Investing Subsidized Student Loans
I need advice. It seems so simple, that I must be over looking
something stupid.
1. Next year I will start at Graduate School.
2. Being poor, I am eligible for $8,500 per year in subsidized
Stafford Loans.
3. Thus no interest will accrue or payments required until six months
after I graduate in 2007.
4. Assuming I could get by without any of the loan money, I could
invest $8500 per year of the government's money.
5. Assuming a very conservative 5% growth per year, in 2007, I would
have $38,467 and owe Uncle Sam 34,000...pay it in a lump sum without
ever paying a cent of interest...4,467 clams in my pocket (or to be
ambitious, 7,366 at 8%)
Somebody please point out my fatal flaw. On a more serious note, is
there any validity to using subsidized loans to investment on any
scale?
I'm not familiar with the terms of Stafford loans, but
are you *sure* that interest doesn't accrue? At least
in the past, there have been forms of subsidized
student loans where payment was not required while a
full-time student, but interest did indeed accrue.
> 4. Assuming I could get by without any of the loan money, I could
> invest $8500 per year of the government's money.
> 5. Assuming a very conservative 5% growth per year,
Well, there's one possible fatal flaw for you. Given
how low today's interest rates and dividend yields are,
I don't think a 5% total return assumption is "very
conservative." Just how exactly do you plan to invest
the money?
- If memory serves, subsidized loans (those based on financial need) do
not accrue interest for specified periods. But the unsubsidized loans
(not based on financial need) do accrue interest. Since poster said
he was "poor" my working assumption is that he has the former.
- On the assumption he is looking for safe short-term stuff, 5%
is not "conservative" today. As for longer-term, who knows?
Personally, since you will have to look longer term to get your
desired 5% and that involves risk, I think the future value of a
diversified basket of blue chip stocks will be worth more than the
future value of a 5% cash account.