Using a Student Loan To Invest – Smart or Unethical?

I recently came across an interesting thread on a forum concerning the usage of student loans.  These people had basically invented a fairly brilliant, if somewhat ethically-grey strategy for maximizing returns when they used a student loan to invest.  These individuals (they obviously posted anonymously) were the product of “old money” and they were law students.  They obviously thought about money and how to use it to their advantage, much differently than the majority of people.  Their parents had retired from their main job before their kids went to school (not as uncommon as one might think given that affluent people tend to have children later in life, and retire much earlier), and consequently had to report little income on their student loan applications.  In cases where their parents still earned a wage these future lawyers had waited until they were 21 and consequently considered independent entities as far as student loan programs were concerned.  These circumstances allowed them to apply for and collect student loans when they really didn’t need the money.  After all, they didn’t work while going to school because their parents paid for everything, so they had no income to report on their loan applications either.  So with this fortunate combination they were able to receive large amounts of student loan money from both the provincial and federal governments.  In addition to the loan amount, these people even got automatic grants because they were considered to be among the most “in-need.”

Interest-Free Investment Loan Anyone?

Now many people in their position would have taken the money and had a great time.  Who couldn’t use a few thousand dollars worth of beer money in college right?  Or possibly one could see themselves buying a nice vehicle of some kind with the money in order to really show off for the ladies/men on campus.  Instead, what they did was invest the money.  Their foolproof theory was that they would simply invest the money, which consisted of an interest-free loan and a non-repayable grant (essentially free money), and then pay the loan back when it came due a few months after they graduated.

Using A Student Loan To Invest – How To Maximize The Strategy

Loan To Invest
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I’m not saying what they did is right from an ethical perspective, but from a purely financial point of view, this was a great idea.  If the students wanted to be cautious, they could invest in GICs and bonds and earn a free 3% or so on the money for the years they were in school before paying it off when it came due; however, I of course would advocate for a different approach.  With the markets in a fairly deep correction, I think there are substantial gains to be made over the next couple of decades in equities.  I have published articles before on the stock market average returns over the years, and I believe they make a pretty convincing case that business will rebound as it always does after it shakes off the inefficiencies (ok, so this is a lot of shaking over the next couple of years, but still).  To get some free money from the government, plus an interest-free loan for a period of years, represents a pretty substantial opportunity to create a little wealth at the beginning of someone’s life.  In many cases, it wouldn’t even make sense to pay off the student loans when they came due and started charging interest as well as requiring payments.  This is because the loans are usually given at a fairly low interest rate, and the money paid on student loan interest is tax deductible in Canada.  This means that your real return on paying the loans back probably would not be as good as investing your money at the moment.

Probability of Being Caught?

I know there are many out there that think this cannot be done, but the more I look at it, the more positive I am that it actually can be.  People claim that the government could see the investment activity, but this is easily avoidable if you get another person to invest it for you after gifting them the money.  For every possible way you could get caught I’m fairly certain there is a straight-forward way to beat it.  Even if there was a theoretical way to catch these savvy loophole-types, the student loan program is so massive that the odds of them getting caught are very low to begin with.

Using A Loan To Invest – Is It Moral?

So if we have determined that the strategy is undeniably effective from a purely money-grabbing standpoint, what message do we get from the “angel” on the other shoulder?  Obviously these guys represent the epitome of taking advantage of the system being that they are already wealthy, but what about if a “regular” person used this strategy after they turned 21?  Maybe by scrimping, saving, and working some hours (maybe some “cash” jobs) a person could get by and still have money left from their student loan (especially after they turned 21).   Would it still be unethical for them to use this investing strategy?  The almost-lawyers caught a lot of flack on the site for taking money that could have been better put into the hands of truly needy students, but they actually had a fairly persuasive argument for themselves (who would have guessed).  They argued that they and their parents would be in the top pay bracket the majority of their lives and would never take advantage of all the other welfare programs out there for unemployment etc.  This would be one of the only times they would be able to get the same “free money” everyone else decided they were entitled to, and really, wasn’t it just a small percentage of their parents’ money coming back to them anyway?  Needless to say, these guys are going to be very good at their jobs one day.

Is Buying Luxuries More Permissible Than Buying Stocks?

Is it wrong to use a student loan to invest money for personal gain?  I think if you’re going to decisively say that it is, you almost have to claim equally decisively that using student loan money for any luxury should not be allowed.  For every student that goes out to eat, buys a round of beers, or a gets a car, there is probably a student out there who could use the money more than them.  I’m not sure where I stand.  I think it is definitely a misuse of the program, and that it certainly is throwing tax payers money away.  On the other hand, I see so many ways that the government to undeserving people, I almost applaud these people in bizzaro-libertarian-Robin Hood-type of way.  Instead of robbing from the rich to feed the poor, this strategy takes back money from the government who basically stole it at gun point and use it so inefficiently.  At the end of the day I guess I would say that it is not right, but it shows how upset I am with wastes of big government that I would even consider these people to be anything less than dishonest individuals.

Is there a real difference between these forum boasters who are already come from wealthy backgrounds investing student loans, and blue-collar students using a student loan to invest if they have saved their money in various ways?  If given the opportunity to enact this guaranteed strategy, would you?  

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Well, I see it as this:

MANY (what, 90%) of students probably use their student loans for vacations to Mexico as well right? Is that moral?

Perhaps that’s why the government took away the grant associated with the student loans.

I guess this is another example of how the rich get richer!

I had never heard of this until now.. ! Thanks for opening my eyes to the continued flaws in the system lol.

I’m pretty sure that I read in the US, this is illegal. However, I don’t know how the government would find out. The strategy could work, but few students are in this kind of situation where they can invest their student loans instead of paying for their education. Interesting idea, though.

I’m sure the IRS would catch this kind of activity if they get audited. Other than that, I don’t think there is a student loan enforcement agency, is there? I think it’s not a bad idea actually. It will teach them more about investment and get them started investing early. These type of investors contribute more to society than consuming students right?

Well, it sounds good on paper, but I’d think there would be some risk if one got into equities with the money and didn’t know what they were doing. Even if it were legal I don’t think I’d do it. I just have such an aversion to debt.

It’s been a few years since I was in college, but as I remember it, we used to max out the loans so we could have the extra cash for “books and food” aka booze and toys. There certainly wasn’t anyone standing there telling us to not do that, so I find it hard to believe that anyone is going to be standing there telling you that you can’t invest the money either. Of course, the caveat is that if you lose your shirt investing, you’ve still got to pay back the loan, but you’ll probably get more out of… Read more »

This is absolutely fascinating! A few thoughts:
1. Only young adults who were raised surrounded by an investment-focused (as opposed to savings-based) financial situation would even think of this option. This would never even cross my mind.
2. I really don’t see a way they would get caught, except for some really inconvenient search by the government. That would ruin everyone’s lives and I hope they don’t start doing that.
3. I don’t think I would do this, even if I could, because it sounds risky and I would rather allow the money to go to someone who really needs it.

The Wealthy Canadian

Interesting post! I don’t think I’d recommend a student who has debt to employ a leverage plan, let alone using their student loan money to invest. Taking it a step further, investing in the stock market with such funds would not be a good idea, at least in my view. When I went to university, I had a friend who blew every bit of extra student loan money on going to the bars, buying clothes, traveling, and so forth. Although he got away with it then, it took 10 years for him to pay his loans off. Just because people… Read more »

The Wealthy Canadian

I’m not disputing your math; all I’m trying to say is that if a student already has an accumulation of debt, and then uses new loan money to invest in say, equities, they are exposing themselves to more debt, which can be risky. In cases where students have everything paid for and don’t have to work during summers because mom and dad have everything covered, then doing ahead with investing the loan money becomes much easier. The problem I have with it however, is that the loan money is not intended for investment purposes and as a result, would not… Read more »

Dee

I’m not sure there is anything to actually get “caught” about. If they have provided all the information requested for the loan, without omitting that was asked to be reported, I’m not convinced that they’ve done anything that could result in being slapped with a penalty or otherwise “caught”. It’s up to the lending institutions to set the requirements and if they’ve set them in such a manner that someone qualifies, then that’s that. When I went to law school, I resided in Quebec. I was asked my marital status and read the definition of marital status — married meant… Read more »

I took out more student loans than I needed for my year of graduate school – and it allowed me to invest the money I was earning as a graduate assistant, while the loans paid for living expenses. But honestly, my loan rates are high enough that it is not really worth it as a financing plan, except that with the price of equities so low (I started grad school in the middle of the recession), I feel like I had a great advantage being able to start to buy into the market at that low point. The government requires… Read more »

That’s something I argue about with myself every time I try to decide if I should pay off my student loan faster, or keep putting some more money into the stock market now while it’s down. The interest I pay on student loans is tax deductible, but not the payment itself. So it does reduce the rate from 6.8% a bit. Plus a portion of my loan is only 3% or so. (A very small portion, but it still brings the average down.) Historical rates suggest that 6.8% may not be super easy to beat, but it’s on the border.… Read more »

I will never forget being in university, as a mature student and dependent on student loans, hearing a couple of female students in the washrooms at the financial aid office celebrating that they will take their grant money and go to the Caribbean. Ha ha. It has stuck with me because I have continued to struggle and find this to be such an injustice to those of us who were not born to “old money” nor had parents who could pay for our education, even if they too struggled to do so. I wish these people were caught but I… Read more »

Finance guy

Even if the government had limited money to give out. I would want other people to have less money for school. If fewer people graduate, then I have a better chance at making money. The more uneducated the population is the better I can take advantage of them.

Andrew

Really interesting article. This largely describes what I am doing right now. When I applied to University I had personally saved over $13,000 as I worked for 3.5 years (mostly in the summers during high school) before University. I’m also lucky enough to have parents that saved for an RESP account and supported my education. When I applied for my Alberta student loan, my dad’s income was something like 140k. Even with parental support, I qualified for a $5000 loan. I saw the loan as an opportunity to invest in a stable dividend paying company and a high interest savings… Read more »

vtoolshop

you can’t invest the money either. Of course, the caveat is that if you lose your shirt investing, you’ve still got to pay back the loan, but you’ll probably get more out of it than the booze and toys I bought with most of mine

jb2888

I am a student now, and have pondered this idea for awhile. I am working while going to school full time and am JUST making ends meet without having to bust into my loaned money, since I don’t have parents to pay for anything. I am considering on investing some of the money.. I don’t really see anything wrong with it. It would help me a lot.

