Using Your Student Loans to Invest in Crypto: As Stupid as It Sounds?

INVESTING - CRYPTOCURRENCY
Using student loans to buy cryptocurrency isn’t guaranteed to make you money. But how bad could things go?
Updated April 3, 2023
using student loans to buy crypto

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Using student loans to buy cryptocurrency could be as risky as it sounds. Making money off cryptocurrencies isn’t guaranteed, but having to pay back your student loans is. If you lose money on your investment, you could end up with burdensome debt after you graduate.

That said, it could be possible to earn a return on your investment if you buy the right digital currency at the right time, which might be a matter of luck. The price of bitcoin (BTC), for example, increased more than sixfold in the time window between April 1, 2018, and April 1, 2022. However, it also plummeted by nearly 50% between November 2021 and January 2022.

Investing in the crypto market might involve a lot of uncertainty. But the stakes become even higher if you’re using student loan funds to build up your cryptocurrency investments.

In this article

What are the 5 main types of student loans?

Before we take a deeper dive into using student loans to invest in cryptocurrency, let’s review the types of student loans you could borrow to pay for college or graduate school.

1. Direct subsidized loans

These are federal student loans designed for students with financial needs. The government covers the interest charges while you’re in school or during periods of deferment, so you don’t have to worry about interest charges causing your student loan balance to grow until you enter the repayment period. Direct subsidized loans are only available to undergraduate students, and they come with a borrowing limit of $23,000.

2. Direct unsubsidized loans

These loans are available to any qualifying undergraduate or graduate student, regardless of their financial needs. Unlike subsidized loans, unsubsidized loans accrue interest charges from the date of disbursement. You could borrow up to $31,000 as a dependent undergraduate student and up to $138,500 as a graduate student.

3. Grad PLUS loans

Graduate and professional students who need additional funding could also borrow a grad
PLUS loan from the federal government. You could borrow up to the cost of attendance of your school, minus any other financial aid you’ve already received. One unique requirement of PLUS loans is having a credit history that contains no bankruptcy, default, or unpaid balance. If you do, you need to apply with a creditworthy endorser.

4. Parent PLUS loans

Parents of undergraduate students may also take out federal parent PLUS loans to help cover the costs of their child’s education. These loans currently come with a 6.28% interest rate and a 4.228% origination fee. As with grad PLUS loans, a parent may have to apply with an endorser if they have adverse credit.

5. Private student loans

If you’ve maxed out your eligibility for federal student loans and still have a gap in funding, you could borrow a private student loan from a private lender such as a bank, credit union, or online lender. Every lender sets its own requirements, rates, and fees.

Most lenders might require that you have good credit and a stable source of income to qualify for these personal loans. If you can’t meet these underwriting requirements on your own (most college students can’t), you have the option of applying with a cosigner.

Private lenders might let you borrow as much as you need to cover the cost of attendance at your school.

Is it possible to invest in crypto with student loans?

It is possible to use student loans to invest in cryptocurrency. When you borrow federal loans, the Department of Education typically sends the money first to your financial aid office, which uses it to cover tuition, fees, and other expenses.

If there’s any amount remaining, the school sends it to you directly to use for your living expenses. Some private lenders also send the money to your school’s financial aid office first, though others might send the money straight to you.

Once the money hits your account, no one is going to be tracking how you’re spending it. Using your student loan funds to buy crypto, however, might be a bit of a legally and ethically gray area. One reason it might be a bad idea is that you’re technically supposed to use student loans, whether federal or private, on educational expenses.

And even though no one is monitoring your bank account, there might be penalties for misusing student loan funds. If a school finds evidence of misuse, it could report it to the Department of Education, which could demand the money back in full. This might only be one part of the high risk involved in using your student loans to buy cryptocurrencies.

Do people actually use student loans to buy crypto?

Using student loans to buy cryptocurrency isn’t just theoretical. According to a 2018 study by The Student Loan Report, 21.2%, or more than one in five, college students with student loan debt had used financial aid money to invest to some degree in cryptocurrencies.

When it comes to using student loans to invest in this volatile marketplace, there could be some pros and cons to keep in mind.

What could go well?

Cryptocurrencies have shot up and down in value over the past few years. If you invested at the right time, you might have seen a hefty return on investment.

On April 1, 2018, for example, bitcoin was worth about $6,926. Four years later, its value was more than $46,000. However, this value is far lower than its highest price last year at more than $68,000.

If you used most of your student loan money to buy bitcoin in the spring of freshman year in 2018, you might have made more than enough back to pay off your student debt as you approached graduation as a senior.

Paying off student loans faster can save you a significant amount of money on interest. Let’s say, for example, that you borrowed $35,000 at a 7% interest rate. By finishing your loan payments in four years instead of 10, you could save $8,666 in interest charges.

