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Student loan question
Posted on 2/23/10 at 10:17 am
Posted on 2/23/10 at 10:17 am
I've been filling up my Roth IRA for the past two years with savings I had in the bank and money I worked for, but now I'm finally running low on money and I can't do it any more.
Would it be a dumb move to take out some student loans and use it to fill my Roth?
I figure it's a good idea because:
1) I'll get a 0% interest loan for a year and a half that I can (at worst) leave in cash collecting some interest
2) If I really get in a bind after graduation, I can take the money out penalty free and repay the loan
3) I've never taken out any kind of loan, so it's a weakness in my credit score. I would prefer if a mortgage wasn't my first loan.
Would someone like to tell me why I'm dumb?
Would it be a dumb move to take out some student loans and use it to fill my Roth?
I figure it's a good idea because:
1) I'll get a 0% interest loan for a year and a half that I can (at worst) leave in cash collecting some interest
2) If I really get in a bind after graduation, I can take the money out penalty free and repay the loan
3) I've never taken out any kind of loan, so it's a weakness in my credit score. I would prefer if a mortgage wasn't my first loan.
Would someone like to tell me why I'm dumb?
2
Posted on 2/23/10 at 2:16 pm to TheHiddenFlask
That's just STUPID. Taking out a loan for no reason.... Call Suze Orman and see what she says about this. 
Posted on 2/23/10 at 2:29 pm to DowntheBayouTiger
quote:
Taking out a loan for no reason
I hope you are joking. Anyone who won't borrow as much as possible at 0% interest is a dumbass.
However, there are some other details to consider. I don't know for certain but is there a tax consequence for using a student loan for a purpose other than school? Also, is the loan truly interest free or is it merely interest deferred?
Because if there is no tax consideration and the loan really is 0%, you should borrow as much as possible and stick it in a Roth as you said - it is literally free money.
Posted on 2/23/10 at 2:55 pm to TheHiddenFlask
quote:
Would it be a dumb move to take out some student loans and use it to fill my Roth?
One of my greatest investment regrets is not taking out the subsidized/defered interest loans while in undergrad and in business/law school and invest those funds and paying back the principal when they first become due after graduation. I didn't even know there were interest free loans then. From 89-97, the S&P 500 index returns were:
1989 31.5%
1990 -3.2%
1991 30.5%
1992 7.7%
1993 10.0%
1994 1.3%
1995 37.4%
1996 23.1%
1997 33.4%
Posted on 2/23/10 at 3:03 pm to TigerDeacon
quote:
One of my greatest investment regrets is not taking out the subsidized/defered interest loans while in undergrad and in business/law school and invest those funds and paying back the principal when they first become due after graduation. I didn't even know there were interest free loans then. From 89-97, the S&P 500 index returns were:
I wouldn't even be that agressive.
Foshizzle, to answer your question (to the best of my understanding) there is a certain limit on student loans where they are zero interest until you graduate. There are some transaction fees, but I can certainly make that back in interest over the next year.
I would be graduating with some debt, but this may be beneficial if:
1) my employer has a student loan paydown program
2) it boosts my credit score enough to knock a point of two off of my first mortgage.
Thanks for the help guys. any additional thoughts would be appreciated.
Posted on 2/23/10 at 3:26 pm to rmc
quote:
2 years removed from school I feel the same way.
If it makes you feel better, if I would have done the same thing, I would be in a pretty shitty position.
Those bubbles will bite you.
I with I would have borrowed and bought at 7000. That would have been nice.
Hind sight is 20/20. All you can do is look forward and watch for opportunities.
Posted on 2/23/10 at 5:03 pm to TheHiddenFlask
quote:
TheHiddenFlask
Well, like I said if you can borrow at zero percent and the taxman doesn't have a problem with this definitely do it. Even if the interest rate is low but positive (which it almost certainly is these days) do it. People are having lots of trouble borrowing money at any rate these days, it's a sweet deal.
Especially if you can stuff it in a Roth (to withdraw if you really have to as you pointed out). Student loans are essentially subsidized personal loans, there should be some way to arbitrage it.
The major caveat, as I pointed out earlier, is possible tax consequences. Any IRS auditor is going to try to nail you for whatever he can.
Another catch is that you do need to be able to borrow enough to make it worth your time. If you borrow $5000 but only get 1% net profit, is it really worth it?
Just some things to think about, it may still not be worth much. Definitely not a dumb idea though.
Posted on 2/23/10 at 5:05 pm to foshizzle
quote:
foshizzle
Thanks. I think that seals it for me.
I'm gonna call my dad for a consult and his good graces on this plan. If he's all good with it, then it's a go.
