Are you currently in college and receiving student loan money? Have you ever thought about using some of that money in another way? Did you even know this was an option?
To be frank, since the government cannot possibly track what exactly you are doing with the student loan money, you could (in theory) spend that borrowed money on anything you want (even though you did technically sign a promissory note to say that you would spend the money on college-related expenses only).
The Absolute Wrong Way to Spend It
I have known some students that spend their student loan money on crazy spring break trips and brand new cars. Long story short, they did not last too long in this game we call life.
They quickly discovered that there was no money left over for their classes, had to drop out of school, and had a difficult time paying back their loans because the items they purchased were now worth far less than when they bought them.
So, even if they sold everything they bought with the government’s money, they would still come up $10,000 to $20,000 short because of their quickly depreciating assets. That’s why you don’t blow your student loans on silly things like trips.
Potentially Wise Ways to Spend the Student Loan Money
What if, instead of buying stuff with your loan money, you could find appreciating assets that would have more value at the time your loan money was due? This way you could pay back the loans, but you would still have quite a hefty sum left over in the end.
So what could you possibly do with these student loan dollars to increase your wealth? While I would be very cautious in attempting any one of these ideas (each one of them does come with its own potential risks), here are a few ways that you could actually improve your financial status by using the money for something other than your college expenses.
At this current moment, student loan interest rates are 3.86%, which is quite low compared to historical rates. In order to improve the overall economy, the government believes that these lower interest rates will result in a larger number of young college grads, which will then lead to more jobs and an improved economy.
Whether this tactic will work or not is irrelevant, because you can still capitalize on these low interest rates today by investing a portion of your student loan money into the stock market.
Within the past few decades, the stock market has an average rate of return that’s over 7% (some even claim that the market has produced earnings of nearly 12%, but we’ll stay conservative here). It is quite obvious that if the market continues to increase in value by over 7%, we can earn approximately 3% on money that we did absolutely nothing to earn (other than get accepted into a college institution)! Find a way to invest $20,000 of the government’s money into the market and earn 7% per year, and you will have an extra $2,500 at the end of your college stint. Not too shabby!
To be safe (although there is still risk here – there is always risk in the market), I would invest the money into mutual funds and index funds. Steer clear of individual stocks, because they can quickly go south and leave you broke, unable to repay those student loans.
Check out our article on investing your student loan money if you want to learn more about this.
2) Begin a Business
If you go to the bank for a business loan, you will almost certainly be paying more than 3.86% to borrow that money, so why not just use a portion of your student loan money to fund your business idea?
A new business venture does not have to be expensive. One could set up a website and buy some inventory for less than $5,000 and officially be open for business. Heck, you could even start a business for much less than that. My friend recently started a lawn care business for about $100. If you are confident in your idea and could earn back many times the amount that you borrow from your student loan money (at a reasonable amount of risk anyway), then why not give it a shot?
3) Loan Money to Other College Students
Do you realize how much those fast-cash places earn on the money they lend out to your friends and family? Typically, they earn over 200% interest! If you know that your friends are repeatedly going to quick cash places like this (and are good at paying back the money), then perhaps it is time for you to start loaning them money yourself.
Think about it. If you were able to give one friend $20 (who then promises to pay you back $25 in a couple days) and another friend $40 (who promises to pay you $50 by next week), you could quickly earn double your money back in a matter of just a few weeks. This is exactly how those fast cash businesses work, but you are lending out smaller amounts of cash for a slightly better rate (because after all, these are your friends right? You’re giving them a deal).
Use your discretion when loaning out cash though. A formal contract and a judge of character are the preferred methods of business these days. Just because a guy might be “cool” doesn’t mean that you’ll ever see your money again.
Do you think you will use your student loans for anything other than college?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.