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22.7.14 2011
The W - Random - Savings and loans advice sought
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TheBucsFan
TheChiefsFan








Since: 2.1.02

Since last post: 8 days
Last activity: 8 days
#1 Posted on | Instant Rating: 2.34
Hi. I’m financially illiterate, and I need some advice on loans and savings. Before I describe the situation, I’d like to stress that I am not going to take what anyone says here as gospel, so you needn’t worry about steering me wrong. I just could really use some advice to get me looking in the right direction.

So here’s the deal. I have been awarded a (relatively?) low-interest student loan for the 2010-2011 school term. The loan is for $22,000 and has a 2 percent interest rate, but I don’t really know what that means. Also, I am not responsible for paying the interest while I am a student.

For the past year, since I returned to school, I have been supporting myself via federal aid and a private loan. The money I’ve borrowed so far is accumulating approximately $170 per month in interest. If I were to renew this aid in the amount I was planning for next year, this number would increase to about $250 per month.

So now, starting in August, I have two options: I can elect not to borrow anymore in federal aid and my previous private loan and use only the new loan, or I can accept both. The only reason I would accept both is if I could invest the $22,000 I will receive in such a way that I make more in return than I have to pay in interest. So basically, I think I’m looking for a situation in which the following is true:

[Amount of interest returned on investment per month] > $250 + [Amount of interest owed per month on $22,000 at 2 percent]

Of course, even if I don’t take out any additional loans, I’m still responsible for the $170 a month I’m already accumulating. So I think even this would be in my benefit:

[Amount of interest returned on investment per month] > $170 + [Amount of interest owed per month on $22,000 at 2 percent]

If I can find this, then I could hopefully pay off all my interest between now and when I finish grad school this way, pay off the $22,000 as soon as I graduate and finish school with only the principle from my other loans to pay.

Is this a laughable suggestion? It might be, I have no idea. If I can’t find a situation that satisfies this requirement, then I just forget the federal aid and stick to the new loan.

I spoke to my bank, and the best they could offer was a Certificate of Deposit that didn’t earn enough interest to make it worthwhile. I’ll consider anything, but I’m not likely to buy into anything I think is risky. I plan on being a student for at least three more years, so I can leave the money untouched for at most that amount of time if it gets me a significantly higher interest rate.

I want to stress again that I am financially illiterate. I don’t know exactly what I should be looking for if I’m going to find the kind of interest rate I’m desiring, or if such an interest rate is even possible. I’ll consider stocks or similar investments, but I’d have to get some professional advice before I would be willing to do that.

One more thing: This isn’t illegal. I have confirmed that the $22,000 loan is to be spent in any way I desire, which is another thing that distinguishes it from standard student loans. Most student loans go through the university and can only be applied directly to school-related costs.




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Lise
Mrs. Guru








Since: 11.12.01

Since last post: 327 days
Last activity: 217 days
#2 Posted on | Instant Rating: 8.90
So, you don't actually need the 22,000 loan for school or expenses?

Does it stay at 2% interest just for the 2010-2011 term?

Will this loan affect your ability to get federal aid-- which I assume you don't have to pay back?

What is your intended degree/what are you planning to do and how much money can you expect to make in your first year of work?

If you couldn't get an investment that fits these requirements, why wouldn't you decline THIS loan and stick with the traditional student loan and federal aid?
redsoxnation
Scrapple








Since: 24.7.02

Since last post: 386 days
Last activity: 386 days
#3 Posted on | Instant Rating: 4.87
Is the 2% a fixed or variable rate loan? If it is fixed, the juice on it isn't bad. Doubt you'll get anything better than that in the future, especially if inflation finally kicks in. If it is variable, run away from it as quickly as possible, as 2% could be 22% should inflation hit.
TheBucsFan
TheChiefsFan








Since: 2.1.02

Since last post: 8 days
Last activity: 8 days
#4 Posted on | Instant Rating: 2.34
    Originally posted by Lise
    So, you don't actually need the 22,000 loan for school or expenses?


I do. The issue is, I could take much more than that with what I think is an unusually low interest rate, turn it into a profit, and use that to pay off the interest I accumulate.


    Does it stay at 2% interest just for the 2010-2011 term?


It stays at 2 percent until I pay it off. This is a special loan awarded by a private institution in much the same way a scholarship is, with students being considered based on financial need as well as academic achievement.


    Will this loan affect your ability to get federal aid-- which I assume you don't have to pay back?


There are two kinds of federal aid: Pell grants, of which I've been awarded the maximum of $5600 because of my very, very low income while I lived in Asia in the past two years, as well as Stafford loans. Obviously I pay back the loans, not the grants. But because I was gone from Florida, I am paying out-of-state tuition rates, and they are obscenely expensive.


    What is your intended degree/what are you planning to do and how much money can you expect to make in your first year of work?


