Is it possible to borrow money to accrue interest, and then use that interest to pay back the borrower + fees?
No.  The WSJ prime rate is 4.25%, even the Fed prime rate is 1.75%, way above the 1.20% you'll be making from your savings account. If you are high worth individual with great credit history, the bank might give you a personal loan at 4.25%. They won't care what you do with it as long as they get their payments. If you are not that creditworthy, they'll ask for a collateral, you can mortgage your house for example. It ends up being the sames thing, you get your money and do what you want with it. If you can make more than the interest rate the bank gave you, great, you made profit. The bank however won't agree to lend you money at 0.6% (1/2 of the 1.2% APY your savings account will bring). Why would they when they can loan that at prime rate of 4.25%?? The closest you can get to something like this is if you are a hot-shot wall street money manager with track record of making big profits. In that case the bank might put some money in your fund for you to manage, but that's not something a regular person can do. "Your plan as proposed will not work, because it goes against how banks make money. Banks make money in two ways:  (1) Fees [including account fees, investment advice fees, mortgage application fees, etc.]; and (2) Interest Rate Spread. They borrow money for x%, and they lend it out for x+y%. In a simple form, someone gives the bank a deposit, and earns 1%. The bank turns around to the next person in line and loans the money to them for 4%. You are asking them to turn the interest rate spread into a cost instead of their main source of profit: You are asking the bank to borrow money from another person paying them 1.2% interest, and then loan the money to you, paying you 0.6% interest and keeping 0.6% for themselves. The bank would lose money doing this. Technically yes, you can borrow from a bank and invest it in something earning above the 4% interest they will charge you. You can then pay the bank's interest off of your earnings, and make some profit for yourself. BUT this carries an inherent risk: If your investment loses money, you still owe the bank, effectively increasing the negative impact of your investment. This tactic is called ""Leveraging""; you can look it up on this site or on google. It is not something you should do if you do not fully understand the risks you are taking on. Given that you are asking this question, I would suggest tactfully that you are not yet well informed enough to make this sort of investment. You run serious risk of losing everything if you over-leverage (assuming the banks will even lend you money in the first place)." "There are many flaws with your idea. Say I want to borrow $225,000.00 to accrue interest on a 1.20% APY   account. I promise ... that I cannot withdraw nor touch the   account by legal contract. If you break the contract and lose the money, the lender is out the money. They can take you to court and will win, but if you don't have the money, then they don't get paid. (You can't squeeze water out of a rock even if a judge orders you to.) By sharing the interest with me on a loan, they keep a percentage that they'd normally get... If you're ""investing"" the money at 1.2%, and the lender gets some amount less than that, then they are getting much less than they ""normally"" get. Lenders typically get somewhere from 5-15% on loans. The money can also be used to fund a stock/trading account. Regardless of whether I profit, I pay interest on the loan and split the profit shares 24/7. How can the lender lose with legal enforcing? Again, if you lose the money, no amount of legal enforcing can force you to pay money that you don't have. Even if you go to jail for fraud the lender still doesn't get paid. Simply, no bank would ever agree to this." "With (1), it's rather confusing as to where ""interest"" refers to what you're paying and where it refers to what you're being paid, and it's confusing what you expect the numbers to work out to be. If you have to pay normal interest on top of sharing the interest you receive, then you're losing money. If the lending bank is receiving less interest than the going market rate, then they're losing money. If the bank you've deposited the money with is paying more than the going market rate, they're losing money. I don't see how you imagine a scenario where someone isn't losing money. For (2) and (3), you're buying stocks on margin, which certainly is something that happens, but you'll have to get an account that is specifically for margin trading. It's a specific type of credit with specific rules, and you if you want to engage in this sort of trading, you should go through established channels rather than trying to convert a regular loan into margin trading. If you get a personal loan that isn't specifically for margin trading, and buy stocks with the money, and the stocks tank, you can be in serious trouble. (If you do it through margin trading, it's still very risky, but not nearly as risky as trying to game the system. In some cases, doing this makes you not only civilly but criminally liable.) The lending bank absolutely can lose if your stocks tank, since then there will be nothing backing up the loan."
