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* (Not actually a CD, but a long term deposit that behaves exactly like a CD.)

I should point out that HSBCdirect and Emigrant have better rates at the moment, though for CDs Emigrant has a minimum of $1,000 - not sure if HSBC has online CDs or not.

I also recommend Emigrant Direct, they are another good online savings bank that pay you good interest. Don't start investing in the markets until you are out of school and debt free. It's that simple.

Read my blog, Finance.ParanoidBrain.com about investing and managing money. You really have to be careful about which advice you listen to regarding money, most people really are clueless. I'm clueless myself in a lot of ways, too, but I keep learning and reading up on financial topics.

What you're basically describing is investing on margin (i.e. investing with borrowed money). Most experts steer people away from investing on margin. The possibility exists to lose money that wasn't yours to begin with AS WELL as having to pay interest on that money. And the interest rates are usually high.

You might be thinking that the interest rate on your student loans is really low. But recent legislation changed that. See this article for a description of the recent change. To summarize, the rate on Stafford Loans is going up to 6.8% and PLUS loans are going up to 8.5%. To compare, my mortgage is only 5.375% and my wife's consolidated med school loans are only 2.875%. So the new rates are pretty high.

What I would suggest to you is to find a really high-rate savings account or a money market account. I often see Emigrant Direct mentioned on Ben's Bargains as a good place to park your money. If you want to go down the money market route, I can highly suggest Vanguard's Prime Money Market Fund. Don't bother with the tax-free money market funds. You don't have enough income to make it worth it.

I would definitely steer clear of investing in stocks. It's just to risky to do with borrowed money. Once you have some money of your own that you can put away for a long time (think retirement savings), that's when you turn to stocks. Also avoid bond funds. Unlike individual bonds, bond funds have no maturity date, so they entail risk with little reward.

Others have suggested that it's illegal to invest your student loans. I find that hard to believe since that would preclude putting your loan money in any form of interest-bearing account. Maybe there's an exception for FDIC-insured accounts?

If this is money you may need in the near term, I highly recommend investing in a money market account. Not the money market account at your bank or credit union, which probably have a low-percentage rate of return, but rather something like Vanguard's Prime Money Market Fund, or Emigrant Direct. Both are paying around 5%, which is pretty darn good. Money market accounts are insured up to $100K by the FDIC. And both Vanguard and Emigrant direct offer all the services you might need, such as being able to write checks against the account, schedule automatic deposits or withdrawals from other accounts, etc.

Don't fool around with the stock market or mutual funds if you plan to need this money in the next few years. If you want to invest it for the long term, put it in something like Vanguard's Total Stock Market Index fund and let it sit. Better yet, set up a Roth IRA account with Vanguard, contribute the maximum amount each year, and don't touch it until you retire. This will be one of your smartest moves.

http://www.emigrantdirect.com/?source=google

You should be easily able to get that rate in a 12 month cd also.

I'll take the 0.03% hit for a company that's not evil. At EmigrantDirect.com, you can't go wrong with 4.25%.

(Disclaimer: my only affiliation w/ EmigrantDirect.com is that of a happy customer. I think banks are evil, but you can't argue with the rate from this one.)

A little research will find lots of good savings rates these days - 3.25% at http://www.emigrantdirect.com/ ..and inflation as of Jan 2005 is 2.97%