Turn excess loans into small profit

atie Greenwald

Investing someone else’s money is one way to solve the problem of not having enough money to invest.

Students can do just that by investing loans, and they can earn interest.

The subsidized Federal Stafford Loan is a loan for low-income students.

Borrowers are offered anywhere from $2,625 as freshmen to $8,500 as graduate students, and the loan is interest-free until six months after the student graduates, said Mark Evans, director of student financial aid.

Sometimes students are offered more than they need in loans to pay tuition.

If they receive a refund, they are allowed to spend that money however they choose. Since the loan never runs out of funding, returning extra money will not make more available for other students in need, Evans said.

Some students take only what they need, and give the rest back to the government, Evans said.

“We encourage students to borrow responsibly,” he said.

But the entire loan is interest-deferred, even the amount not used to pay tuition.

Instead of using the loan to buy new clothes or other luxuries, the unneeded portion can be invested into a certificate of deposit, which is a risk-free way to invest, said Ken Hierholzer, investment manager at Charter One Bank. By using CDs, a student will make money in interest.

Interest rates are about 4 percent for five-year investments, and fall to about 3 percent for two-year investments.

But Mike Martin, investment manager at National City Bank, said the idea might not work out as well as it seems.

He said if students were to invest loans, the only safe way would be through CDs, but CD interest rates aren’t high enough to earn students enough money to make it worth their while.

He said it would only be worthwhile to invest loans into a mutual fund, but that’s too risky.

Hierholzer estimates a student could earn a few hundred dollars by graduation.

So whether or not the effort of investing is worthwhile is up to the individual.

David Smith, senior general studies major, said he would make the effort to invest a loan for a few hundred dollars.

“If I knew about it early on, I would have definitely done that,” he said.

But sophomore exploratory major Mike McMahon said he would not.

“I need that money for other things,” he said.

Contact financial reporter Katie Greenwald at [email protected].