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Can You Invest Student Loans? Follow Up

invest student loan refund

Back on September 12th, I posted an article titled Can You Invest Student Loan Refunds?. This has become one of my most popular articles, and I wanted to write a follow-up post to give another perspective that arose out of your comments.

I did my best to make a convincing argument against taking your student loans and investing them. I still believe that this is simply a moral barrier that should not be crossed, but it is also a Federal law.

The main question that was raised in the comments, and which is quite valid, is how will the government ever track these student loan refunds if they are invested?

Government Black Hole?

Moral high ground aside, I think it is very interesting to see exactly how someone can take the student loan refund that they receive and invest it for a profit (or a potential loss). The fact that this is possible brings to light a large need in our government for more student loan oversight and tighter restrictions on who, and how much, students can borrow. If it were publicized that investing student loans is a great way to make money (which ok, I am doing here on this blog, but please forgive that for a moment) then I could forsee this practice becoming much more common.

Many commenters asked the question in the original article of how the government enforces their rule that student loan refund can only be used for “educational expenses”. From all of my work in higher education, the only answer I could come up with is that unfortunately, they do not. I see their reasoning behind this. Can you imagine how difficult it would be to track the refunds of millions of student loans across the country? You would need to hire hundreds of auditors to work full-time on enforcing this rule.

So as it stands, the government really does not have an adequate way of enforcing their rule that you cannot invest student loan refunds.

The Gray Area…

As with many federal regulations, there is a large gray area that is left open to interpretation. If you receive a student loan refund, and you want to do something proactive with that money, what are your options?

Strictly investing that money in the stock market is out. That would mean that you are using the funds to directly incur a profit (or a loss). What about investing the student loan refunds in a Roth IRA? This is still based on the whims of the stock market, but arguably more safe

What about stuffing your student loan refund into a high yield savings account? You are incurring no risk, and it is also gaining a small amount of income as time passes.

I would say that this decision is left up to you.

There are positives and negatives to every financial decision that you make regarding your student loan refunds. If you invest in a ROTH IRA, then you have to pay a penalty if you withdraw the funds to pay off your student loan before you reach retirement age.

If you invest your loan refund in the stock market, then you run the risk of losing all of that money, and having no funds to repay your student loan.

Parking your student loan refund in a high yield savings account seems like a very safe option, but the yield is so small these days, is it really worth it?

All questions that you will need to think through.

I know there are some strong arguments on both sides of this topic, and I know you all would love to share them. So please let me have it in the comments.

Would you invest your student loan refund? How would you do it?

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12 Comments

  1. Thanks for this great follow up to your other article. I wouldn’t invest a student loan, even if the government could not find out about it. It is like paying income taxes. There are several illegal ways to avoid paying taxes without being caught, but that doesn’t make it right.
    Dave recently posted..Envelope Budgeting Software, Best Budget Software for Financial FreedomMy Profile

    • @Dave — I completely agree with you. The gray area is no place I want to get caught in, and I would highly recommend anyone else not end up on the wrong side of the Federal Government. Thanks for stopping by!
      MoneyforCollegePro recently posted..Can You Invest Student Loans? Follow UpMy Profile

  2. I’ve never liked the idea of borrowing to invest. It works on paper but I don’t like the added risk. I’d rather avoid the loans when possible.
    Matt Wegner @ Financial Excellence recently posted..085 Financial Excellence: Money & Military – A Tribute to our TroopsMy Profile

  3. It boggles my mind that people even consider investing their student loans. Sure the interest rate on subsidized loans is still pretty low (3.4% this year), but on unsubs, it’s at 6.8% that’s accruing while you’re in school. (I know, in different years things might be different). If I somehow ended up with more money in student loans than I needed, I honestly think the best investment would be to make an early payment on the loans, saving myself more in interest (and stress later on) than I would likely get out of any investment.
    shanendoah@The Dog Ate My Wallet recently posted..Year End Budget Review (part 3)My Profile

    • @Shenendoah — I could not agree more. Sometimes it does work out that you take out more student loans than you need. Maybe an extra scholarship pops up, or something else creates an overage. Your smartest play regardless, is to make that payment directly back to your lender. Even better, is to give the check directly back to your Financial Aid Office and have then cancel that portion of the loan. Typically, this deletes the entire disbursement, and you are not charged interest (on UNSUB loan) for the amount of time the loan had been disbursed.
      MoneyforCollegePro recently posted..Can You Invest Student Loans? Follow UpMy Profile

  4. The problem is that if this caught on there would be restrictions put into place to stop it, and that would hurt those who are honest and do the legal thing. Bottom line, you shouldn’t be trading stocks or what not with money that isn’t yours. My opinion, anyways!
    Money Beagle recently posted..5 Reasons To Be Optimistic About Student Loan DebtMy Profile

    • @Money beagle — Investing with money that is not yours is always a scary proposition. I believe it has led to many business failures and collapses, and could do the same with our student loan system. I think that the system needs an overhaul, but not a collapse!

  5. I’m glad you discussed smart ways to use your student loan refund. I’ve read alot of articles on getting student loans, but I think it’s also good to think about the best way to spend your refund to benefit you and weigh the pros and cons. I think putting your refund into a savings account is a good idea. I know from personal experience that it’s helped me in the long run since I’ve gained interest on it.

    • @Beth — socking away this refund in a savings account is a great idea, but if the refund is from a student loan, you really would be best served to use that refund to pay down your student loan debt.

      • When receiving a student loan refund, it is wise to hold onto it. Tuition rates may increase in following years combined with reward decreases. The socked away refund money can be used to paying any difference in tuition. This will prevent issues in the last semester right before graduation. Otherwise, particularly for the unemployed, this will serve as the first few payments until the student gains employment. This is preferred over a deferrment that still incurs interest on the loan.

  6. The laws are made by the criminals themselves who did that very same things they made illegal. So, as I see it, do whatever is necessary to make money. Risk is going to be in the equations regardless of what you do. You could put it in a private account overseas, I’m sure that haven’t been thought of yet, and if so, then, someone has already done it. Laws are not just, they are ways to keep us from reaching the top. If you want to get rich then you’ll have to break some laws in this country–and that’s the truth.
    Queerlyautuer recently posted..A Tigers’ Trap: The Creation of the Black AthleteMy Profile

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