hello!
i am 20 years old and just about starting to study. in my country i get money from the government that i do not need to ever pay back! this is more than enough for me to live from. there is the option to take on a studentloan in addition to the support you already get. it has only 4% interestrate and can be payed back over 25 years after the last payment.

i thought about getting my investmentshoes wet... if i put that money into a indexfund that gives me 10% return/year im getting some free money here.

i wanted to hear what you think about this idea and if you got any recommedations.

thanks very much!

Vuxeni,

This sounds like an interesting option. In theory, you should be okay doing this, but there's always a risk when you borrow money to invest. Though an index fund (in the U.S. anyhow) will generally return an average of about 10%, there's no guarantee that tomorrow the stock market won't head south for a couple decades.

Still, if I were in your position, and I didn't have any other debt, I'd seriously consider this. It's an intriguing option. Mostly, I think, it depends on your risk tolerance. How worried are you about the future? How scared are you that things might go sour? If you're responsible with your money, and a little risk doesn't bother you, this may be a great option for you...

thank you for the reply!

The risk and that I could end up with some debt does not worrie me. Since I would be investing over 5 year period of time the market ups/downs would have lesser impact. I am more concerned about letting an opportunity pass by on me. I have recently read various books about finances/investments and just beginnig to learn about it. In the books they often talk about the importance to build your passive cashflow through assets. Would there maybe be smarter things to do with that student loan than index funds?

I waffled on this subject quite a bit, as there are pros & cons. Ultimately, I think, being 20 years old is your greatest asset: You still have LOTS of time to recover from any mistakes, assuming you don't get in too deep.

One way to look at it is to ask yourself how much you can afford to pay back, in the worst case scenario that you lose it all. For example, if you can afford to pay $25 per month to pay off that debt, you shouldn't borrow more than $4750. (This is because he monthly payment on a 25 year loan @ 4% is $25)

On the other hand, it's easy to make an argument that if you have $25/month in the first place, why not just put that into your investment fund? You can see why I waffled.

If I was planning on paying it back at the end of my degree (ie within a few years) I would probably put it in a high interest savings account, if one is available. I did this with my interest free overdraft.

If I was planning on just paying it back as slowly as they'll let me, and keeping the money locked away for 10 years, I'd invest it in an index fund. This would just be part of my eventual portfolio of investments (in index funds probably).

A lot of this depends on how it has to be paid back. In the UK, student loans taken out now have income contingent repayment so if I'm not earning enough I don't have to make repayments, also they are wiped out if I die. If I had to make repayments within a few years regardless of my financial position then I would be loathe to risk losing the money completely (even if I know that is unlikely).

I am in a bit of a dilemma. Firstly because I really dont want to miss out on free cash. Secondly Im talking about 430$/month in Investment over 4-5 years. So if I really loose everything in a marketcrash, say because the babyboomer generation will retire and the government cannot pay them all, I got some serious debt...
I would love to invest in some other kind of market, fx real-estate or my own bussines. But I neither feel ready to buy real-estate nor do I have a business.
Any recommended reading about real-estate or some kind of solution would be super?

thanks for the replies![/url]

If you believe real estate is a good investment but aren't ready to purchase any on your own, you might consider a real estate investment trust, which is like a mutual fund for real estate. I don't know much about them, but they may be of use to you.

I would caution against any real estate investment given the current market and its outlook

I however, if I were in your shoes, would invest that student loan into a ROTH IRA, and point to 3 funds (US TOTAL MARKET INDEX, EURO MARKET INDEX, CONTRARIAN INDEX). I'd go with Vanguard on 2(one of the markets and contrarian) and with another firm on the other, but all index funds.

Then forget about it. Treat it like student loan debt after you graduate, and pay it off with your income. The head start of several years of compounding interests and investments will be huge.

When I was in college and leveraged the almighty signature to pay for my education there was a huge "hole". The money i asked for HAD to be used for College Expenses, getting things like books, tuition, room and board were covered. Things like paying off credit card debt or investing where not part of the money piece.

chris

I wish I would have done this when I was in school.

One thing to consider.. In the US banks are allowed to charge you up to 3% origination points on your student loans (at least they did a coupe of years ago). This could make the calculation a little more complex.

I did this earlier this year in order to max out my Roth IRA for 2006. I knew I wouldn't have enough money to contribute the maximum before the deadline for 2006. I realized this just as I was taking out a private loan for school. The interest rate of the loan is 8.25% which I have since paid most back. I pretty much broke even between the interest earned on the money in the IRA and the interest paid on the loan. The benefit here was not that I was going to make a ton of money between cost of the loan and the potential interest earnings but for the ability to contribute to an IRA that I otherwise would not have been able to.

One thing to watch out for is the length of time it will take to get the money from the school. I ran into some issues and it ended up costing me about 2 months of interest.