Exotic uses for a student loan

I have a friend who came up with, what to me (and to her, I know it) was a GREAT strategy for cashing in on debt. It really had the bold stamp on brilliance on it, and showed to me a great way to turn a future liability into a long-term paying asset. Unfortunately, the experiment failed at the absolute worst time.

The first time I met her, on a train to the airport, as we were on our way to a student-debt-financed study abroad trip to Egypt, she told me she was a homeowner. I was duly impressed. I knew she was a broke student like myself, and asked her how she had gone about it. "Well," she said "I applied for an $8,000 student loan and used it as a downpayment on a house."

Boy, was I impressed! I'm not kidding. She said that, and immediately my mind turned to the 12-packs of beer, clove cigarettes, and Portishead CD's my own student loans were financing, and I quickly figured out she was getting a way better return on her investment. "That is so freaking COOL! You must have some serious discipline. I don't know if I could ever do that."

She smiled. Truth is, she knew a thing or two about real estate as it was, and though she was using the house as her primary residence, she was sitting on a relatively inexpensive piece of real estate in a developing neighborhood long before any except the most pessimistic pundits had any concept of a future Subprime meltdown. She had plans for her life, and they involved this house. So, she studied the matter, figured out the best way to get a reasonable down payment was to cash in on a student loan, and there you have it. Instant homeowner. It helped that she was gainfully employed.

If you think about it, it really was a great plan. Up until 2 years ago or so, especially in this town, she had every expectation of being able to sell the property at at least a modest profit. Real estate was booming at the time, and it was just a matter of time till gentrification took hold of that area of West Atlanta, instantly jacking up all home prices. Then, what began as a double debt (student loan and mortgage) would have almost magically transformed itself into a paying asset. She calculated she needed a year or so to complete her studies; during that time she'd fix the house as best she was able, wait for the appreciation of home values in her area, graduate, and move on to the next phase of her life with a positive ledger.

It was a brilliant plan. If only the upkeep of the house had not been such a nuisance that a downstairs bathroom went for 2 years without a commode. If only the neighborhood had gentrified faster than it did. If only she had been able to keep a decent roommate for long enough to help finance things. If only she had not gotten behind on her taxes. If only the company she'd been working with for 4 years had not decided to restructure their workforce, leaving her without a job. If only by this time we hadn't begun seeing the beginings of the real estate bubble burst.

Knowing about real estate as she did, she was able to, after much scrambling to hold on to the property, fenagle a short sale on the property and walk away mostly unharmed, save for the bad experience and some lingering debt.

But, unfortunate though the experience was, in a sense, it came at the perfect time. Had all her program melted down 18 months after it did, she would not have been able to unload that property for all she was worth. She drove by the neighborhood a few months ago, and said it was a ghost town - a total casualty of the subprime mess.

Some might question the legality of such a move, but it all depends on under what conditions the loan is disbursed. Some loans are pretty open-ended, allowing for any clever person to use them as they see fit. Others, on the other hand, can only be used to take care of school related items, which of course can and does include housing. As my friend later explained it to me, after the fact, "for me it that's exactly what it was, seeing as how I had already moved into the house and could either move out again and find another place putting down a deposit & first month's rent, or use money as a down payment on a property I was already living in and paying rent for."

Her final analysis? "If I had it to do all over again, 1. I would find something in a less marginal neighborhood and 2. I would have better financial habits but hey - water/bridges now."