Posted on 2/23/10 at 7:14 pm to TheHiddenFlask
The voice of reason. Bad move. Do everything you can to increase your income, get on a budget, and remain free of debt. Borrowing money will lead to regret, my friend. I am a firm believer in living within your means. You're trying to cheat the system for a long-term financial goal. Use your head on this one and you'll sleep well at night.
Here's the #1 rule - "When in doubt, Don't!" It's your inner voice of reason. Don't ignore it.
Yours truly,
Debt Free/Sleeps Well at Night
Here's the #1 rule - "When in doubt, Don't!" It's your inner voice of reason. Don't ignore it.
Yours truly,
Debt Free/Sleeps Well at Night
Posted on 2/23/10 at 8:31 pm to calminvestor
quote:
The voice of reason. Bad move. Do everything you can to increase your income, get on a budget, and remain free of debt. Borrowing money will lead to regret, my friend. I am a firm believer in living within your means. You're trying to cheat the system for a long-term financial goal. Use your head on this one and you'll sleep well at night.
Here's the #1 rule - "When in doubt, Don't!" It's your inner voice of reason. Don't ignore it.
Yours truly,
Debt Free/Sleeps Well at Night
I don't see how this is living outside of my means.
Also, there's a difference between "cheating the financial system" and profiting of of government inefficiencies. The latter is easily accomplished and sustainable over the long term.
I appreciate your thoughts, but my inner voice is saying "do it dumbass, you've already missed out on a ton of opportunity".
I think you are misconstruing my intentions to think that I am going to lever myself to create gains in a risky market.
What I am actually trying to do is max out my contribution to a highly beneficial annually capped account. I will not be putting my self in a position of insolvency. At any point, if I want to undo this transaction, I can do so easily.
Sorry if this came off as defensive. I understand the benefit of not having debt for someone who is financially irresponsible or who doesn't understand how debt works (not directed at you), but I'm not using this irresponsibly.
Posted on 2/23/10 at 8:44 pm to calminvestor
quote:
OK.
Once again. Thanks for your opinion, but right or wrong, I believe myself to be above the Dave Ramsey method.
I'm looking for people to poke holes in my theory as a whole.
Posted on 2/23/10 at 8:50 pm to calminvestor
I hope you stick around and post some.
The big guns around here could use a little Dave Ramsey in our conversations.
The big guns around here could use a little Dave Ramsey in our conversations.
Posted on 2/23/10 at 9:00 pm to TheHiddenFlask
Brah, L1 CFA and MBA student, you know the answer to this (fwiw my most recent student loan was 6.8%, the first two (04 and 05)....1.88%.... ....).
....).Posted on 2/23/10 at 9:01 pm to TheHiddenFlask
Interesting that you think I'm hook, line, & sinker for Ramsey.
Guess it would help to tell you that I disagree with his investing philosophy.
I do agree with his "no debt" philosophy, however.
Where does that put me in your book?
You're not a real investor, my friend. I know this because a real investor listens to reason/the gut and the mind and weighs the two against common sense. Where do you stand?
Guess it would help to tell you that I disagree with his investing philosophy.
I do agree with his "no debt" philosophy, however.
Where does that put me in your book?
You're not a real investor, my friend. I know this because a real investor listens to reason/the gut and the mind and weighs the two against common sense. Where do you stand?
Posted on 2/23/10 at 9:04 pm to calminvestor
He listened to common sense, which tells him he has two years to pay it back for free, with zero penalty, and/or make money buy earning more than the predictably low cost of capital he will likely receive. I have 20k in student loans, I have never had any problem sleeping at night because of it.
Posted on 2/23/10 at 9:11 pm to kfizzle85
No problem sleeping because you've not attempted to pay off that $20K. That's alot of money when working a full-time job. Money is not easy to come by. When you have a family with responsibilities maybe you will understand more.
Remember to factor in Risk. When risk is considered, you may change your mind.
Remember to factor in Risk. When risk is considered, you may change your mind.
Posted on 2/23/10 at 9:17 pm to calminvestor
1. I don't have any intention of having a family any time soon, so that's off the table.
2. I already work part-time and I graduate in August. Even if I stayed part time @$14/he, I can afford a $61/month minimum loan payment.
3. The risk comment makes me think you believe me to be a complete moron.
2. I already work part-time and I graduate in August. Even if I stayed part time @$14/he, I can afford a $61/month minimum loan payment.
3. The risk comment makes me think you believe me to be a complete moron.
Posted on 2/23/10 at 9:22 pm to kfizzle85
1. that's fine
2. those that don't understand interest pay it, those that do understand it, earn it
3. i don't think you're a moron, i don't know you. i just think you don't have life experience.
2. those that don't understand interest pay it, those that do understand it, earn it
3. i don't think you're a moron, i don't know you. i just think you don't have life experience.
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