One of many things to consider is that in the United States student loan interest is tax deductible. That fact could change the math enough to make it worth putting A's money elsewhere depending on his interest rate and income bracket. When you get a loan (car, home, student) the lending company (bank) give the (auto dealer, previous home owner, school) money. You as the borrow promise to pay this money back with interest.  So in your case the 100,000 you borrow requires a payment for principal and interest of ~965 per month. After 240 payments you will have paid the bank ~231,605.  So who got the ~131,000 in interest. The bank did. It was used to pay interest to the people who made deposits into the bank. It was also used to pay the expenses of the bank: salaries, retirement, rent, electricity, computers, etc. If the bank is a company with investors they may have to pay dividends to them to.  Of course not all loans are successfully paid back, so some of the payment goes to cover the loans that are in default. In many cases loans are also refinanced, or the house is sold long before the 20-30 year term is up. In these cases the amount of interest received for that loan is much less than anticipated, but the good news is that it can be loaned out again. In short, your scenario could work in theory, but is not realistic... Generally speaking, you can borrow up to some percentage of the value of the property, usually 80-90% though it can vary based on many factors.  So if your property currently has a value of $100k, you could theoretically borrow a total of $80-90k against it.  So how much you can get at any given time depends on the current value as compared to how much you owe.  A simple way to ballpark it would be to use this formula: (CurrentValue * PercentageAllowed) - CurrentMortgageBalance = EquityAvailable.     If your available equity allowed you to borrow what you wanted, and you then applied it to additions/renovations, your base property value would (hopefully) increase.  However as other people mentioned, you very rarely get a value increase that is near what you put into the improvements, and it is not uncommon for improvements to have no significant impact on the overall value.  Just because you like something about your improvements doesn't mean the market will agree. Just for the sake of argument though, lets say you find the magic combination of improvements that increases the property value in line with their cost.  If such a feat were accomplished, your $40k improvement on a $100k property would mean it is now worth $140k.  Let us further stipulate that your $40k loan to fund the improvements put you at a 90% loan to value ratio.  So prior to starting the improvements you owed $90k on a $100k property.  After completing the work you would owe $90k on what is now a $140k property, putting you at a loan to value ratio of ~64%.  Meaning you theoretically have 26% equity available to borrow against to get back to the 90% level, or roughly $36k.  Note that this is 10% less than the increase in the property value.  Meaning that you are in the realm of diminishing returns and each iteration through this process would net you less working capital. The real picture is actually a fair amount worse than outlined in the above ideal scenario as we have yet to account for any of the costs involved in obtaining the financing or the decreases in your credit score which would likely accompany such a pattern.  Each time you go back to the bank asking for more money, they are going to charge you for new appraisals and all of the other fees that come out at closing.  Also each time you ask them for more money they are going to rerun your credit, and see the additional inquires and associated debt stacking up, which in turn drops your score, which prompts the banks to offer higher interest rates and/or charge higher fees... Also, when a bank loans against a property that is already securing another debt, they are generally putting themselves at the back of the line in terms of their claim on the property in case of default.  In my experience it is very rare to find a lender that is willing to put themselves third in line, much less any farther back.  Generally if you were to ask for such a loan, the bank would insist that the prior commitments be paid off before they would lend to you.  Meaning the bank that you ask for the $36k noted above would likely respond by saying they will loan you $70k provided that $40k of it goes directly to paying off the previous equity line. "Borrowing to invest is almost always a bad idea.  You'd have to take out an unsecured loan, which has a higher interest rate, or a secured loan and put at risk whatever you are securing the loan with. You need some means to make payments on the loan, or if interest is being added to the balance then take the compounding effect into account with regards to the cost of the money and how much you will really end up owning. In order to come out ahead you need to 'invest' in something that will yield a return that is higher than the cost of borrowing the money, such high yields always come with higher risk, meaning that you will actually GET that return is less and less of a sure thing.. so now you are talking about the 'chance' to make money, Or a chance your 'investment' could fail, perhaps badly.  