Is it a bad idea to invest a student loan?
"This answer is better served as a comment but I don't have enough rep.  It is not guaranteed that they 'do not accrue interest while you are a full time student'. Some student loans can capitalize the interest - before pursuing leveraged investing, be sure that your student loan is not capitalizing. https://www.salliemae.com/student-loans/manage-your-private-student-loan/understand-student-loan-payments/learn-about-interest-and-capitalization/ Capitalized interest Capitalized interest is a second reason your loan may end up costing   more than the amount you originally borrowed. Interest starts to accrue (grow) from the day your loan is disbursed   (sent to you or your school). At certain points in time—when your   separation or grace period ends, or at the end of forbearance or   deferment—your Unpaid Interest may capitalize. That means it is added   to your loan’s Current Principal. From that point, your interest will   now be calculated on this new amount. That’s capitalized interest."" https://www.navient.com/loan-customers/interest-and-taxes/how-student-loan-interest-works/ Capitalized Interest If you accrue interest while you are in school – as with Direct   Unsubsidized, FFELP Unsubsidized, Direct and FFELP PLUS Loans, and   Private Loans – you will have capitalized interest if it is unpaid.   Unpaid accrued interest is added to the principal amount of your loan   after you leave school and finish any applicable grace period. Simply put, there will be interest to be paid on both the principal of   the loan and on the interest that has already accumulated. To minimize the effects of the capitalized interest on the amount you   will pay overall, you can pay the interest during college instead of   waiting until after graduation. That way, you start with the original   principal balance (minus any fees) when you begin repayment." Are there any laws against doing this?  so long as you are truthful in your application for the loan, none that I know of - technically you could use the loan to pay for school and the cash that you would have used instead to invest.   Are there other reasons why this is a very bad idea? I think you've already identified the biggest one, but here are my reasons: Will you go broke or go to jail? Likely not, but there is significant risk in investing with borrowed money. You might come out ahead, but you might also lose a bundle.  If you're willing to take that risk, that's your right, but I would not call it a good idea under any circumstances. "There will be many who will judge your proposal on the idea that subsidized loans should be available to those who need them, and should not be used by others who are simply trying to profit from them. Each school has a pool of money available to offer for subsidized and unsubsidized loans. If they are giving you a subsidized loan, they cannot allocate it to someone else who needs it. Once you weigh the investment risks, I agree that it is analogous to investing rather than repaying your mortgage quickly. If you understand the risks, there's no reason why you shouldn't consider other options about what to do with the money. I am more risk averse, so I happen to prefer paying down the mortgage quickly after all other investment/savings goals have been met. Where you fit on that continuum will answer the question of whether or not it is a ""bad idea""."
Forgive me as I do not know much about your fine country, but I do know one thing.  You can make 5% risk free guaranteed.  How, from your link: If you make a voluntary repayment of $500 or more, you will receive a bonus of 5 per cent. This means your account will be credited with an additional 5 per cent of the value of your payment. I'd take 20.900 of that amount saved and pay off her loan tomorrow and increase my net worth by 22.000. I'd also do the same thing for your loan.  In fact in someways it is more important to pay off your loan first.   As I understand it, you will eventually have to pay your loan back once your income rises above a threshold.  Psychologically you make attempt to retard your  future income in order to avoid payback.  Those decisions may not be made overtly but it is likely they will be made. So by the end of the day (or as soon as possible), I'd have a bank balance of 113,900 and no student loan debt.  This amounts to a net increase in net worth of 1900. It is a great, safe, first investment. I don't know much about how student loans work, so there might be some caveats (e.g. does the interest rate stay constant, do you get a discount if you pay off early etc.). Ignoring those caveats: The interest on you student loan looks quite small. Depends a bit where you are in the world, but it seems very likely that you can get more interest than that on a 100% guaranteed investment form, e.g. term bank deposits. So, it seems a no-brainer to not pay back you student loan and invest the money securely for a higher interest rate instead. Similar situation when you think about taking the money as a down-payment for a house. More factors come into play here: What you're getting at is the same as investing with leverage. Usually this comes in the form in a margin account, which an investor uses to borrow money at a low interest rate, invest the money, and (hopefully!) beat the interest rate.  is this approach unwise? That completely depends on how your investments perform and how high your loan's interest rate is. The higher your loan's interest rate, the more risky your investments will have to be in order to beat the interest rate. If you can get a return which beats the interest rates of your loan then congratulations! You have come out ahead and made a profit. If you can keep it up you should make the minimum payment on your loan to maximize the amount of capital you can invest. If not, then it would be better to just use your extra cash to pay down the loan.  [are] there really are investments (aside from stocks and such) that I can try to use to my advantage? With interest rates as low as they are right now (at least in the US) you'll probably be hard-pressed to find a savings account or CD that will return a higher interest rate than your loan's. If you're nervous about the risk associated with investing in stocks and bonds (as is healthy!), then know that they come in a wide spectrum of risk. It's up to you to evaluate how much risk you're willing to take on to achieve a higher return. "If the interest rate on the student loan is lower than inflation, then the student loan will be ""cheaper"" the longer you take to pay it.   This is now a very rare instance, but there were programs and loan consolidation opportunities in the mid-200x's that allowed savvy student's to convert their loans to have an interest rate of around 1.5%. Right now the inflation rate is actually quite low, but it's not expected to stay there, and wasn't that low just a few years ago, so in the long run this type of debt will only be cheaper the longer it takes to pay off. It is risky, as others point out, as it can't be written off in bankruptcy, but there are other situations where it can be written off more easily than other debts, so on balance the risks aren't better or worse than other loans in general.  For specific individual situations the risk equation might work out differently, though. Further, student loans aren't considered traditional debt by some lenders for specific lending opportunities, thus allowing you to go into greater debt for certain types of purchases.  Whether this is good for you or not depends on the importance of the purchase. If you need to buy a house and the interest rate is higher than your student loan rate, it will be better, financially, to pay off the house first, while paying the minimum on the student loans.   If you have no other debt with a higher interest, and the student loan interest is higher than inflation, there is no reason to delay paying off the student loan." My recommendation would be to pay off your student loan debt as soon as possible. You mention that the difference between your student loan and the historical, long-term return on the stock market is one-half percent.  The problem is, the 7% return that you are counting on from the stock market is not guaranteed.  You might get 7% over the next few years, but you also might do much worse.  The 6.4% interest that you will save by aggressively paying off your debt is guaranteed. You are concerned about the opportunity cost of paying your debt early.  However, this cost is only temporary.  By drawing out your debt payments, you have a long-term opportunity cost.  By this, I mean that 4 years from now, you could still have 6 years of debt payments hanging over your head, or you could be debt free with all of your income available to save, spend, or invest as you see fit. In my opinion, prolonging debt just to try to come out 0.5% ahead is not worth the hassle or risk. "2.47% is a really, really good rate, doubly so if it's a fixed rate, and quadruply so if the interest is tax-deductible. That's about as close to ""free money"" as you're ever going to get. Heck, depending on what inflation does over the next few years, it might even be cheaper than free. So if you have the risk tolerance for it, it's probably more effective to invest the money in the stock market than to accelerate your student loan payoff. You can even do better in the bond market (my go-to intermediate-term corporate bond fund is yielding nearly 4% right now.) Just remember the old banker's aphorism: Assets shrink. Liabilities never shrink. You can lose the money you've invested in stocks or bonds, and you'll still have to pay back the loan. And, when in doubt, you can usually assume you're underestimating your risks. If you're feeling up for it, I'd say: make sure you have a good emergency fund outside of your investment money - something you could live on for six months or so and pay your bills while looking for a job, and sock the rest into something like the Vanguard LifeStrategy Moderate Growth fund or a similar instrument (Vanguard's just my personal preference, since I like their style - and by style, I mean low fees - but definitely feel free to consider alternatives). You could also pad your retirement accounts and avoid taxes on any gains instead, but remember that it's easier to put money into those than take it out, so be sure to double-check the state of your emergency fund." "The article said $65,000 (rounds numbers imply an estimate) was the original amount she borrowed. However she isn't on the hook for only $65,000. Her loans have interest and ***one*** of the loans had an 8% interest rate.   