UnivAN

I have thought about this for a while and came to the conclusion that it is worth it if you find yourself a bargain. The only people that will not be able to take advantage of this loophole are the truly needy ones. Financial sense it makes, interest-free loan for the duration of your bachellors (4-5 years), basically a push-start to your personal finances once you graduate OR a cushion in case you can’t find a job in the next 6 months (which is entirely possible given the economy). Immoral, unethical, smart? I’ll have to go with smart. You have… Read more »

Spencer

I just came across this article in a prospective idea. Seeing the current trends of etf’s in Canada I am certain it is possible to make at LEAST 20% per year. (I’ve made 7.67% on a Horizons leveraged etf since February 12th, 2013 – Now March 29th, 2013) I’m planning on taking a certificate/diploma course; possibly distance which my RESP would cover, all I would need is rent/food money. I’ve considered taking out max student loan and potentially taking out multiple student line of credit’s to invest with. My biggest concern is tax reporting. If I weren’t to put my… Read more »

spencer

Oh jeez! I forgot about this post, just came back to it! Questrade in canada allows you to have a margin account and a tfsa side by side. The money inside the tfsa can not be leveraged within the tfsa but they allow you to leverage in your margin account based off the funds in your tfsa. \ My thoughts on 20% returns are conservative in my opinion. I could leverage even one making 10% and make 20. Some Canadian etfs are doing very well such as. ZUB.TO, CLU.TO, XST.TO, CHI.TO. Theres even a mutual fund I had been considering… Read more »

Mat

Nice write up! I’ve been looking for information regarding this subject for a couple weeks now. Here is my situation; I’m 23 years old, and I’ve already completed 3 years of College. I’ve managed to pay for school, and come out without having any debt. After College, I got hired by an Engineering company where I worked for almost 2 years before getting laid-off. While working, I managed to save quite a bit of money, top up my RRSP and my TFSA. After much thought, and still having time on my side, I decided to go back to University to… Read more »

Mat

Thanks a bunch! Especially for the quick reply!
I will sign up for the book.

eddie

You dont need “old Money” to go to college, just give three years to your country and state college is paid for in full.

Anon

The military isn’t the answer for everybody. Those with health conditions like Asthma are automatically disqualified from military service.

Joshua Williams

Not sure how it is in Canada but in the states you can only receive unsubsidized loans during law school. Therefore, interest starts accruing on day one and is added to the principle. At 6.8% you would loose money unless you could get more than a monthly 6.8% return on investment.

Nope, definitely not the case in Canada.

Throwaway

I think it feels more unethical because it deals with a larger sum of money and rich people but I think its smart. I mean I “invested” $30 on a kitchen set and I helped my floor save hundreds of dollars per person when I studied abroad since we could cook . The other dorm on bursary complained they had no money after the first month because they drank everynight and ate out. They missed out on the actual partying at the end of the year and some of us ended up with net money from our grants/bursaries. After that… Read more »

Interesting introduction into return on investment (ROI).

Jake

I thought of doing this years ago, and tried to take out private student loans as a result of working this out. I guess I’m a “brilliant” investor myself, with a turnover rate of anywhere from 50-400% annually on the stock market. Interesting story, I wondered how I would pay for college, thinking I would have to take out loans. I’m a US war veteran, and my father is a US war veteran, and he got a minor service-connected disability while he was in the Army. There’s all manner of veteran benefits for college in the US, and one of… Read more »

Sev

Anyone can make money, it’s just a matter of how hard they are willing to work. As a personal example, I need money for school over the next few years, and this summer I have been working 13 hours daily.

susie

I see any use of loan money great if your aiming at getting more finances as a priority. taking art,or some useless degree and being 20k in debt without work serving coffee seems dumb. any loan can lift lower income kid with goals out. its all a game,the smart,fast,competitive ones will outwin the tradional models in in century , its a old system . broken and unethical . my 50 yr old friend is still being held liable for a federal loan,where the SCHOOL CLOSED. His finances are 25k behind,and he was from the ghetto . so ? i say… Read more »

the road less traveled

I used my leftover student loan money to invest in the stock market and I made a 1000% return by the time I finished school. I not only have enough to pay back my student loan but I have an incredible head start on retirement. I don’t think creativity is immoral and I’m happy to make my student loan payment every month. They deserve their 4% interest on 30K The whole point of going to college for me was to work smarter not harder. My parents could not help me pay for school so I went to community college for… Read more »

makingcake

My two cents on this matter is that the student loan service I deal with in Canada encourages you to put any unused loan money for the year aside incase you need it in the future. So if you put it aside in a high interest savings account or invest it dos not seem to be of any consequence to them. You have that $15k sitting in your pocket either way until you go into repayment, I would definitely choose grow it over blow it any day.

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