Updated: May 9, 2022
Originally published, 10/25/20
In the 1990s, when I was in grad school, I devised a plan to make money on student lending. To be fair, I didn’t make “life-changing” money. I did make enough money to be meaningful to me at the time. The experience gave me a very real sense of what it means to have skin in the game. Also, this provided the thrill of accomplishment and risk-taking. Ultimately, this experience provided risk-taking confidence that has since been very useful.
Here is my story. I decided to go to grad school for Economics. I had (and still do have) a passion for business and mathematics. Economics seemed like a good focus to combine my interests. The first part of my story has to do with my choice of grad school. This is important - because keeping costs of grad school down is a critical aspect of achieving a student lending-based profit. I applied to many schools, was accepted at some, and finally narrowed down the decision to Virginia Commonwealth University (Rams) and University of Oregon (Ducks). Ultimately, the Rams offered a better financial package than the Ducks, so I chose the Rams. For my grad school, I received a full-tuition scholarship + an hourly stipend to work part-time in their student aid department.
My goal, besides getting a great economics education, was to spend as little money as possible to acquire the education. So I was already on my way.
As an employee in the Financial Aid department, I learned much about student aid, especially student loans. I learned two very helpful rules about student loans:
A non-dependent grad student, because they have little Expected Family Contribution (or "EFC") will qualify for a bunch of student loan money, even if they have a full ride.
The Stafford loan program does not go into repayment until 6 months after graduation.
Also, I had just married and my new wife and I lived together in Richmond, Va. She had a first-year teacher’s salary and I had my student aid department stipend. We were fortunate we had no debt, but we also had no savings. We were financially starting at zero and we were living VERY frugally. Our time together in Richmond was like living in a Zac Brown song! 🎶 “No we don't have a lot of money... All we need is love!”
So, I had a 2.5-year time horizon of “free money.” So what did I do? I maximized my loan eligibility and took out the max Stafford loan. Owing to our low expense lifestyle, I invested this money in a number of different stocks and bonds. I was careful to invest the majority in stable companies with a few investment “flyers” for less mature but very interesting companies (like Microsoft and Apple). As planned, in 2 years I graduated and 6 months later I had liquidated the investment portfolios and paid off the student loan debt. I made about 30% on the investment. This money helped as a down payment on our first house, as my wife was then pregnant with our first child. In case you are curious - my wife and I consider this time as one of the many high points of our marriage.
So, you may be wondering:
Is this allowed? I did not think investing is the intent of the federal student loan system. Think of my usage of student lending funds as non-traditional but otherwise permissible under Federal Student Aid rules. I easily justify it because:
I received the education as intended. I would argue I received an even better “practical” economics education by managing an at-risk investment portfolio;
The federal government is notoriously inefficient at allocating capital (think of the $1000 hammer or other chronic government waste examples), so I thought of my approach as “capital liberation;”
I allocated resources to companies that could efficiently use them;
My time and effort was rewarded as is appropriate for efficient and at-risk capital allocation, and;
the money was paid back in full.
Why didn’t you keep the investments and pay off the Stafford loan over time?
Good question, I absolutely could have. Knowing what I know today, I should have. We would probably be rich on Microsoft and Apple stock gains by now. But hindsight is 20/20 and decisions may only be understood through the lens of that moment in time. At the time, we had little in savings, I had just started a new job, and we had a new and growing family. I was so risk-averse.
I didn't know what I didn't know ..... and I knew I didn't know a lot!
I was very concerned about holding debt. Also, I had this nagging feeling that I should just pay back all the student loan money to be fully reconciled.
What is the moral of the story?
To some degree, I did get lucky. But, per Seneca's wise quote: “Luck is where preparation and opportunity meet.” Success comes to those prepared for an opportunity and then energetically pursuing that opportunity. With that said, even though I made well-reasoned investment choices, if the market moved against me, I could have had a less favorable outcome. Also, one could argue that holding the investments longer could have turned into significant wealth. Thus, opportunity costs may have fallen either way, positive or negative.
However, this experience gave me a sense of confidence about risk-taking. I learned a willingness to take risks and to be smart about risk-taking. This led me to think in terms of a barbell approach to investment risk management, where the majority of the risk is well managed and well known. That way, if the flyers don’t fly, this doesn’t lead to ruin. This reminds me of Warren Buffett’s saying: “Don't test the depth of the river with both your feet...”
Thanks to Virginia Commonwealth University for a great academic and practical Economics education.
For more information on my investing philosophy, please see the Stoic's Arbitrage Personal FInance Journey series listed below.
High School Students
10. College Success!
Career and Beyond
The Stoic's Arbitrage: Your Personal Finance Journey Guide
Making the money!
7. Career success - Success Pillars - A Life Journey Foundation
8. Career choices - Do I need to be a Data Scientist in an AI-enabled world?
9. Career choices - Diamonds In The Rough - A perspective on making high impact college hires
Spending the money!
10. Budgeting - Budgeting like a stoic
11. Home Buying - Homeownership is an important wealth-building platform
12. Car Buying - Cutting through complexity: A car buying approach
13. College choice - The College Decision - Framework and tools for investing in your future
14. College choice - College Success!
15. College choice - How to make money in Student Lending
16. Event spending - Wedding and event planning guiding principle
Investing the money!
Pulling it together!