Student Loans Funding Cryptocurrency Purchases
A recent survey reveals 21.2% of college students with outstanding loans said they used their financial aid money to cash in on the cryptocurrency craze.
Founder of The Student Loan Report, Drew Cloud, said in an exclusive interview with The Scope Weekly, “The results of the survey definitely surprised me. I really did not think one-fifth of college student loan borrowers would be using financial aid to invest in Bitcoin simply because college budgets are pretty tight to make such risky investments.”
The Student Loan Report survey was conducted over a four day period and polled 1,000 students. However, the data doesn’t include information about how much of their financial aid students spent buying crypto or which cryptocurrencies they purchased.
Students sometimes borrow more than they actually need to pay for their tuition fees. Once the course fees are paid for, colleges send a refund check for any excess financial aid amount remaining to help the student cover living expenses.
However, many students choose to use those funds to dabble in the crypto markets instead.
School administrators frown on the practice of using borrowed funds for non-school expenses. Yet there are currently no rules expressly forbidding it. Students are simply able to use the excess funds from loans to cover what they deem to be ‘living expenses’.
Dabbling In Cryptocurrencies
It’s no surprise why many college borrowers believe buying cryptocurrencies is a good way to spend the money they receive from student loan refund checks. After all, with the sheer number of ‘get rich quick’ stories circulating about instant millionaire crypto investors, it’s tempting to believe that jumping onto the bandwagon might yield similar results.
Stock market investors have been borrowing money to buy stocks for decades. Lending on margin to leverage their investments can sometimes yield higher returns.
Taking that principle to a new level, students are simply using borrowed money to ‘invest’ in bitcoin and other cryptocurrencies. In theory, if the price of the asset is increasing, the logic of leveraging borrowed money to buy crypto is sound.
However, if the price of cryptocurrencies falls, the student is stuck with a dud investment. They also still need to repay the loan balance.
“Millennials are diving headfirst into the crypto-market because of all the stories that highlight everyday, younger investors getting rich off virtual currency. Everybody has gotten swept up into the virtual currency-frenzy, and everyone wants a piece,” said Cloud.
Fee-Free Crypto Trading
In a story recently published by The Scope Weekly, the new fee-free cryptocurrency trading app Robinhood Crypto makes it easier than ever for anyone to jump into the market. The trading app doesn’t impose minimum trading limits, so it’s easy to get started with limited funds.
Cloud said, “The crypto-trading platforms definitely could encourage younger, less experienced investors to get involved. They are very easy to use, attach no fees, and have no minimum spending limits. To me, that looks the perfect storm to drum up interest amongst novice investors.”
Students with spare cash from a refund check can buy their favorite crypto with a few swipes on a mobile device.
Lavinia Chirico, a representative for Robinhood told The Scope Weekly in an email, “Of the over four million people on the platform, 78% are between the ages of 18-35.”
“Robinhood’s mission is to democratize the American financial system and our goal is to make the financial markets more accessible and cost-effective for everyone. We’ve been releasing more and more financial tools at no cost, to further this mission – last year, we launched Robinhood for Web and commission-free options trading, and earlier this year we launched Robinhood Crypto, with a commission-free trading of Bitcoin and Ethereum,” said Chirico.
Adding to Huge Student Loan Debts
Recent statistics show that the average student loan debt in the U.S. for the Class of 2016 graduates was $37,172. The same statistics show a student loan delinquency rate of 11.2%, where payments are in arrears for 90 days or more.
Federal student loan interest rates range between 4% and 7% for those who borrow money in the 2017 to 2018 school year. Paying an average of $351 in monthly repayments for borrowers aged between 20 and 30, it can take up to 21 years to repay the outstanding debts owed.
Using additional funds to purchase cryptocurrencies increases debt levels unnecessarily, which could increase the length of time it takes to pay off the loan balances. Fortunately, under federal income-based repayment options, any remaining debt is forgiven after 20 years.
Interest Rate Hikes
On Wednesday, March 21, 2018, the Federal Reserve raised short-term interest rates by 0.25 percent, marking the sixth consecutive interest rate hike. More than a million borrowers are repaying private student loans, most of which have variable interest rates that increase in line with the Federal Reserve rates.
As a result, repayments tend to increase to cover the additional interest charges. Many people with outstanding student debts may find the monthly budget is squeezed a little tighter.
Taking out student loans to pay for high-risk investment seems like a sure way to graduate with even more debt. Cloud agrees, saying “College students would be better off using that money on what it is supposed to be used on: living expenses. College budgets are ultra-thin, use that money on rent, food, and school supplies.”
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