Author: Brennan E. Wells
As old as the institutions themselves, the advice is passed from generation to generation without question, that students should take out loans, needs not wants. Coupled with this advice, is that loans should be a last resort. And scholarships and grants should be sought after first since you do not have to pay those funds back. Despite these and other supposed sage words, if you find yourself following in the footsteps of others you will always be fighting for second place. If you ever dared to be more and do more than what is expected of you then max out your student loans.
The Dow Jones industrial on average returns anywhere between 4.6% to 9% annually. There are outliers such as in 2014 when the Dow Jones returned to investors 10% and in 2013 the Dow return 26%. Depending on your source, the percentages will be slightly skewed.
The stock market at the moment and foreseeable future is making good returns on money placed there by investors.
Hence, why you the undergraduate student, graduate student or professional student should take advantage of a once in a lifetime opportunity in your life to receive large sums of money at discounted interest rates that will not reappear later in life.
Taken into consideration that the subsidized loans, loans that do not incur interest while you are in school, cost in interest 3.76% after you graduate. Therefore one could in practice take out the maximum allowable in subsidized student loans, which is $3,500 for your first year (increasing by $1,000 every year until your junior year) and continue to take out the max in subsidized loans and place any excess funds you are not using for school into the stock market. As the stock market goes up ( occasionally going down ) you make a profit on the excess and by the time you graduate, sell the stock, pay off the loan, and pocket the profit.
For students who are able, must or dare to do so, this method can be used in tandem with unsubsidized loans. Unsubsidized loans do incur interest over time while you are in school, but according to the Department of Education, the interest to be paid out on this loan is only 3.76%. Remember the lowest average the Dow pays out is 4% on what you place into the stock market. So when considering unsubsidized loans, if the market does not perform well above 4%, one would not be able to pay back the interest obtained on this loan. This is a small risk but offers big rewards considering current market trends.
For example, for fiscal years 2012 through 2016 the Dow Jones increased in worth over 38%. These are abnormal good economic times as the United States rebounds from the Great Recession, but sometimes, timing is everything. If this advice had been taken by a freshman in 2012 in an ideal situation where all loans were unneeded and in excess, with a 38% return from the market, a student would net $6,973 (Remember, the unsubsidized loans took on interest while you were in school and counted against your profit).
Note, that the profit is the money a student is left with four years later(Fall 2012- Fall 2016) after paying off the principal ( the original loan amount ). Additionally, the Dow Jones is not the only aspect of the stock market you can invest in, in the situation provided above, it was merely for example. I recommend exchange-traded funds (ETF), where, you the owner, are able to hedge against potential losses by heavily diversifying your investments and ensure the money you make in the stock market will beat the rate of interest. Moreover, ETFs require a low amount of money to initiate, which is affordable for most college students.
Simply, by taking out the maximum allowable from the federal government you are able to take the extra money and place that into the stock market. By placing that money into the stock market, barring any catastrophic events, the profit you make in the stock market will enable you to not only pay back the loan you placed into the market but also take home a profit. The best case scenario; you are able to place extra money into the market, garner a return high enough to net a profit and pay down on the principal loan that was used for school expenses.
These words are seldom and few in the African-American community, but I am here to tell you, that by thinking strategically and long term you can leave college wealthier than the way you entered.