How much money I'll make in the future doesn't really matter, because under what I'm looking to do, I won't be costing myself any extra money. If I can do what I want, I will pay back the $22,000 as soon as I graduate, because it will be sitting idly collecting interest between now and then. And that interest will hopefully be enough to pay off my interest on my OTHER loans, which is where it will save me money. I'm going to have to take out a sizable loan regardless.


    If you couldn't get an investment that fits these requirements, why wouldn't you decline THIS loan and stick with the traditional student loan and federal aid?


This loan has a slightly lower interest rate than the federal loans and a MUCH MUCH MUCH lower interest rate than the private loan I already have.

I guess I didn't need all the backstory, because I can sum up my question as thus: What are some ways I can maximize my gain on a three-year, $22,000 investment?

The only reason the story is explanation is needed, I suppose, is in saying that the hypothetical investment is only worth my time if it allows to do what I describe.



Lise
Mrs. Guru








Since: 11.12.01

Since last post: 327 days
Last activity: 217 days
#5 Posted on | Instant Rating: 8.90
Ugh. Out of state tuition.

Mind you I'm not a financial wizard and I routinely misplace decimals and remainders... but I don't think there's anything without risk you can invest in with a high enough interest rate. Interest rates are really low right now, and it looks like you'd be hard pressed to invest in something that would even make you the interest on the loan.

Personally, I'm not willing to risk my future on any sort of investment that has a chance of failure, especially if the loan I am using to do so is NOT something I could declare bankruptcy on. If things went horribly south on you (say you got hit by a bus and had to drop out of school and were unable to work) you'd be in real trouble.

However, can you use this 2% loan to pay off your other commercial loan? THAT might be much more useful.
RYDER FAKIN
Six Degrees of Me








Since: 21.2.02
From: ORLANDO

Since last post: 584 days
Last activity: 22 days
AIM:  
#6 Posted on | Instant Rating: 9.17
Flea advice would be to take that money and look around for either a cheap condo, apartment or maybe a house to buy

Apartment or Condo – you could probably purchase and renovate a foreclousre outright for about 2/3rds of your money. From there, find a local property management company to facilitate renting the property / approving the renters. They will handle all the headaches and allow you to collect whatever the set rent amount is, less their fee for processing

House – dirt cheap these days. You can pick up a foreclosure for 40 or 50k, maybe less. Provide the proper down payment (usually 10%), let the bank finance the rest, and again, hire a property management group to handle dealing with the renters

Rent charged for a house would be about the same as the apartment / condo, with the difference being you would “own” the home and if the market turns around in the next few years (it will), you can sell it for a decent profit*

* Read the fine print from the bank to make sure there are no heavy pre-payment penalties for early sale. Or if there are, and you sell, make sure the buyer gets stuck with that bill

Basically, an investment of 10-15k would yield whatever the net rent is. Then take what you are paid in rent and and place it in a separate interest bearing account. At tax time, you have to claim the income, but the write-offs available for renovation, taxes, etc normally put you ahead, or at least break even

FLEA

(edited by RYDER FAKIN on 16.4.10 1403)


Demonstrations are a drag. Besides, we're much too high

"Learn to love yourself... for it is the greatest love of all" - Jeremy Borash 11:24 AM May 13th,2009
emma
Cherries > Peaches








Since: 1.8.02
From: Phoenix-ish

Since last post: 118 days
Last activity: 1 day
#7 Posted on | Instant Rating: 8.43
    Originally posted by TheBucsFan
    Hi. I’m financially illiterate, [[...]]

    So here’s the deal. I have been awarded a (relatively?) low-interest student loan for the 2010-2011 school term. The loan is for $22,000 and has a 2 percent interest rate, but I don’t really know what that means. [[...]]
OK, having established that you're neither a math/science, engineering or business major ... :-) The bottom line answer for what you describe is "no".

Look at it this way: If this were a do-able proposition, people much more savvy & knowledgeable than you (in this arena -- no offence) would be all over it. That would drive the numbers in such a way that it still wouldn't be viable for you. Anybody offering a loan always wants to make a profit (or at least break even, if they're some sort of benevolent entity). Why would they offer a loan if they could put that same money in a "safe" investment & make more that way? And if they can't do it, neither are you likely to be able to do so.

Use that as your "background sanity check" throughout.

To really do the math, you need to fully qualify the numbers to be sure you're not comparing apples to oranges.

Pretty much, right now, at that level of $$$, a "safe" investment opportunity might get you 1.0 -1.7% APY. So, no, you're not even in the ballpark of what you're thinking about

<< Oops, gotta go deal with a crisis -- I'll try to get back to more of the math later, if'n you want ... >>
TheBucsFan
TheChiefsFan








Since: 2.1.02

Since last post: 8 days
Last activity: 8 days
#8 Posted on | Instant Rating: 2.34
    Originally posted by emma
      Originally posted by TheBucsFan
      Hi. I’m financially illiterate, [[...]]

