The ODT reports on how an enterprising student made $2000 by taking out student loans from different banks and investing it.
The student, who prefers to remain anonymous, employed a system known as “stoozing”, which works in a similar way to the international “carry trade” – where money is borrowed at a low rate in one country and invested at a high rate in another.
The student realised banks trying to attract students as customers had created a similar, legal, opportunity for free money within New Zealand.
“Stoozing” is a slang term to describe an activity where money is borrowed at 0% interest and invested elsewhere. Eventually, the borrowed money is repaid but the interest it has earned remains with the “stoozer”.
. . . At the beginning of last year, the student visited four banks and set up bank accounts with 0% overdrafts. He then withdrew all the money – amounting to $6000 – and invested it for one year in a safe term deposit at a rate of 9.25%.
He’s a business student and he’s already shown he can spot and act on an opportunity others mightn’t see which shows he has an entrepreneurial streak which can’t be taught at university.
However, interest rates were much higher last year and Westpac media relations manager Craig Dowling points out there are risks in stoozing:
“The opportunity for arbitrage – the old term for stoozing – is lower in a low-rate market such as we moved into over the past six months so there should be decreasing propensity to stooz.”
Short-term deposit rates with Government guaranteed institutions such as banks were about 3.5%-4% per annum, and there was a definite risk involved in chasing higher returns.
“That needs to be considered, because if a gamble turns bad, the stoozer could find themselves in debt, way beyond their means.
“In the case of a student who stoozes and loses, it could be to the tune of the bank overdraft and if they haven’t established a good relationship with one or other bank, they might find zero interest in return.
One of the criticisms of interest-free student loans was that they’d be used by people who didn’t need them because a scheme which offers something for nothing will always attract people who don’t need the money but see an opportunity to use it to make more.
I know students who’d earned enough in holiday jobs to take them through the academic year who took student loans and invested the money. One bought shares and did very well, but the risk/return ratio for that would be much higher now than it was a few years ago.
UPDATE: To clarify – the loans the student took were bank loans which as Kiwiblog points out are loss-leaders to attract new customers, not interest-free student loans from the government scheme.