Why You Should Max Out Your Student Loans

I’m about to let you in on the secret of how I used my student loans to build wealth. Now, coming from a frugal individual like myself, this secret may shock you.

Are you ready? Do you have your notepad and pen? OK.

I maxed them out.

Yes, that is correct. I completely maxed out every penny that I could in student loan funds. I took advantage of every student loan program that I could find and you should too!

Why You Should Max Out Your Student Loans

No Collateral Needed

The premise behind student loan programs is that the financing institution is banking that your education will allow you to repay the loan at some point in the not too distant future. These programs are put into practice to assist those of us who came from poorer backgrounds as a way to enhance our futures by financing an education. The education is then supposed to lead to a successful career that will allow us to be a contributor to society instead of a drain on society.

This means that your future is all you need for collateral. This is great for students, if it used correctly. When you view student loans in this light, they hold more wealth building power as financial tool of leverage than a mortgage does!

How To Leverage Student Loans To Build Wealth

First off, don’t take my heading the wrong way. I lived rough in college – but I had a purpose!

Most student loan programs, or the ones that you should take advantage of, have deferred payments until after graduation. Essentially, this means that you have access to FREE MONEY for at least 4 years!
*Note: Some programs require minimum – interest only payments.

Student loan money is meant to be used for tuition, books, and living expenses. The first trick to leveraging this student loan money is to ask scholarship or grant money after you receive your loan. I accomplished this by simply approaching the financial aid department at my University for additional funding. I would make an appointment and plead my case days before the semester would begin. It wasn’t often that I received less than an additional $500.00/semester.

So there I was with an extra $500 in free money along with my student loan that would pay for my tuition, books and allow me to live comfortably. This was the beginning of my strategy. Read on to the end of the article to find out how to leverage this money!

Get A Job

Put time and experience on your side.

It is essential that you have a job in college. I know that sounds obvious, but I’m heading in a different direction with it. I don’t suggest working full time or finding the job that pays the most money; I’m suggesting that you get a part-time job in your field of study.

Working at even a menial job within your field of study will at least give you some experience when you head out into the workforce with your hard earned degree. This will often allow you to skip the entry-level positions and actually earn a mid-level salary right after graduation.

The Strategy

Live like a peasant and invest like crazy.

Because repayment of student loans is deferred until after graduation, sometimes up to one year after, it provides the perfect opportunity to leverage free money to your advantage and harvest the growth of investments over a short time period.

As long as you invest the money and don’t use it to live “high on the hog” in your college years, this strategy works. Depending on the investments you choose and their performance, you could graduate with a positive net worth! So, don’t go and blow the money – be smart.

We have all heard the stories of the poor college student living on Ramen noodles and kool-aid. Well, that’s how I did it. Actually, mine was more of a macaroni and cheese and canned tuna – I need my protein!

Anyway, I took all of the money that was left over from my scholarships, student loans and part-time job and rolled it into certificates of deposit that matured in the year I was to graduate. I would have invested in the stock market, had I had the knowledge that I do now.

Hindsight is always 20/20!

This has been the basic strategy of leveraging student loans, if I have skipped over something or if you have any suggestions, please share them in the comments below.

21 comments

  1. Investing some of the money in the stock market, preferably the money from the first year, might be okay, but for money you plan to be using in less than ten years, the market is considered risky. The market generally on average tends to go up over time, but anything can happen in one to four years.

    Love this idea, and wish I had done it instead of rejecting that extra loan I decided I could live without.

  2. Debbie,
    It would have been risky for me to do so because of the short time period – you are right. However, being so early in one’s life the risk might be worth it considering the upside potential if you happen to be at the early stages of a bull market.
    Thanks for stopping by. I appreciate the comment.
    -Tyler

  3. Interesting idea. I knew a couple people who did this in university. The problem being that its a lot of extra paper work and nobody I knew actually got much loan to work with to get a return.

  4. I have been thinking about this myself with around $30k.But what i am wondering is if people invested on there own or should you go through your bank (investment banker)? i know youll have to pay fees but i still believe thats smarter then just taking a shot in the dark and possible losing all your money. What does everyone think?

  5. When you talk about deferred payments, you don’t mention whether the loans are subsidized are not. With unsubsidized loans, interest keeps accruing while you are in school.

    My dilemma is this. I have $6000 extra and I don’t know whether to use it to pay off part of my unsubsidized loans at 6.8% interest. Or I could use that money and buy severely depressed stocks like General Motors.

  6. Pharm Kid,
    My loans were such that interest did not start accruing until the period of study was complete. This is the only case where this model makes complete sense.
    With respect to depressed stocks, there are great companies that offer incredible dividend yields right now. It would be risky to invest in stocks with student loan money, but the rewards could be large when purchasing at these prices.
    Please do your own due diligence before investing any money in the stock market.

  7. I must say this article is poorly written and makes no real sense.

    You are basically saying 101 statements like of course you will have to make efforts to repay or defer loans upon graduating.

    If you want to offer some real advice (I maxed out)…I’ll say DONT EVER MAX OUT unless you’re a grad student. IT’s the worse thing you can do unless you go to an ivy school or have a major that PAYS extremely well to repay this back – lawyer from a highly ranked school, medical doctor, engineer or some hard science major.

    Otherwise, you are screwed unless you have someone to turn to.

    Only take what you need, apply for other fundings besides loans. These lenders who call you after college are entry level call centers and mostly calling from overseas with thick accents and often are rude – b/c it’s a pissy job that they arent built for usually, no one likes a crappy, insulting job dealing with the stupid public. These folks call you and harass the ish outta you until you start paying, one day deferment is over, they r callin you up everyday until they receive some money. Like debtors…

    College students – dont heed this article’s advice…its very shoddy and thoughtless and not too realistic.

    If you get in your field and find out you dont like it…if you maxed out on loans, you can forget going back to school… kiss of death.

    Scholarships are 98% of time for military beneficiaries and honor students.

    Talking from the horses mouth…

  8. Business grad,
    I’m almost certain that you did not read the entire article.
    The majority of the student loan money is invest in CD’s that mature the year of graduation – thus giving you the funds to apy back the loan money that you borrowed.
    I encourage you to go back and read the entire article(I will approve your retractment statement in the comments).
    Take it from this horse’s mouth…the strategy works and can work for anyone who takes on student loans where paymetns and interest are deferred.

  9. Not to mention this is illegal. It’s considered fraud. A man was arrested and forced to pay back all plus some for taking out private student loans and using them for other purposes. Please do your research before listening to such dumb advice.

  10. that is exactly my husband’s situation. he has ONE class + dissertation stuff left for a PhD in Ed. I just graduated w/my only BA degree and no job yet. We have 3 kids, one has 1 more yr of undergrad, one is just starting college in fall.

    My husband teaches fulltime and I am substitute teaching every chance I get + petsitting – but we can’t even make it pay-to-pay! Our credit is shot (from life-threatening medical events).

    Now what?!

  11. This is an interesting article, but there are a few things to consider. First, you would not want to invest in stocks. It is very risky for a short-term investment. Now, the CDs would probably be fine, if the student had the self-control to actually not touch that money.

    Second, if someone is planning to go to grad. school, the lifetime max can be reached very quickly, especially if pursuing a Ph.D. This means you would have to be dipping back into this early student loan money anyway. Also remember that it will accrue interest on the loan starting six months after graduation, even if it is subsidized. At 6.8% interest, it will be very hard to recoup that unless you plan on taking all you invested and paying it right back into the loan system.

    So, if you’re a first-year dependent student, the maximum you can borrow in subsidized Stafford is $3500 (if you qualify!). The next year it is $4500. The next two years it is $5500 each year. A CD might average 2% a year, and (remember) you don’t want to go for five-year CDs, because you want to pay these off before you interest starts accruing 6 months after graduation.

    This gives you an interest income of around $70 the first year, $160 the second year, $272 the third year, and $380 the last year. This is a whopping total (in very rough numbers, I admit) of $882 for four years. Is this really worth all the headache of maxing out these loans, and the risk of being “tempted” to dip into them when trouble strikes during those four years?

    No, I’d say not.

    However, maxing out student loans might be very wise if you used them for your own living expenses (hence did not break the law) but used the money that they freed up (from your job, since that isn’t going to living expenses any more) to pay off loans with high interest rates and get you on a more secure financial footing for gradation. For example, coming out of your degree with no credit card debt and no vehicle loan might be well worth taking the extra student loans, whether they’re subsidized or unsubsidized.

    Just my two cents, having spent a god-awful long time dealing with student loans.

    Take care!

  12. Dumbest Plan I’ve ever heard of…

    This plan sounds great but what if some readers don’t have the investment acumen that you possess and lose their student loan money, or just spend their money on the stuff they want to live well while going to school? Did you know that student loans are the most collectible type of debt? Also deferred payment doesn’t equal free money at all, it means you have capitalized interest building every day. I’m completely in favor of investing, but no investor doesn’t lose money at some point, and you shouldn’t be investing money that you can’t afford to lose at least in the short term. This plan involves huge risk, and could wreck a student’s financial situation for many years following graduation not to mention that using student loan funds for investment is illegal, it is loan fraud because student loans may only be used for qualified educational expenses.

  13. This is extremely poor advice. Please, readers, if you’re thinking of following Tyler’s advice, DON’T!

    He brags about “climbing out of” >$40,000 in student loan debt in 3 years. Good for him. Probably won’t happen for you.

    Yes, if you follow all of his advice to the letter, and have the exact same life experience, talents, skills, credentials, professional network, and luck that he has, and you happen to take the wisest interpretation of everything he sometimes inartfully suggests, then you’ll do fine.

    But it probably won’t happen. Here’s some real good advice: Take the least amount of student loans you can get by with. Period. All reputable financial advisors say so. Judging from his earlier comments (e.g., “I’ll be happy to approve your retraction later”), I kind of doubt Tyler will “approve” this comment, but there ya go.

  14. Jack,
    I’m sorry to hear that you don’t believe in this philosophy.
    I’m not sure which part you disagree with though?
    Investing in CDs is zero risk. Living below your means is definitely advised by all of your “reputable” financial advisors. Getting a job surely isn’t a bad thing… is it? I know it takes discipline, which is something that many college students don’t have, but the formula is solid.
    Again, I’m sorry that you don’t like the article.
    Perhaps you can clarify why you wouldn’t take out student loans to leverage the interest free and payment free period, while investing the money in an essentially risk free asset? (Granted CDs are not paying much these days)

  15. I know some shady stuff but can’t give away trade secrets. Lets just say school pays off my classes, books and still pays me over 10 grand a year (summer, spring, fall). No lie but be dumb to admit what it is for multiple reasons. My advice, look into EVERY crack in the wall for education assistance and find a way to get those funds

  16. Love the article, but I also agree with kidslibrarian – it’s too much headache for today’s rates.

    Tyler, did you earn 2%? I remember not too long ago you could get a student loan at 4 or 6%, deferred & subsidized, and CD rates were 5% or higher.

    That would multiply kidslibrarian example from about $900 to 2.5 times that, or $2250, which is starting to look better.

    But let’s take it a step higher.

    I had a friend tell me he was going to get a student loan, then use it to buy a house (while in school this is a necessary expense, no rule or law breaking here). He was a grad student.

    I don’t know if he did it, but if he did, and had some equity appreciation, his investment could have grown to double.

    If you have the means and the understanding, this system can work.

  17. My 2 cents:

    There is a lots of money out there for students (not loans), currently making all of my tuition payments on scholarships, and an additional $15K in other forms of assistance. That pays for everything I need to stay alive during school.

    You really don’t need the student loans, you can find money in other places. I’m an Econ Major and actually, I could probably make a strong case for not going to college all together and just working.

    The academic literature that I’ve read says the returns to a college degree is only about 7%. (Don’t believe everything about the returns to a college education that you read, find reputable sources on google scholar)If you can beat a 7% return, then you should take the money and invest it rather than go to college. And if you can’t beat a 7% return go to college, simple. Furthermore, if your interest on student loans is more than 7%, then you should probably skip college as well.

    And that is probably a more blunt rule that most high school students should be told than that they need to go to college.

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