Saving on student loan repayment could free up more of your income for other priorities. Plus, your debt-to-income ratio could decrease, making it easier to use other financial products, such as a new credit card or a mortgage.

What could go wrong?

Although it’s possible to make money by investing in cryptocurrencies and blockchain technology, it’s also possible to lose it. Let’s consider the value of bitcoin again.

In November 2021, bitcoin hit an all-time high of more than $68,000 as user demand grew during the coronavirus pandemic. But by January 2022, its value had fallen by nearly half to below $35,000.

If you’d invested during this time period, you might have seen the value of your investment plummet. Although bitcoin has been trending up again, investors who sold their bitcoin during this time period may have seen a sharp net loss.

You would usually start paying back your student loans six months after you graduate. If you invested in cryptocurrency and lost money, you would have to pay back that amount with interest.

Instead of putting your extra student loan money in crypto assets, you might have been better off repaying it to your lender. By returning unused student loan money immediately, you wouldn't have to pay interest on that amount.

So, how stupid is buying crypto with student loans?

Making a well-informed investment decision is not stupid, but using loan money to fund that investment could increase your risk quite significantly. Student loans are supposed to be earmarked for education expenses.

Although it might be tempting to use those funds to get in on the cryptocurrency game, you could end up losing that money. In the long run, that loss might become even more expensive due to the interest charges that pile up on student debt.

Furthermore, cryptocurrencies are perhaps one of the most volatile investments out there. With a traditional investment such as an index fund, you could often weather ups and downs in the market by investing for the long term. But cryptocurrency values may intensely move up and down in short periods of time, making it difficult to weather the changes and to predict how an investment will eventually fare.

Although it might be tempting to think, “The greater the risk, the greater the reward,” this approach has the potential to leave you with burdensome debt after graduation. Not to mention that investing your student loan money instead of saving it could leave you scrambling to cover your living expenses while you’re attending school.

Are there other ways to invest in crypto?

Instead of investing money that you borrowed, you could draw on your own savings and put that money into cryptocurrency. If your budget is tight, you could consider working a part-time job on campus or online to earn extra money. You might also consider if there are ways to reduce your expenses, such as by sharing a house with several roommates or cooking at home if your school’s dining hall is pricey.

While you still run the risk of losing your investment, you won’t have to pay that money back with interest, as you would with student loans.

And when it comes to actually investing, the first step would naturally be to learn how to buy cryptocurrency. There are several places to get started. Some common exchanges are Coinbase, Gemini, and Binance.US. It could also be a good idea to set up a crypto wallet for your investments, as keeping them in an exchange might be risky.

At the same time, you may want to make sure that you have enough to cover your basic living expenses before you start investing in cryptocurrency. It could be a good idea to build your emergency fund before you consider other financial goals.

FAQs

Is it legal to invest in crypto with student loans?

While student loans are supposed to be used toward education expenses, it’s technically not illegal to use them to invest in cryptocurrency.

You’re allowed to use your student loans for living expenses, and no one might be monitoring your spending or bank account activity. That said, if a school does find evidence that you misused your loan money, it’s possible that you could be subject to penalties.

Should I borrow money to invest in cryptocurrency?

Borrowing money to invest in cryptocurrency increases your risk of loss. Cryptocurrencies could be extremely volatile, so it’s possible you could lose your investment. Whether you lose money or make money, you’ll have to pay back the borrowed amount with interest. To reduce risk, consider investing your own money into cryptocurrency, rather than borrowing money to do so.

How do I make money from investing in crypto?

Cryptocurrencies are an asset class just like traditional investment classes, such as index funds or individual stocks. While cryptocurrencies might be volatile and unpredictable, you could still invest a certain amount of money into the crypto market and make money if the value of your investment increases.

There are lots of different cryptocurrencies you can invest in, but a couple of assets that are more popular are bitcoin and ethereum. You could learn how to buy bitcoin or how to invest in ethereum. But it’s a good idea to make sure you understand the levels of risk and volatility often present in the crypto market.

Bottom line

If you receive a lump sum of money from your student loan in your bank account, it might be tempting to invest it in cryptocurrencies. But before you do, consider the potential consequences of losing that money. You may still need to pay back the sum, plus any interest that accrues. So instead of risking borrowed money, you could consider buying crypto with your own personal funds instead.

Student loans are meant to cover your education costs and living expenses while you attend school. By using them for this purpose, you could hopefully avoid making money mistakes that students may struggle with even after graduating.

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Author Details

Rebecca Safier Rebecca Safier is a personal finance writer and a Certified Student Loan Counselor who loves helping individuals make informed financial decisions. Her work has been featured on MarketWatch, U.S. News & World Report, Business Insider, and other leading publications.

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