Investing Loans...

Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
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HankMoody
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Investing Loans...

Postby HankMoody » Tue Jun 22, 2010 3:50 pm

I'm currently trying to decide the amount of loans I will take out for law school. Since I have a partial scholarship and cheap housing, I really don't need to take out the full amount of loans available to me. Conventional wisdom says to avoid additional debt, yet at the same time I see an opportunity to take advantage of this relatively "cheap" money (low interest rate+expected inflation). Here's a recent article making a case for debt.... http://online.wsj.com/article/SB1000142 ... 22856.html

The U.S. is printing money at an insane pace which will eventually lead to inflation and the devalued dollar (Even Bernanke admits this - - http://usawatchdog.com/bernanke-admits- ... -thin-air/ ). If I were to invest my loan money into a diversified dividend paying equity portfolio, the price of the portfolio will adjust (increase) w/ inflation and I should be able to "beat" the interest rate on my loans from the inflation boost of the portfolio coupled with the dividend payments.

I understanding the risk involved in leveraging my investment (stocks plummet/deflation), but nevertheless the seems like a terrific opportunity to take advantage of low interest rates and future inflation.

Has anyone tried or thought about trying something like this?

Usernamepassword
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Joined: Wed Mar 10, 2010 11:28 am

Re: Investing Loans...

Postby Usernamepassword » Tue Jun 22, 2010 3:54 pm

Im guessing everyone here will tell you its a bad idea...but i think its great. I did it with UG loans, and not only did i already pay off the UG loans, I had 5k leftover from my gains to help me going into law school. I'm planning on maxing out loans for law school and doing it again.

nol607
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Re: Investing Loans...

Postby nol607 » Tue Jun 22, 2010 3:59 pm

I've been wondering the same thing actually- it is legal to use educational loans for other purposes, like contributing 5k annually to Roth401K for example? Any forseeable trouble with C&F or otherwise for this?

holborn
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Re: Investing Loans...

Postby holborn » Tue Jun 22, 2010 4:01 pm

nol607 wrote:I've been wondering the same thing actually- it is legal to use educational loans for other purposes, like contributing 5k annually to Roth401K for example? Any forseeable trouble with C&F or otherwise for this?


pretty sure its illegal. I know you can't with federal loans and I think many times loans require you to sign something saying youll use them only for your educational expenses.

nol607
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Re: Investing Loans...

Postby nol607 » Tue Jun 22, 2010 4:02 pm

Yeah that's what I thought. I should be more certain, having just taken the federal loan quiz...

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D-hops
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Re: Investing Loans...

Postby D-hops » Tue Jun 22, 2010 4:04 pm

First, you would be in default of your loan agreement to use the money for non-education related purposes. Second, the interest rate on your educational loans is higher than what a typical mortgage or private debt interest rate is going to be right now so I am pretty sure it would be a terrible investment strategy as well.

nol607
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Re: Investing Loans...

Postby nol607 » Tue Jun 22, 2010 4:05 pm

life fail on my part

high0034
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Re: Investing Loans...

Postby high0034 » Tue Jun 22, 2010 4:09 pm

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Last edited by high0034 on Tue Jun 22, 2010 5:24 pm, edited 1 time in total.

TheOcho
Posts: 394
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Re: Investing Loans...

Postby TheOcho » Tue Jun 22, 2010 4:15 pm

HankMoody wrote:I'm currently trying to decide the amount of loans I will take out for law school. Since I have a partial scholarship and cheap housing, I really don't need to take out the full amount of loans available to me. Conventional wisdom says to avoid additional debt, yet at the same time I see an opportunity to take advantage of this relatively "cheap" money (low interest rate+expected inflation). Here's a recent article making a case for debt.... http://online.wsj.com/article/SB1000142 ... 22856.html

The U.S. is printing money at an insane pace which will eventually lead to inflation and the devalued dollar (Even Bernanke admits this - - http://usawatchdog.com/bernanke-admits- ... -thin-air/ ). If I were to invest my loan money into a diversified dividend paying equity portfolio, the price of the portfolio will adjust (increase) w/ inflation and I should be able to "beat" the interest rate on my loans from the inflation boost of the portfolio coupled with the dividend payments.

I understanding the risk involved in leveraging my investment (stocks plummet/deflation), but nevertheless the seems like a terrific opportunity to take advantage of low interest rates and future inflation.

Has anyone tried or thought about trying something like this?


I've been waiting for someone to mention this. I agree with the assessment of many on here about the risks of debt and law school. However, the debt incurred could possibly be lessened through (what I see as) inevitable inflation. If you borrow at a fixed interest rate you will be paying back with a much weaker dollar. Depending on the severity of inflation, your debt could be significantly alleviated.

I'm trying to save money so I can invest in stable, dividend paying companies in countries where the threat of inflation is relatively less severe than in the United States. It's possible you could profit on both the company you are investing in and on an appreciation of the foreign currency your company trades in (relative to the dollar). Hell you could lose money on your investment but end up profiting on the exchange. Although if this scenario played out it might hurt the legal market further, it's possible one could capitalize on such a situation.

