Investing a 0% interest loan

Anomisma

Hi guys,

Looking for people's opinions on a plan I've been hatching, trying to gauge if it is worth going ahead with and if so, the best route to take.

For the next 2 years, I will be studying in the Netherlands and I qualify for a student loan. I also work and will receive a supplementary grant which means I won't actually need to take out any loan to subsist while I am here.

The interest on the student loan is set by the government each year. This year, and in previous years, the interest rate is 0%.

I'm thinking of taking the maximum possible loan amount each month (I can change the loan amount borrowed each month) and putting it straight into something like a high-interest saver account, NS&I premium bonds or a relatively low-risk investment portfolio.

After I finish studying, I have 2 years before I have to start paying it back in installments and the interest rate is frozen for 5 years (hopefully at 0% if it is the same next year).

Seems like a no-brainer but maybe I am missing something here, is it wise to invest a loan? Is one strategy better than another in this case?

Thanks! :money:

Thrugelmir

Exchange risk. I assume the debt will be in €'s. Yet you'll be investing in £.

Brynsam

Your plan is nothing new - see https://www.investopedia.com/ask/answers/100314/it-legal-invest-my-student-loan-money.asp (not strictly relevant because it is a US article, but parts of it may be of direct relevance/flag areas you need to check).

bostonerimus

Is it really worth it for 1%?

Novice_investor101

I did a similar thing in the early 2000's but with my interest free student overdraft. Back then cash ISAs were paying about 5% interest so I maxed out my £2.5k overdraft & stuffed it into an ISA with the same bank.
I lived off my student loan & my wages from a part time job paid back the overdraft. I also smashed as many overtime hours as I could outside of term time.
Then I rinsed & repeated each time I'd paid it back.
Result - the only student out of my social group who left uni with more money than I started with.

kelkka

This is a completely normal thing to do in Finland. However, I'd consider something with higher interest rate than a savings account. There are risks of course, so don't take this as a recommendation.

Notepad_Phil

Anomisma wrote: »

Seems like a no-brainer but maybe I am missing something here, is it wise to invest a loan? Is one strategy better than another in this case?

It would certainly work if your loan was in £ but as per Thrugelmir I assume your's will be in € so you will be taking a massive risk on how the currency exchange rate falls and rises over the coming years if you put your money into any £ based account such as common high street high interest bank accounts, premium bonds, etc.

I doubt that the £ will hold steady over the next 6 months never mind the next few years, and that it could easily swing up or down by 10-20% depending on what happens with brexit.

You also talk about possibly using a low risk investment portfolio - yes you could do that, but any investment portfolio has a chance of capital loss, so I wouldn't do that.

The only way it could be a no-brainer is if you put your student euros into a euro based savings account paying a decent rate of interest with government protection on your deposit. I've no idea on the interest rates you can get in euro-land, but I'd be surprised if they're going to be anywhere near the rate where I'd think it was worthwhile the hassle you'd need to go through in applying for the loans etc and keeping on top of all the admin.

steampowered

Yes, this is a no-brainer.

There is also a benefit to having a cash sum which is paid off over time. After you have graduated you can use it, for example, as a deposit towards a property.

Over a 5+ year horizon I would strongly advise considering a conventional stocks & shares portfolio (through a passive globally diversified fund) rather than premium bonds or cash savings. Over a 5 year timeframe the statistical probability of making a loss is well under 10%, and the statistical probability of getting a decent return is high.

Anomisma

Thank you everyone I appreciate your inputs. After a bit of research into the best savings accounts and stocks & shares portfolios, I will likely press ahead (and definitely be keeping it in €).