Take A Loan

if you’re rich enough

By Darryl Weng

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There are plenty of unfortunate students who either work long hours or take loans to pay off college tuition. At the same time, there are students better off who, while themselves cannot afford college tuition, have parents with enough savings to pay off the tuition. In this time period, we are met with high college tuition and politicians who think eliminating loans is the solution for unfortunate students. A tragedy certainly describes our higher education situation of tuition. Investing-wise, however, the situation is neither a tragedy nor a blessing.

Contrary to popular belief, the optimal solution to this situation is taking student loans, given proper conditions. This academic year of 2021-2022 saw an average of 3.73% annual interest rate for federal student loans, according to Matt Carter on Credible. Therefore, if one is to take a student loan for four years and pay all off by graduation, he/she would pay a total of more than 15% of the original tuition amount due. Due to such loans, a student paying a yearly tuition of $50k for four years would result in an excess of more than $30k to be paid.

Although seemingly dreadful, students with enough college savings should take note.

The only solution where such a student would be better off taking loans would be investing his/her college savings with a higher annual return rate than the student loan interest rate. The pressure to beat a total 15% rate over 4 years in the investment standpoint, regardless of pandemics and stock market crashes, is nearly nonexistent. Simply investing in S&P 500 would suffice. After all, according J.B. Maverick on Investopedia, the historical average yearly return of S&P 500, adjusted to inflation, is around 7%. Accumulated over four years would amount to over 30%. Proper investments with college savings would lead to greater benefits for a student taking loans than for students paying tuition regularly.

When such a huge amount of money is left sitting by itself like college savings, it would be a waste not to invest. The same logic applies to paying off a house mortgage. When one knows he/she can pay off the entire mortgage immediately, he/she should refrain from simply taking a vast amount of money and dumping it into mortgage payments. Simple, safe investments on huge amounts of money have substantial effects. By investing instead of paying a mortgage, one’s investment can outpace any interest rate, providing benefits that would otherwise be tossed away as outrageous.

Interest rates are projected to increase substantially. However, such rates may never beat the returns of investments. So what are you waiting for? Take a loan already.