TheOcho
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Re: Investing Loans...

Postby TheOcho » Tue Jun 22, 2010 4:16 pm

TheOcho wrote:
HankMoody wrote:I'm currently trying to decide the amount of loans I will take out for law school. Since I have a partial scholarship and cheap housing, I really don't need to take out the full amount of loans available to me. Conventional wisdom says to avoid additional debt, yet at the same time I see an opportunity to take advantage of this relatively "cheap" money (low interest rate+expected inflation). Here's a recent article making a case for debt.... http://online.wsj.com/article/SB1000142 ... 22856.html

The U.S. is printing money at an insane pace which will eventually lead to inflation and the devalued dollar (Even Bernanke admits this - - http://usawatchdog.com/bernanke-admits- ... -thin-air/ ). If I were to invest my loan money into a diversified dividend paying equity portfolio, the price of the portfolio will adjust (increase) w/ inflation and I should be able to "beat" the interest rate on my loans from the inflation boost of the portfolio coupled with the dividend payments.

I understanding the risk involved in leveraging my investment (stocks plummet/deflation), but nevertheless the seems like a terrific opportunity to take advantage of low interest rates and future inflation.

Has anyone tried or thought about trying something like this?


I've been waiting for someone to mention this. I agree with the assessment of many on here about the risks of debt and law school. However, the debt incurred could possibly be lessened through (what I see as) inevitable inflation. If you borrow at a fixed interest rate you will be paying back with a much weaker dollar. Depending on the severity of inflation, your debt could be significantly alleviated.

I'm trying to save money so I can invest in stable, dividend paying companies in countries where the threat of inflation is relatively less severe than in the United States. It's possible you could profit on both the company you are investing in and on an appreciation of the foreign currency your company trades in (relative to the dollar). Hell you could lose money on your investment but end up profiting on the exchange. Although if this scenario played out it might hurt the legal market further, it's possible one could capitalize on such a situation.


*I'm not advocating using student loans for this purpose.

theanswer
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Re: Investing Loans...

Postby theanswer » Tue Jun 22, 2010 4:18 pm

It is a bad idea. You have to remember you will only be investing your money for three years. In the long run, you could probably expect to make a good return on a mutual fund or diversified equity fund, but people do not buy these things expecting to sell them in three years and make a return. They buy them to bolster their portfolios/retirement accounts/trust funds etc. You are so very far from guarenteed a positive return in your three years of LS that it is simply not worth the risk.

Another thing, you need to work on your reading comprehension.

What the article says:

For people with the capacity to take on debt, who understand it and can tolerate the risk, "now is an ideal time to leverage cheap dollars to buy into areas that can produce much higher returns over the longer term," he says.

What you have taken from it:

"now is an ideal time to leverage cheap dollars to buy into areas that can produce much higher returns over the longer term," he says.

While you personally may have less debt than your average law student, that doesnt mean you fit into the category of persons (those with "the capacity to take on debt") for whom it would be a good idea to use debt to invest. As a law student, you will have a negative income and no savings.

If you really want to scare yourself out of doing this--something it is probably in your best interests to do--ask youself what your investment would look like if you took out a loan and invested it in September 2006 and then cashed out upon graduation in 2009.

In order for this to be a good idea, you will have to catch the right random fluctuation in the market. In other words, you will have to get lucky. You may as well take out money and go to the casino.

theanswer
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Re: Investing Loans...

Postby theanswer » Tue Jun 22, 2010 4:21 pm

Honestly, investing in a law degree is a bad enough idea. No need to torture yourself even more.

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SamSeaborn2016
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Re: Investing Loans...

Postby SamSeaborn2016 » Tue Jun 22, 2010 4:25 pm

nol607 wrote:I've been wondering the same thing actually- it is legal to use educational loans for other purposes, like contributing 5k annually to Roth401K for example? Any forseeable trouble with C&F or otherwise for this?



In theory, I suppose this could work. I don't know the legality and I'm not an advocate of borrowing money to invest like that but to each their own. A well-managed, long term investment such as an IRA would likely yield more that your student loan interest rate. Problem with IRAs, though, is that in order to contribute you must make at least that much in earned income. That should work fine as long as you make that much during the summer or with part-time employment while in school.

I'm a bigger advocate of using student loans to pay off higher interest debt such as credit cards and the like. What's the point of getting 5-10% on an investment if you are one of the millions of people paying 18-25% on your credit card balances?
Last edited by SamSeaborn2016 on Wed Jun 23, 2010 12:35 am, edited 1 time in total.

JJWAL
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Joined: Mon Aug 10, 2009 3:43 pm

Re: Investing Loans...

Postby JJWAL » Tue Jun 22, 2010 4:34 pm

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Last edited by JJWAL on Tue Jan 08, 2013 12:08 am, edited 1 time in total.

nol607
Posts: 182
Joined: Thu Feb 25, 2010 5:45 pm

Re: Investing Loans...

Postby nol607 » Tue Jun 22, 2010 5:11 pm

JJWAL wrote:
nol607 wrote:I've been wondering the same thing actually- it is legal to use educational loans for other purposes, like contributing 5k annually to Roth401K for example? Any forseeable trouble with C&F or otherwise for this?


