Is Using Your Student Loan to Invest a Good Idea? 3 Things to Consider & 3 Investment Options

By Chika

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Last Updated: October 23, 2021

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Soaring college costs and pressure to compete in the job marketplace have contributed immensely to the rising cases of student loan debt.

About a third of all American students use debt to finance their college education.  In 2020, the average amount of student loan debt owed by Americans reached a record high of $38,792 in 2020.

Student loans debt is the second-highest form of debt that most people are burdened with. Many millennials have been forced to postpone the achievement of life milestones to focus on repaying their student loans

With such a huge debt burden, many current and prospective students are looking for creative ways to sidestep this financial sinkhole. One of the ideas being touted is using student loans to invest.

However, is such a move a good investment strategy or a recipe for a financial blowout? Let's have a look.

 

3 Factors to Consider 

If you are tinkering with the idea of using your student loan to invest, there are certain factors that you have to consider.  

1. Legality

There are still some legal grey areas when it comes to using student loans to invest.

Students who appropriate their federal (student) loan money for noneducational purposes may not be engaging in illegal acts per se but could face legal action from the U.S. Department of Education if their actions are discovered. 

2. Lender

Perhaps the biggest consideration is the type of lender.

Borrowing from the government or a private lender affects the parameters within which you can use a student loan. If you are using a loan from the government, you're more restricted in the ways you can use your loan other than educational purposes.

On the other hand, private lenders are less restrictive on how loans can be used, which gives students the incentive to use them to invest. 

3. Interest rate 

Secondly, federal loans have lower interest rates than private loans.

The government regularly subsidizes interest on some student loans as an incentive to having an educated population. On the other hand, loans from private lenders come with a high-interest rate. 

Investing your student loan means you have beat the interest rate charged on your loan to reap any meaningful benefits. With current student loan rates ranging between 5.05% to 7.60%, the risk-reward tradeoff may not be sufficient to justify the downside potential.

 

3 Ways to Invest Your Student Loan

If you have decided to take the plunge and invest your student loan, there are a variety of ways you can do this and beat the interest rates which would accrue.

1. Business with high cash flow 

If permitted, you can use your student loan to invest in businesses with huge cash flow. The cash generated from the business would be used to augment your monthly payments.

The extra income can also give you the leverage to pay off your debt on time. Be sure to carry out a detailed feasibility study of the business you intend to invest in. 

2. Real estate

If your lender permits using student loans for non-educational purposes, you can invest a chunk of it in real estate. While real estate can act as a hedge against inflation, it can also be monetized to bring in cash flow. If the price appreciates, it can be sold and the proceeds used to pay off the outstanding debt. 

3. Stocks

Tracking student loans to equities work like a double edge sword. It is a risky option with its success depending on your knowledge, risk appetite, and investment behavior. The S&P 500 is up by 20% year-to-date. This means if you had invested your student loan, you would have made gains to offset the interest payments.

However, stocks don't always go up, plus the quality of stocks in your holdings determine the performance of your portfolio. If you are considering investing in stocks, then discipline is of utmost importance. you have to invest in stocks that are reliable and do not have sharp price movements.

Investing in high-risk or meme stocks is a recipe for financial disaster. Pay close attention to fundamental analysis and caro economic trends before deciding on your investment move. 

Read this next: Is it Worth it to Pause Your Student Loan Payments? Top Benefits & Risks

 

2 Alternatives to Using Student Loans to Invest

Apart from fiscal irresponsibility and the lure of easy money, escaping the debt burden is a major factor that pushes people to seek ways of investing their student loans.

However, there are still grey areas surrounding its legality, plus the potential of incurring losses. Because of this, there are other alternatives students can consider if they don't want to reduce the burden that comes with paying off their student loans. 

1. Loan consolidation

Consolidating your loan is one way to reduce the debt burden. This entails taking out a new loan to pay off an existing loan.

When shopping for the best debt consolidation loan, look for the lowest interest rate, a loan amount that meets your needs, an affordable and workable repayment term, and minimal fees.

2. Loan refinancing

Another way to reduce the burden of student loan debt is by refinancing your loan.

Similar to consolidation, refinancing works by taking out a new loan to pay off an existing loan. However, consolidation works for only federal loans, refinancing works on both federal and private loans.

Also, refinancing allows you to lower your interest rates, while consolidation does not give that option. This makes refinancing a better option for students hoping to reduce their debt burden. 

 

Bottom line

Student loans are a drag on millions of Americans' financial growth, and paying off that debt should always be a goal. Investing your student loan already amplifies your risk. You are walking on thin ice which could crack at any moment. 

As such, you have little room for error or experimenting, as one mistake could plunge you deeper into debt. You have to consider the legality, the interest rate, and the type of venture investment you would want to channel your loan towards.

A more conservative approach would be refinancing and consolidation. However, the best strategy is sticking to a payment plan and making contributions consistently. In no time, you would be able to pay off your existing student loan.

Photo by Helena Lopes on Unsplash

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