      So here’s the deal. I have been awarded a (relatively?) low-interest student loan for the 2010-2011 school term. The loan is for $22,000 and has a 2 percent interest rate, but I don’t really know what that means. [[...]]
    OK, having established that you're neither a math/science, engineering or business major ... :-) The bottom line answer for what you describe is "no".

    Look at it this way: If this were a do-able proposition, people much more savvy & knowledgeable than you (in this arena -- no offence) would be all over it. That would drive the numbers in such a way that it still wouldn't be viable for you. Anybody offering a loan always wants to make a profit (or at least break even, if they're some sort of benevolent entity). Why would they offer a loan if they could put that same money in a "safe" investment & make more that way? And if they can't do it, neither are you likely to be able to do so.


    Originally posted by Me
    This is a special loan awarded by a private institution in much the same way a scholarship is, with students being considered based on financial need as well as academic achievement.


I don't pretend to know what motivates every person or agency that awards money to college students to do so, but I do know that it happens. Why do people who give away grants and scholarships do so, as those are even less likely to return a profit than a loan is?

Which isn't to say that the rest of your message is incorrect. I think I'm going to explore Flea's suggestion, but the most likely scenario seems to me like I'll just do nothing. I actually went to a realty office today to discuss my options with them. I basically need to find something that I can buy, rent out relatively soon for more than $500 a month or so, and then, if I so choose, hopefully sell it when I graduate for either my money back or a profit. It never occurred to me to look into buying property before because I've never had the resources (and that's precisely why I asked for advice here), but I think $22,000 plus a little extra I could spare would make a nice down payment if I can get financed for something nicer. The guy I spoke with today said banks aren't really willing to finance homes of less than $75,000 or so right now. Condos seem to my uneducated eye to be a bit riskier because of monthly fees to condo associations if I don't find a renter right away.

If all I had to worry about was the 2 percent interest I have to pay on that loan, I think I could easily find something to make this work. My bank has Certificates of Deposit that pay out 3 percent interest over three years. The problem is the much higher interest on the other loans.

(edited by TheBucsFan on 16.4.10 1623)

Leroy
Andouille








Since: 7.2.02
From: Huntington, NY

Since last post: 21 hours
Last activity: 10 min.
#9 Posted on | Instant Rating: 6.09
    Originally posted by TheBucsFan

    I don't pretend to know what motivates every person or agency that awards money to college students to do so, but I do know that it happens. Why do people who give away grants and scholarships do so, as those are even less likely to return a profit than a loan is?


They don't do it for the profit. They do it to help people get an education who, otherwise, wouldn' have access.

My advice - take out as little debt as possible, apply only as much as you need to your education, and bank the rest to use "in case of emergency". I don't know of a single investment that isn't without some kind of risk, and, in this case, any investment loss is exacerbated by the fact that you're using debt to invest (a big no-no, especially if you don't know what you are doing).

If you're earning a Masters, you basically have two or three years to make some return on your investment (while, mind you, you're in school and really should be focused on other things). Although I like the idea of throwing the balance in some kind of short term CD to offset some of the accruing interest. My credit union usually has short term CDs at decent interest rates.



Who likes the little little duckies in the pond? I do, I do, I do, a chicka-quack quack.
lotjx
Scrapple








Since: 5.9.08

Since last post: 12 hours
Last activity: 4 min.
#10 Posted on | Instant Rating: 1.44
As someone who has a 2% fixed loan interest with $28,000 for 20 years, I pay $180 a month. If you think you can afford that for that period of time or $300 a month for 10 years then do it. Also, if this is the only way you can get a degree for what you want to do then do it. If you can afford the monthly payments, I would buy the house since you are getting $8,000 tax break as a first time homeowner which will wipe out most fees and be a small down payment. If the market turns around you can make a small profit on the house to help pay off the loan or buy a better house. Don't worry about motivations for people giving you money, its a tax write off for them.
ScreamingHeadGuy
Frankfurter








Since: 1.2.02
From: Appleton, WI

Since last post: 656 days
Last activity: 656 days
#11 Posted on
As other posters have said, it's almost impossible to find a "safe"/FDIC insured instrument to invest in that would beat the 2% interest rate.

All that being said, 2% is a rock-bottom interest rate. If you think that you'll need that money in the near future for whatever reason (a car, property, etc.), I don't believe you could get such a good rate at any commercial institution. (Is this interest tax deductible? That may be another advantage to look at.)




We must not, in trying to think about how we can make a big difference,
ignore the small daily differences we can make which, over time,
add up to big differences that we often cannot foresee
-- Marian Wright Edelman

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