Let's ASSUME (for the purposes of this exercise to illustrate what compound interest can do to ""good debt"") that all of her loans are at 8% interest over a 30 year repayment period. Her total payments over the course of the 30 years will amount to $172,000. Yes that's a big number. $107,000 going to INTEREST and $65,000 going towards the original loan balance.   More realistically her loans are probably in the 6-8% interest range (since interest rates were higher 20 years ago) so the amount is a little smaller, but the bulk of her payments will be for paying interest not paying down her loan balance. She really couldn't afford to borrow for a master's degree to make so little in a high cost of living area." One reason to not do that is if you consider that one of the loans is at risk of being called in early.   e.g. You have a line of credit which is close to its limit, and the bank decides to reduce that limit, forcing you to quickly come up with the money to pay it down below the new limit, which can really throw a wrench into your plans. "A coworker put the idea in my head ""what if one day we wake up and thousands of pissed off young people are defaulting on their student loans""?  It's Crazy I know but out of curiosity I started doing homework on this and within one paragraph of Investopedia reading, I had questions.    1).  How is a loan an asset?  I'm the bank and I have 100$.  I loan Jimmy 20$.  With interest I expect him to pay back 25$.  My books sure as shit shouldn't say I'm worth 105$ or even 100$!  I gave away 20$.  I'm worth 80$ right?  Sure I can put it on my books that Jimmy owes me 20$ but I cannot be acting like I HAVE that 20$ can I?  Isn't that how the 08' crash happened? Explain why it makes sense to consider a loan an asset.  Is the risk of default accounted for?  Which leads me to question 2.  2).  I came across this phrase: "" because default risk is not transferred with the asset.""  Does that mean that when these institutions pass around the loan, the risk doesn't go with it?  How is it possible?  Assuming loan has the risk of default priced in (which I still don't fully get See #1), how can it possibly be sold in such a way that the risk of default is detached?    I am guess I am trying to dig around and learn as much as I can about student loans because the initial theory is not far-fetched to me." "A) Yes, it does accomplish the goal of adding more money, but the money is in lieu of any return you can earn while the loan is outstanding. If you somehow knew exactly which periods where going to run negative, and you took a 401k loan during that time, you'd be in pretty good shape, but if you had that information you'd probably be ruling the world in short order and wouldn't care much about a measly 401k. B) It's a nice idea, but unfortunately you are not allowed to set your own interest rate. (If you could your idea would work perfectly.) The interest rate is bank specific, and is typically 1-2 points over prime. But if your plan was to leave your money sitting in cash or low interest bearing accounts anyway, the loan does actually achieve the goal of ""getting more money in there"". Though it's your money; you aren't ""earning"" it." The interest that you are proposing to pay your MIL is actually quite low compared to even extremely conservative investing which easily earns 7% or more with quantifiable low risk. You claim that it would be no risk, but what would happen if you lost your job? The risk she faces is more or less exactly what a bank would experience while giving the loan, or in other words it is pretty much whatever your credit score says. Even worse, she does not have a large pool of investments to distribute this risk like a bank would. Making loans this large in a family situation is a recipe for disaster. Taking a huge risk with the relationship your wife has with her mother over three points of interest is exceptionally unwise. Are these private or federal student loans? Federal student loan debt is some of the safest to carry due to its income based repayment plans and eventual loan forgiveness after 25 years. Have you investigated income based repayment options? It's tough to borrow fixed and invest risk free. That said, there are still some interesting investment opportunities. A 4% loan will cost you 3% or less after tax, and the DVY (Dow high yielders) is at 3.36% but at a 15% favored rate, you net 2.76% if my math is right. So for .5%, you get the fruits of the potential rise in dividends as well as any cap gains. Is this failsafe? No. But I believe that long term, say 10 years or more, the risk is minimal. "they said the expected returns from the stock market are around 7-9%(ish).  (emphasis added) The key word in your quote is expected.  