Question about student loans for the financial experts

[Eeezee]

So it's my understanding that you don't get charged interest on student loans until after graduation. If you pay back the loans before you graduate, you've essentially borrowed money and paid it back at no cost.

I am debt free. I'm going to grad school and getting my PhD, so that's 6 more years of potential student loans. My fellowships are paying for everything though, so I won't need loans for anything unless my car explodes or something.

So should I take out student loans and drop that money in a 5% high interest savings account? Let's say I take $10,000 per year in loans at 5% yearly yield. These are very approximate figures, let's just assume the interest accumulates all at the very end of the year and then I take another $10,000 loan (I don't know what the real maximum is, but throughout my undergrad I've been offered $20,000 or more in student loans yearly).

Beginning of First year - $10,000
Beginning of Second year - $20,500
Beginning of Third year - $31525
Beginning of Fourth year - $43101.25
Beginning of Fifth year - $55,256.31
End of Fifth year - $58019.13
Pay off $50,000 in borrowed money for a grand total of
$8019.13 profit (before taxes)

Could I really make $8000 over 5 years for filling out loan applications if I can borrow $10,000 yearly interest-free? This plan really relies on the loans being interest-free during college and paying them off before I have to make interest payments.

A really good question is, do the interest payments just stack up until you graduate? If I took out 4 years of student loans, I wouldn't have to pay interest as a student, but would I be stuck with 4 years worth of interest added to the principal once I got out of college? If I had to pay interest on those 5 or 6 years of grad school, then this whole plan would just lose me money overall.

 

[Tarrant64]

Too much thought put into this.

This is my 4th time through.

 

[sciencewhiz]

I find it hard to believe that you would qualify for subsidized student loans if your fellowships cover everything. Unsubsidized loans do accumulate interest while you are in school, but you wouldn't have to start repaying them until you graduate. Your plan would only work for subsidized loans.

 

[FoBoT]

that is Fraud, you are borrowing the money for school/living expense and then not using it for that

 

[LegendKiller]

1. Only some loans are subsidized and are usually a very small portion.

2. They do look at the amount you are taking out over your fellowship and can audit you for fraud.

3. Just take your money and stop gaming the system, crook.

 

[dullard]

1) In theory you can do that and make money.

2) In practice, you are really stretching the process. There are limits on how much you can borrow. The amount they lend depends on how much you have in the bank (on year 5 with >$40,000 in the bank you aren't going to get a dime in loans). I know this will turn into a flame, but the documents you sign say that the money will go to college expenses, can you honestly sign that if it'll go to a bank account instead? Etc.

3) Can you actually keep your paws off of it? Or will you spend it?

Plus, your whole idea could be flawed from the start. Student loans are some of the best loans you can get. You probably DON'T want to pay them off immediately. Suppose after you graduate you want a nice vehicle or a house. Why pay off a low interest rate loan and then turn around and borrow money for the car/house at a higher rate? Doing so would be a financially stupid move. Plus, you lose the ability to deduct student loan interest if you change it for car loan interest (if your income is too high, this isn't applicable).

Take out the lesser of these two items: (A) How much you ethically can borrow (ie where you aren't blatantly lying that it'll be spent for school.) (B) How much they legally will lend you. Then don't pay it off, use it as a down payment for a house.

 

[BigJ]

Originally posted by: LegendKiller
1. Only some loans are subsidized and are usually a very small portion.

2. They do look at the amount you are taking out over your fellowship and can audit you for fraud.

3. Just take your money and stop gaming the system, crook.

Bingo!

 

[jjdeltor]

Just a heads up, the loans (the govt. loans) are not interest free while you are currently an active student. The interest and principal payments are simply deferred. Along with this, you also have what everyone else has posted concern your scheme.

- J

 

[dullard]

Originally posted by: jjdeltor
Just a heads up, the loans (the govt. loans) are not interest free while you are currently an active student. The interest and principal payments are simply deferred. Along with this, you also have what everyone else has posted concern your scheme.

- J

Some loans (subsidized) are interest free, the rest (unsubsidized) are just deferred interest.

 

[Midlander]

Originally posted by: dullard

Originally posted by: jjdeltor
Just a heads up, the loans (the govt. loans) are not interest free while you are currently an active student. The interest and principal payments are simply deferred. Along with this, you also have what everyone else has posted concern your scheme.

- J

Some loans (subsidized) are interest free, the rest (unsubsidized) are just deferred interest.

 

[homercles337]

Originally posted by: sciencewhiz
I find it hard to believe that you would qualify for subsidized student loans if your fellowships cover everything. Unsubsidized loans do accumulate interest while you are in school, but you wouldn't have to start repaying them until you graduate. Your plan would only work for subsidized loans.

There is a cost analysis for grad school loans. If his stipend covers the "average" rent/goods/etc he wont qualify. I took out a lot of subsidized loans in grad school because my stipend was only $15k / year in berkeley. However, i did have a friend that took some loans and invested in the market and made a bunch of money off it.