So almost everyone knows student loans suck. No one wants to start their career in Debt (capital D). When I first started the college process, debt was probably the most intimidating thing on my mind, and not just because I didn’t have a cosigner. First, college graduates have to deal with the struggle of actually finding their career and starting at the bottom of the totem pole; then, they have to pay off, sometimes, hundreds of thousands of dollars in debt, digging them into an even deeper hole?
Can I just say, “Ew”?
But then I discovered a few ways to profit off your student loans. Let me tell you how.
When it comes to financial aid, there are these things called “subsidized Stafford loans.” These loans, unlike unsubsidized ones, don’t accrue any interest while the student is in college. That means that $3,500 taken out in this loan form will still be $3,500 when students graduate.
Many students are granted these loans. The maximum amount students can take out each year are as follows:
First year: $3,500
Second year: $4,500
Third year: $5,500
Fourth year: $5,500
Continuing through this article, we’re going to assume that you are granted the maximum for each year, just to make things easier.
Now, let’s also say you have a job that pays $8 an hour (around the minimum for some states). If you work 40 hours a week during the summer for, let’s say, 12 weeks, and 15 hours a week during the school year for 24 weeks, that’s:
$8×40 = $320 a week during the summer
$320×12 = $3,840 during the entire summer
$8×15 = $120 a week during the school year
$120×24 = $2,880 during the entire school year
$2,880 + $3,840 = $6,720 total
$6,720 – ($6,720×0.2) = $5,376 total after taxes (assuming 20 percent on taxes, which, given, is high)
After making this much money a year and being granted $3,500 in the subsidized loan for the first year, most students first instinct is to just pay directly rather than take the loan.
Now, allow me to tell you why you shouldn’t do that.
For many banks, there is a thing called a CD, or a “certificate of deposit.” This is very similar to a savings account, except you cannot touch the money in it for a set amount of time or you’re charged a very large amount.
In other words, it makes sure you keep your hands off it.
So, instead of paying directly to the school, an alternative to this is placing a set amount of money into a CD for a 12-month period.
Let’s say the CD has a 2.5 percent APY (annual percentage yield). For the first year, let’s put $4,500 into your CD, even though the loan is only $3,500, leaving you $1,000 in spending money. For this 12-month CD, your ending amount would then be $4,612.50. That means you’ve made $112.50, which, to some, may not be that much, but that’s why we’re continuing this through all four years.
Meanwhile, it’s important to note that you still only owe $3,500.
So, for the second year, let’s assume the same thing, job-wise. Same hours, same wage, same taxes. Again, you make $5,376. This time, you take a subsidized loan out for $4,500, the max for that year. Again, you put away $4,500, along with the $4,612.50 you had from the last year. Thus, you put away $9,112.50.
With the same CD stats, this year you get back $9,341. So, you’ve made $341 in two years. And you still only owe, this time, $8,000.
Okay, so you’re in your third year of college. You’re sick of your same old, poorly paying job. So, you switch and work at a restaurant. Now, I’ve worked in the restaurant industry for a little over a year as a waitress. And, as a waitress, a lot of the time, it’s safe to say I make around $20 an hour with tips. But, just to play it safe, we’ll say you make $15 an hour (still a $7 raise from your old job).
Again, you work 15 hours a week for 24 weeks during the school year and 40 a week for 12 weeks during the summer. Thus, you make:
$15×15 = $225 a week during the school year
$225×24 = $5,400 during the entire school year
$15×40 = $600 a week during the summer
$600×12 = $7,200 during the entire summer
$12,600 – ($12,600x.2) = $10,080 total after taxes
Again, you choose to take out the max this year ($5,500) but since you made so much more, you put away $7,500, along with the $9,341 from the last two years, in the same CD.
After a year, this comes out to be: $17,262.
Over the last three years, you’ve made $762. For doing basically nothing. For taking out loans. And you still only owe $13,500.
Do the same thing for the next year, putting away $7,500 plus what you had left over from before, and you have, as a final amount:
Over time, you’ve made a total of $950 which, okay, you might say is nothing. But, the truth is, you made almost a grand off of taking out a loan and putting money into savings.
So, when you graduate, you pay off that $19,000 loan right away. The first month. No interest has accrued at all — just, straight out of school, all your debt is paid off. And you’re left with $5,950 from the extra you saved and the extra you made from putting all that money in a CD.
Of course, I know this isn’t an option for everyone. Some people have to take out unsubsidized loans that have a higher APY than CDs, and the interest accrues during college. So, for these people, putting away money wouldn’t save anything, let alone make anything, and the first thing they should do is pay for costs directly as long as they can without taking out the unsubsidized loan.
But, for those for whom this works, there’s a cheat for you. Learn the loopholes, make the money. Maybe student loans aren’t always that bad.
Contact Damian Marlow at ddrue ‘at’ stanford.edu.