Meaning you could well do nothing but end up in debt with little to nothing to show for it. If someone claims to have a 'sure thing' and is encouraging you to borrow money to invest in it, I'd be checking their back for a fin and remembering the lyrics ""when the shark bites ... scarlet billows start to spread""" If they have borrowed money without paying it back, what makes you think you could get interest paid? The problem that you face first is to make clear to them that a loan is a loan. As long as they can get free money off you, they will keep borrowing. If it is a business loan, the borrower would be able to claim a deduction for any interest paid on the loan and the lender would include the interest earned as part of their taxable income. You need to be careful on what you do and don't include as income. If the repayments made to you by the borrower in a year is $10,000 but only $8,000 of that is interest and the other $2,000 is part of the principal being returned to the lender, then you would only claim $8,000 as your income and the borrower would only claim $8,000 as a business deduction. Of course if it is interest only, then you and the borrower would use the full $10,000. It depends on the type of loan.  Fully amortized loans have a schedule of payments don't recalculate as you pay.  If you want to make an additional payment you need to contact the lender to apply your payment toward principle and reamortize the loan.  Otherwise all your additional payment will do is change the amount due on your next payment, or push out your next payment due date. Regarding interest calculation, you owe interest on the principle outstanding.  Say you have a 10 year loan (120 Months), at 5% APR, and a $1,000 payment (this means you borrowed roughly $94,000) Each month the amount of interest owed reduces because there is less principle outstanding.  The reason loans are amortized like this is so the borrower has a predictable, known, monthly amount due. "There are two things I can think of that might be different in other countries: Until 2013, American Express, Visa and MasterCard prevented businesses from charging extra for credit card usage, and credit card surcharges still illegal in several states. Since credit card companies add a surcharge to credit card purchases, and merchants can't pass that onto credit card users, they just make everyone pay extra instead. Since everyone gets charged the credit card surcharge, you might as well use a credit card and recoup some of that via ""rewards"" points. Almost all credit cards here have grace periods, where you won't be charged interest if you pay back your loans in full within some period of time (at least 21 days). This makes credit cards attractive to people who don't need a loan, but like the convenience that credit cards provide (not carrying cash, extra insurance, better fraud protection). Apparently grace periods aren't required by law here, so this might be common in other countries as well." "Money relationships are the opposite of friend relationships. That's why there's so much danger in loaning money to a friend - if the transaction doesn't work out well for one of you, it can destroy the friendship. Many of the answers here suggest you be prepared for the possibility that your friend will not pay you back. This is called a ""gift"". Give your friend the money, and trust that they will feel grateful. That gratitude will create generosity, and they will in turn seek to give gifts to you and to others in your circle. If you're not ready to give money to your friend, then you're better off not doing it. If you are ready to give money to your friend, then do it without expectation of return." "As others have said: unless you can find someone willing to make a zero-interest loan, the answer is no.  If you can figure out how to turn a ""0% for first N months"" credit card offer onto a leveraged investment or something of that sort -- seems unlikely -- maybe." This is very much possible and happens quite a lot. In the US, for example, promotional offers by credit card companies where you pay no interest on the balance for a certain period are a very common thing. The lender gains a new customer on such a loan, and usually earns money from the spending via the merchant fees (specifically for credit cards, at least). The pro is obviously free money. The con is that this is usually for a short period of time (longest I've seen was 15 months) after which if you're not careful, high interest rates will be charged. In some cases, interest will be charged retroactively for the whole period if you don't pay off the balance or miss the minimum payment due. He would spend it into the economy that is accepting his dollars. As an example, the apple maker might borrow $100 with $10 interest for the deer shank, then later on get the $100 back from the deer hunter in trade for 150 apples, and then pay this $100 to the banker. Now the apple maker still needs $10 to pay off his loan. The banker says he'll trade his $10 in interest profit for 15 apples, now the apple maker can resolve his debt without further borrowing.  