Some students are starting to use cryptocurrency — a digital or virtual currency that uses cryptography for security — to pay for college.
In fact, a few schools even accept bitcoin for tuition. King’s College in New York became the first U.S. institution to allow bitcoin tuition payments in 2014. Since then, a number of other international schools have followed.
A bitcoin is digital currency exchanged independent of banks or governments; this currency can be converted into cash when deposited into accounts at prices set in online trading. Last December, the value of bitcoin reached nearly $20,000 — that’s about $2,000 more than the typical cost of attendance for a full-time student at a community college in 2017-2018.
Although the values of cryptocurrencies such as bitcoin have plummeted since then, interest in these currencies remains high — especially among college students.
While a direct transaction may help from a tax standpoint, students can use these types of digital currencies to pay for college costs even if their school doesn’t accept this type of money for payment.
[Discover five overlooked ways to pay for college.]
For instance, you could easily invest in these currencies and cash out when the tuition bill arrives. Schools somewhat expect this by counting most investments in your expected family contribution.
But is this a smart tactic? The Student Loan Ranger can’t comment on whether to invest in cryptocurrencies, and we suggest finding online resources to learn more. But here are a few pros and cons for borrowing student loans versus investing and cashing out cryptocurrency. These can apply to most non-college savings investments too.
Return on Investment
Once they have student loans, many borrowers wonder whether to pay down their debt or invest in the future. This is an important balancing act, especially when it comes to saving for retirement.
The key consideration is the return after taxes.
[Read what to do when a tax refund is seized for student loans.]
For a student loan with a fixed interest rate, the return is clear; this can be a positive to using loans. For instance, let’s say you leave school owing around $37,000 in student loans. At a 6.8 percent fixed interest rate, repaying those loans over five years instead of 10 would drop the total interest you pay from $14,096 to $6,749. