Investing Student Loans
Looking to invest your student loan? Find out all the various factors that you should consider in order to invest your student loan.
Updated by Roopsi Gupta on 12th December 2019
Before thinking of investing your student loans, there are some areas to focus on. Check if you can manage all your related expenses like household, credit card bills, savings of emergency and most importantly to know when you need your money back.
If the initial targets are set and some money from the loan amount is left then you can go for investing that amount of money for the specific duration. Again it is all on your potential about how well you know how to play with the digits if you are opting to go for investment.
Table of contents
- How it worked out in the past
- What to expect in the future?
- Factors on your side while Investing
- Questions a borrower should ask before investing
- Priorities a borrower should consider
- Various risks associated with investing student loans
- The bottom line
How has investing student loans in the past worked out?
A decade ago, the scenario of these markets was very different than what it is now. That time, the markets were not typical to understand and generally, they offered guaranteed returns which somehow made people realized that their student loan can be invested in and paid back at the end of that duration.
Also, the higher and fixed returns were giving them an opportunity to earn and pay early so that they can get rid of their loans easily with time.
Say, the student loan interest is around 9%, then also it generated enough amount to deal with all the related things and deal with the loan amount. But you cannot take the previous performances to invest in the future and assume to get good results.
The market experts only watch the past and present trends and predict the future accordingly. It’s not like the prediction will come true but not sure of the other way as well.
In September 2008 the Dow Jones Share fell 777.68 points in an intraday trading, before this event the same share in October 2007 it hits its pre-recession high & closed at 14,164.43 points. Till 2018, this was the largest point drop in history.
By March 2009 it got dropped by 50% to 6.594.44 which was not at all expected by investors. It all happened because Congress rejected Bank Bailout Bill and this immediately impact it and whosoever invested that time must have suffered a lot.
What can we expect with investing student loans in the future?
All borrowers having federal student loans opt for the forgiveness of their loans. This is done with the help of student loan forgiveness programs. If you are one of these borrowers with similar intentions then you should not be paying off your loan completely because you will not be able to take the benefit of forgiveness in the future.
If you are qualified for Public Service Loan Forgiveness or IDR loan forgiveness then in the next 20 or 25 years you can get your remaining loan forgiven. But if you earn less from what you owe then there is no point in investing and adding on to your burden of debt.
It is difficult to decide if you should invest your loan amount or payout your loan. This decision is all on how you have set your priorities. Taking into consideration the related aspects like the balance of your present requirements and making possible funds for your future so that in case of emergency you can manage well.
Factors that are on your side while investing
There is a big-picture behind the word “invest”. If you want to invest then some factors are there which needs to be considered are as follows-
Risk and return are directly related to each other. The more the risk the more will be the chances to get higher returns. It depends on how much risk you can take and bear within a specific time duration.
Starting investment at a young age will not only help you take more risk and higher returns, but it also helps you in knowing your income potential better. Getting older and making investments generally divides your caliber into different other things like the responsibility of your family, planning for retirement and many more.
Objective to invest
Again, if you want an investment for the purpose of saving your money from risks then go straight to government bonds or fixed deposits but if you are a risk-taker and looking for something like that, then you should definitely go for shares and mutual funds.
Another is that it's important to determine if you want to invest for long term or short term then there are plans according to it as well.
Questions a borrower should ask oneself before investing student loans
There are so many if's and but's that come to our mind while opting to invest. Some of them are as follows-
Should I keep paying minimums?
The most important part is to be your own savior, pay the minimum amount of your student loan so that you will not end up being a person of default.
Should I consider consolidation & refinancing?
Different loans have different loan amounts to pay, different rates of interest but what you can do is go for consolidation if you have a federal type of loan that will minimize your monthly payments as well. In case of different private loans and federal loans, you can go for refinancing that will actually lower down your interest rate.
Read more on student loan refinancing.
What is the amount that I can invest?
Decide the amount to invest in so that at least you can begin to repay your loan. There are so many apps, websites that even offer low amount of investment in the beginning and later on, you can increase it as per the returns you will be earning.
What is the benefit of tax-advantaged retirement accounts?
Try to get the benefit from the 401(k) account it is a tax-qualified, defined contribution account with the Internal Revenue Code. Invest in it according to your income and make maximum use of it by increasing the contribution in it.
Priorities a borrower should consider before investing student loans
Based on your needs and goals, you need to prioritize things and see if should go with the option of investing or should be paying out your loan. Following are certain points to check your priorities-
Having funds reserved for emergency
Saving funds for an emergency is as important as keeping a security answer in case you forgot your pin. Aside a fixed amount of money every month to face emergency calmly. Maybe if the funds are not being used you can use it on later dates but for the time being they should be done.
High-interest debts should be paid first
Mostly, credit cards hold the maximum debt and it needs to get paid on time so that it will not hinder you when you think of making an investment.
The other way to invest is saving for retirement. The benefit can also be taken if the employer is making the same contribution. You can withdraw the money whenever you need it.
Funds to meet wedding expenses
in terms of getting married, it’s important to save some money as you will need it in the future.
Buying a house
Another need to save money is to make it collectively for the down payment for some of your other priorities.
It’s difficult to make the cost of the child that you might be going to have, it’s necessary to include this in your priorities.
May be priorities matter from person to person but a blueprint of the basic set of priorities is listed here so give an idea of how they should be going to be like.
Various risks associated with investing student loans
Apart from checking on the priorities, options to look for investing and it's crucial to know what are the risks related to the investment options. Some risks are as under-
(i) Sentiments of markets
Humans and shares both works on sentiments like shares have sentiments i.e. ‘bullish or bull’ & ‘bearish or bear’. Bullish is when the investors are thinking that the price of the asset will increase in the coming time. Bullish, bull or long can be used interchangeably. This can be for some months or years.
Bearish will be the sentiment when the investors are thinking that the prices are going to fall. The investors need to see in which direction the market is going so that they can take into consideration if they will invest or not.
Though it is not illegal to invest the loan amount. But the loan is given on certain calculations which include the tuition fees, the extra expenses, various allowances. The amount is generally compact to all the related expenses that are paid to the college but there are certain loopholes like the living expenses are also given to the students who are going to live off-campus where the borrower finds an escape and invests the money to repay the loans quickly.
Litigation is the real risk that the investors take in order to repay the loan. But they should not opt to invest out the full amount to keep them safe in the worst scenario and some part of it can be paid.
(iii) Risk of Return
As you know that risk and return are directly associated with each other, the more risk you are ready to take, there are more chances of you to get a higher return.
In the case of investing your loan, it’s very important to check whether you will be able to pay your loan money with interest after graduation or not. The investment cycle should be maintained in a way that it will give you results when you require and will not hinder you after your graduation.
(iv) Types of Loan
The investment of a loan depends on the type of loan that you have. If the loan is a subsidized one, then you should not go-ahead for an investment. But in any way, if you have federal student loans rather than paying it, it's better to invest and repay it quickly.
The bottom line on investing student loans
It is not easy to draw a conclusion if you should go for investing your loan or not. But there are certain conditions based on which you can decide if you want to go for paying off early or investing.
If the debt is something that gives you sleepless nights, then you should keep the investment on hold and focus on how fast you can pay your loan. But if you are willing to take the risk than going for investment and repayment together can be an option for you.
So, it is completely at the discretion of the borrower to go in whichever direction taking all the possible risks, areas of growth and other aspects into consideration.