I'm guessing since you are in law school you won't be working with a company who will let you contribute to a 401k, so no roth 401k. And you have to have reportable earned income to contribute to an ira.


Well you do have to have reported income, you can't contribute with babysitting/drug dealing money. But you don't need to be employed by a "company" that allows you to contribute. Anyone can walk into a fidelity and set up an IRA set to mature at any specific date- 2030-2040...The date just affects the risk of the investment, with investments becoming more stable, and lower yield as you get closer to the maturation date. Anyway, just wanted to say that it is something anyone can do, and its a pretty good idea (not contributing with student loans, that is, but being proactive with retirement savings. A few thousand in the bank now grow to a pretty sizeable amount in thirty years.)

JJWAL
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Re: Investing Loans...

Postby JJWAL » Tue Jun 22, 2010 5:14 pm

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Last edited by JJWAL on Tue Jan 08, 2013 12:07 am, edited 1 time in total.

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HankMoody
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Re: Investing Loans...

Postby HankMoody » Tue Jun 22, 2010 5:25 pm

theanswer wrote:It is a bad idea. You have to remember you will only be investing your money for three years. In the long run, you could probably expect to make a good return on a mutual fund or diversified equity fund, but people do not buy these things expecting to sell them in three years and make a return. They buy them to bolster their portfolios/retirement accounts/trust funds etc. You are so very far from guarenteed a positive return in your three years of LS that it is simply not worth the risk.


After 3 years I do not need to immediately sell my holdings...I need to begin making payments on my loans. I can continue to hold these positions and collect the dividends+inflation boost. Assuming inflation, my loan payments (YY equal payments of $xxxx.xx) will be devalued over the YY payments while my portfolio adjusts for inflation and continues to pay dividends.

Another thing, you need to work on your reading comprehension.

What the article says:

For people with the capacity to take on debt, who understand it and can tolerate the risk, "now is an ideal time to leverage cheap dollars to buy into areas that can produce much higher returns over the longer term," he says.

What you have taken from it:

"now is an ideal time to leverage cheap dollars to buy into areas that can produce much higher returns over the longer term," he says.

While you personally may have less debt than your average law student, that doesnt mean you fit into the category of persons (those with "the capacity to take on debt") for whom it would be a good idea to use debt to invest. As a law student, you will have a negative income and no savings.


I did not include the article because I assumed I was one of the people he was referring to, I included it to show some reasons why it may be a good time to take on debt.

If you really want to scare yourself out of doing this--something it is probably in your best interests to do--ask youself what your investment would look like if you took out a loan and invested it in September 2006 and then cashed out upon graduation in 2009.

In order for this to be a good idea, you will have to catch the right random fluctuation in the market. In other words, you will have to get lucky. You may as well take out money and go to the casino.


You're right, there is a risk of the market going to shit...but your also assuming I would sell off rather than hold my positions. If you believe the US is in store for a prolonged period of inflation, which I do, inflation will bolster my equities and devalue my loan payments over time.

I am betting on inflation, which I see as inevitable given the amount of money the U.S. has been printing.

andreea7
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Re: Investing Loans...

Postby andreea7 » Wed Jun 23, 2010 9:39 am

HankMoody wrote:I'm currently trying to decide the amount of loans I will take out for law school. Since I have a partial scholarship and cheap housing, I really don't need to take out the full amount of loans available to me. Conventional wisdom says to avoid additional debt, yet at the same time I see an opportunity to take advantage of this relatively "cheap" money (low interest rate+expected inflation). Here's a recent article making a case for debt.... http://online.wsj.com/article/SB1000142 ... 22856.html

The U.S. is printing money at an insane pace which will eventually lead to inflation and the devalued dollar (Even Bernanke admits this - - http://usawatchdog.com/bernanke-admits- ... -thin-air/ ). If I were to invest my loan money into a diversified dividend paying equity portfolio, the price of the portfolio will adjust (increase) w/ inflation and I should be able to "beat" the interest rate on my loans from the inflation boost of the portfolio coupled with the dividend payments.

I understanding the risk involved in leveraging my investment (stocks plummet/deflation), but nevertheless the seems like a terrific opportunity to take advantage of low interest rates and future inflation.

Has anyone tried or thought about trying something like this?


Just no.

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jdubb990
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Re: Investing Loans...

Postby jdubb990 » Sun Jun 27, 2010 7:00 pm

An IRA and a 401k are two very different retirement accounts for those of you who aren't aware. 401k is through your employer. And like somebody else said, anybody can start a Roth IRA no matter if you are employed or not.

Here's where a tricky stipulation comes into play. With a Roth IRA you can take cash out early with no penalties if the money is used to pay for certain things such as...ding ding, EDUCATION! I would bet that the exception was intended for parents paying for their childrens education though, not individuals paying for law school. I plan on doing more research on this in the near future but in the mean time does anyone else know the details of this?

JJWAL
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Re: Investing Loans...

Postby JJWAL » Sun Jun 27, 2010 9:19 pm

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