On average ""the market"" gains in the 7-9% range (more if you reinvest dividends), but there's a great deal of risk too, meaning that in any given year the market could be down 20% or be  up 30%. Your student loan, on the other hand, is risk free.  You are guaranteed to pay (lose) 4% a year in interest.  You can't directly compare the expected return of a risk-free asset with the expected return of a risky asset.  You can compare the risks of two assets with equal expected returns, and the expected returns of assets with equal risks, but you can't directly compare returns of assets with different risks.  So in two years, you might be better off if you had invested the money versus paying the loan, or you might be much worse off.  In ten years, your chances of coming out ahead are better, but still not guaranteed. What's confusing is I've heard that if you're investing, you should be investing in both stocks and bonds (since I'm young I wouldn't want to put much in bonds, though). So how would that factor in?  Bonds have lower risk (uncertainty) than stocks, but lower expected returns.  If you invest in both, your overall risk is lower, since sometimes (not always) the gain in stocks are offset by losses in bonds).  So there is value in diversifying, since you can get better expected returns from a diversified portfolio than from a single asset with a comparable amount of risk.  However, there it no risk-free asset that will have a better return than what you're paying in student loan interest." "I invested in Prosper.com loans.  I'm getting out.  I only have about $37 left, and as the principal is doled back to me, I withdraw the money.  The default rate I experienced was over 30%.  Only six of the 53 loans I invested in were with borrowers whose credit rating was less than ""A.""  Borrowers with a rating of ""A"" and ""AA"" had a higher proportion of defaults that those below ""A"". Some of my blogging colleagues were wise enough not to start this game. Some who invest in other P2P lending are almost certainly doing it with ""found money.""  They post articles with affiliate links.  As people sign up, they get the commissions deposited in their accounts, which they invest.  As they update their blogs with the returns on their portfolio, it serves to encourage more signups, and the machine continues on.  Even if they lose money on the invested loans, they're still ahead.  To paraphrase John Chow's tagline:  They make money with Lending Club by telling people how much money they're making with Lending Club.  It's almost like investing with the house's money. My high default rate might be because I started earlier in the game.  Borrower screening and criteria have gotten tighter with time. I don't recommend investing in P2P loans.  My experience has been that a large percentage of borrowers requesting loans on these sites have run out of options, which the credit reporting doesn't reflect accurately enough." There are two fundamental flaws to your plan: Supposing that you can get a loan with an interest rate that is less than the profit you are likely to get from an investment. Historically, the U.S. stock market goes up by 6 to 7% per year. I just did a quick check and found rates for unsecured loans of 10 to 15%. Of course interest rates vary depending on your credit rating and all sorts of other factors, but that's probably a reasonable ball park. Borrowing money at 15% so you can invest it at 6% is not a good plan. Of course you could invest in things that promise higher returns, but such investments have higher risks. If there was a super safe investment that was virtually guaranteed to give 20% profit, the bank wouldn't loan you money at 10 or 15%: they'd put their money in this 20% investment. I don't know what your income is, but unless it's substantial, no one is going to give you an unsecured loan for $250,000.  In your question you say you'll use $2,000 of your profits to make payments on the loan. That's less than 0.8% of the loan amount. If you really know a bank that will loan money at 0.8%, I'm sure we'd all like to hear about it. That would be an awesome rate for a fully secured loan, never mind for a signature loan. $250,000 for 10 years at 10% would mean payments of $3,300 per MONTH, and that's about the most optimistic terms I can imagine for a signature loan. You say you plan to lie to the bank. What are you going to tell them? A person doesn't get to be a bank loan officer with authority to make $250,000 loans if he's a complete idiot. They're going to want to know what you intend to do with the money and how you plan to pay it back. If you're making a million dollars a year, sure, they'll probably loan you that kind of money. But if you were making a million dollars a year I doubt you'd be considering this scheme. As TripeHound said in the comments, if it was really possible to get bigger returns on an investment than you would have to pay in interest on an unsecured loan, then everybody would be doing it all the time. Sorry, if you want to be rich, the realistic choices are, (a) arrange to be born to rich parents; (b) win the lottery; (c) get a good job and work hard.