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  • Writer's pictureMarcus P. Miller, CFP®

Student Loan Arbitrage: A Buffett-esque Investment Strategy for Young Investors

Are you a young investor looking for an innovative way to make money? Then student loan arbitrage might be the perfect strategy for you. This investment strategy involves borrowing money at low-interest rates via student loans, even when you have other means of paying for college. By taking advantage of the long payback period and low-interest rates, investors can reap hefty rewards. Let’s take a look at how student loan arbitrage works and why it could be the perfect investment strategy for ambitious investors.

How Student Loan Arbitrage Works

The standard 10-year payback period for student loans starts 6 months after graduating. However, borrowers can extend this repayment period to 20 years for undergraduate loans and 25 years for graduate loans using Income Based Repayment (IBR). During this time, borrowers can take advantage of highly competitive interest rates (usually between 3-4%). The borrower then invests this borrowed money into a diversified group of assets that generate an average return of 8-10%. This allows them to make 4-7% on the borrowed money while keeping their exposure to risk relatively low by diversifying their investments across different asset classes.

Advantages of Student Loan Arbitrage

One major advantage of student loan arbitrage is that it is a passive income stream that requires very little maintenance or upkeep once established. By taking advantage of subsidized loans, investors can maximize their benefits while still in school as the interest on these loans is paid by the government. Additionally, since student loans offer repayment options such as Income Based Repayment (IBR), borrowers can tailor their repayment plan according to their budget and financial situation without having to worry about defaulting on their loan payments.

Risks of Student Loan Arbitrage

Student loan arbitrage may seem like a low-risk investment strategy, but there are still significant risks associated with it. The borrower must make sure that they continue to make their loan payments on time and maintain good financial behaviors in order to reap the rewards of this strategy. Furthermore, if the stock and bond markets turn downward then they would need to hold onto the investments for a longer period of time. Lastly, if someone changes their investment allocation in the middle of market volatility, then this strategy will not be effective. Therefore, it is important to weigh out all potential risks before making any decisions when it comes to student loan arbitrage.

Student loan arbitrage may not be suitable for everyone; however, it can be a great option for young investors who are willing to take risks in order to get a jump-start on their investment portfolio. With its low-risk exposure and potentially high returns, student loan arbitrage could be the perfect investment strategy for ambitious investors. By taking advantage of highly competitive interest rates and extended payback periods, savvy investors can benefit from the lucrative rewards offered by student loan arbitrage without incurring too much risk along the way.

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The opinions expressed in this website are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. We cannot provide financial advice if we do not know your specific financial situation. Please talk to your financial advisor or do your own research before making financial decisions. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Any indices referenced for comparison are unmanaged and cannot be invested into directly. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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