Bernie Sanders wants to reduce student loan interest rates from the current 4.5-7% to 1.88%. If this happened, student loans would become the bank for all kinds of transactions. Why get a car loan when you could just get a student loan and buy a car outright, effectively reducing your interest rate greatly and avoiding the possibility of your car being repossessed?
And how about borrowing to invest? Did you know that it’s only a “legal gray area” to invest your student loans? Presumably they’d crack down on it, but there’d be ways around it.
- If you’re living with your parents and benefiting from the imputed rent tax loophole, pay an artificially low rate of rent to them, who will then invest the money and return it to you later. It must be artificially low so that they can deduct the cost of maintenance, depreciation, and property taxes from the amount you pay and avoid it being taxed as income. So long as you don’t put it in writing this should be quite safe. You, being a responsible adult, will pay rent and they, being generous parents, allow you to pay less than the market rate and will help you out when you need it later.
- If you have an existing car or home loan, refinance so that in effect you are paying a higher rate while in school and will be rewarded with a lower rate after you get out. Effectively, you are borrowing from the government in order to give money to the banks, who invest the money and return the gains to you in the form of lower payments later. Since the banks already know who you are, transaction costs would be minimal.
- If your parents are giving you money, have them stop, invest it, and give it to you later. If they gave you money in the past, decide that was a “loan” and use the student loan to “pay it back.”
- Life insurance today functions as a tax shelter, and could function as an investment shelter. Of course college students are young and won’t be very motivated to seek an investment which only pays off after their deaths. Health insurance is already so subsidized that it would be unprofitable to try to use it to game the system.