The difference between spending interest earnings and issuing a loan is that when the banker is spending, they are getting something for their own use, when they are issuing the loan, they aren't getting anything but the promise to repay that loan. "I read up on it and saw that the IRS can ""charge"" the loan provider on   interest even if the loan provider doesn't charge interest, but this   is normally mitigated by the 0% interest being considered a gift and   as long as it's below X amount your fine. Yes, this sums it up. X is the amount of the gift exemption, the $14K. However, you must differ between loan with no interest and loan with no paying back. With loan with no interest you're still giving a statutory gift of the IRS mandated minimum interest. However, the principal is expected to be repaid to you and you must show that this expectation is reasonably fulfilled. If you cannot (i.e.: you gave a ""loan"" with no intention of it being paid back), then the IRS will recharacterize the whole amount as the gift, and you'll be on the hook for gift tax for the amounts above the exemption. What defines a loan vs a gift in terms of the IRS, is it simply that   the loan will be paid back, or is it only considered a loan if a   promisary note is made? As I said - you must be able to show that the loan is indeed a loan, even if it is with no interest. I.e.: it is being repaid, it is treated as a loan by all parties, and is not an attempt to evade gift tax. Promissory note is not a must, but will definitely be helpful in showing that. But without the de-facto repayment of the loan, it will be hard to argue that it is not a gift, even if you have a promissory note. That means, you should make a loan in such a way that the borrower will (begin) repaying it reasonably soon, so that you can show payment schedule being followed and money moving back to you. Reasonably soon is not of course defined in a statute, so do consult with a EA/CPA licensed in your state on how to structure the loan so that it will not appear as an attempt to evade the gift tax. Are there any limits on how big a loan can be? No, but keep in mind that even with statutory interest charges (published by the IRS monthly, see the link), with large enough loan you can exceed the gift tax exemption. Also, keep in mind that interest is taxable income to you. Even if you gift it back (i.e.: the statutory interest)." I would advise against this, answering only the first part of question #1. Borrowing and lending money among friends and family members can often ruin relationships.  While it can sometimes be done successfully, this is most likely not the case.  All parties involved have to approach this uniquely in order for it to work.  This would include your son's future significant other.  Obviously you have done very well financially, congratulations.  Your view for your son might be for him to pay you off ASAP:   Even after becoming a doctor, continue to live like a student until the loan is paid off.   His view might be more conventional; get the car and house and pay off my loans before I am 50.  He may start with your view, but two years in he marries a woman that pressures him to be more conventional.   My advice would be to give if you can afford to, but if not, do not lend.  If you decide to lend then come up with a very clear agreement on the repayment schedule and consequences of non-payment.  You may want to see a lawyer. For the rest of it, interest payments received are taxable. "A few thoughts: You said,  To me it makes sense that if he accidentally put his own money in when he wasn't supposed to, he could just take it out and pay the tax on it and be fine. In this case, he would be putting his own after-tax money in, and wouldn't be able to deduct it, so the act of putting it in and taking it back out in the same tax year would be as if the transaction never occurred at all. He would not have to ""pay the tax on it"". As for this question: Is there any penalty to his employer if they contribute to an HSA on his behalf, knowing that he is not eligible, and that the money will be an excess contribution? It's good that your son is prepared to treat it as regular income and pay the appropriate taxes. However, the employer should be the one doing that. They should be treating it as regular income and taking out FICA and paying their end of FICA too. If they aren't doing that, technically they are breaking the law. The employer really shouldn't be making the contributions at all, and if they ever bothered to correct this, this article suggests that the employer may be legally allowed to drain the HSA account and take their money back out of it, but only for the same tax year. Apparently they can do this without your son's consent. If that's true, it may make sense to withdraw all money from that account immediately as soon as the money arrives, since they cannot take the money back if it is no longer there. Once the money leaves the HSA account the employer has no choice but to change it to income and if they don't, your son must declare it as such (which it sounds like he is prepared to do). This doesn't really answer your question of whether or not the employer can be penalized- I would assume yes, but not too badly. The worst case scenario for them would probably be just having to pay all the back FICA on those funds if they aren't doing so already. Maybe an interest penalty as well. All that being said, I'd recommend talking to an accountant. The most important thing you want to be sure of is that your son cannot possibly be liable for any wrongdoing. Particularly I would get confirmation on pulling money out of the HSA that you know shouldn't be there in the first place, just to make sure there is no possible way to get dinged for that."