of course this plan is dependent upon getting hired by an employer that offers this benefit.  But it's essentially risk-free to the extent you take out subsidized loans.  If you don't end up with such a signing bonus, you have the possibility of paying off subsidized loans without ever paying a dime of interest, plus you capture the time value of the money while you are in school.  If you use unsubsidized loans in addition to subsidized loans, you risk the interest you pay while in school.  If you don't get the job with a loan forgiveness program, you are out the interest you paid while in school but even then if the interest is low enough there is a possibility you could come out ahead by investing the difference while in school.  Seems like a fairly low risk, potentially high-reward strategy.  Kudos to you for going for it!

Edit to add:   If I did this, I would choose a fairly conservative asset allocation for my investments to hedge against needing to sell in a down market to pay off the student loans.  Of course, there is no reason you cannot hold on to the loans for ten years if the interest rate is low. 
« Last Edit: June 15, 2016, 06:59:20 AM by AlwaysLearningToSave »

Giro

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Re: Is there any reason to take out student loans if you have money
« Reply #8 on: June 15, 2016, 07:02:22 AM »
My twins just graduated and even though I had the money in their 529 accounts to pay for college, the market has been down the past few years.  They took all of the subsidized loans they were offered, used scholarships and I paid cash for the rest.   I'll pay off the loans in a few months before the interest starts accruing.  For us, it was market timing and taking free money for a few years.


TravelJunkyQC

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Re: Is there any reason to take out student loans if you have money
« Reply #9 on: June 15, 2016, 07:46:19 AM »
I was lucky that my parents paid for my undergraduate degree. However, they insisted I take out a few small student loans, which were promptly paid off before the end of the school year. This was to build me a credit history in my name - simple as that.

StarBright

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Re: Is there any reason to take out student loans if you have money
« Reply #10 on: June 15, 2016, 08:01:35 AM »
That would be a reason and I actually did it - but here's a major caveat if you are married.

I had a large scholarship to grad school (about 80%) and could have cash-flowed the rest easily. My Ex-DH, a programmer who specifically worked for a small hedge fund writing trading bots, convinced me to take out loans and invest. This was in 2003.

We divorced a couple of years later and I walked away from the divorce with 35k in school loans. In the ensuing ten years my ex has become a multi-millionaire.

I am so much better off now than I was and I paid off my loans years ago. But it kills me that I basically funded 30k of my ex's fortune.

So if you are married - think long and hard about taking out the loans in just your name.  Or don't be a dummy like I was and make sure the money is at least invested in your name :)

MrsPete

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Re: Is there any reason to take out student loans if you have money
« Reply #11 on: June 15, 2016, 09:25:40 AM »
As a general rule of thumb, if you're able to pay ... do it.  You're fairly sure to save by not paying interest; investments may or may not "win" in the end. 

However, every rule has an exception.  Yes, if you anticipate your employer will pay off loans, loans make sense. 

I'll add one more possibility. A friend of mine's son had plenty of ability but wasn't a very serious student, and she wasn't completely sure he would take college seriously.  She had him take out loans with this agreement:  If he worked hard and graduated on time, she'd pay off all his loans.  If he piddled along and required more time than was necessary, or if he dropped out, the loans would be his own responsibility.  In the event, he graduated on time and is now working in his chosen field.  His mom paid off the loans in one fell swoop.

Paul der Krake

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Re: Is there any reason to take out student loans if you have money
« Reply #12 on: June 15, 2016, 09:37:55 AM »
Being able to commiserate with other new grads at the water cooler...

More seriously, there is value in taking loans in your own name. My education was paid for in cash by the Bank of Mom & Dad and I took it for granted, not putting enough work into my studies. I turned out okay, but still wonder what could have been if I had more skin in the game.

boarder42

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Re: Is there any reason to take out student loans if you have money
« Reply #13 on: June 15, 2016, 10:00:05 AM »
i'd take out the loans if the rates were good.  why not.  could even get grants.  i was doing some FAFSA calcs the other day and my kids could get piles of money from the govt if i can work some magic with my earned income while they go to school.

Axecleaver

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Re: Is there any reason to take out student loans if you have money
« Reply #14 on: June 15, 2016, 12:15:49 PM »
Subsidized loans are currently running at about 4.5%, which is deferred until 6 months after you graduate. Unsubsidized loans are 6-7%.

But origination fees are the biggest reason for Mustachians to avoid them. Stafford (subsidized) loans are ~1.1%, and unsubsidized PLUS loans are a staggering 4.3%. Origination fees have been called "the hidden student tax" and have generated a lot of buzz lately.

Add to this the risk - they are not eligible for bankruptcy protection - and I can't see a scenario where arbitraging student loans makes a whole lot of sense.



forummm

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Re: Is there any reason to take out student loans if you have money
« Reply #15 on: June 15, 2016, 01:40:44 PM »
It used to work. I had loans that were 2%. I kept them and put money in my IRA instead. But the rates are much higher now. It doesn't make sense to hold a 7% loan to invest the money instead.