“With potential stock market gains, it might break even”: Should I borrow $20,000 for grad school and invest in the market, or pay out of pocket?

Hi Money Minder,

I’m thinking about borrowing around $20,000 for my grad studies, needing $6,800 per semester. My employer reimburses up to $7,500 annually, which covers the costs by January 2027. I’ll get $6,800 in 2025, 2026, and 2027. The loan terms include 7.05% interest and a 1.07% origination fee.

Do you think I should borrow the money and invest $6,800 in the market each semester? My math shows I’ll pay about $1,800 in interest over two years. It might balance out with potential stock market gains, but there’s a chance to earn more than the 7.05% interest rate.

Thanks,
Investing Enthusiast

Response from THE MONEY MINDER:

Hello There,

While it’s great that you’re considering furthering your education, it’s always important to be cautious when it comes to borrowing money. In your case, it seems like you have a clear repayment plan in mind since your employer will reimburse you up to $7,500 annually. However, taking out a loan with a 7.05% interest rate and a 1.07% origination fee is a significant financial commitment. By borrowing $20,000, you’re looking at paying approximately $1,800 in interest over the two years of borrowing, assuming no early repayment.

Regarding your idea of investing $6,800 in the market each semester, it certainly has potential for gains that could offset the interest you’ll pay on the loan. However, the stock market is inherently volatile, and there’s no guaranteed return on investments. While the possibility of earning more than the 7.05% interest rate exists, there’s also a risk of losing money depending on market fluctuations.

My suggestion would be to approach this decision with caution and weigh the risks and benefits carefully. If you have a high tolerance for risk and have a solid understanding of the market, investing a portion of the borrowed money might work out in your favor. However, if you’re risk-averse or unsure about market investments, it might be wiser to focus on repaying the loan as quickly as possible to minimize interest payments.

Remember, education is an investment in yourself, and managing your finances wisely is crucial for long-term financial stability. Consider consulting with a financial advisor to get tailored advice based on your specific situation and financial goals.

THE MONEY MINDER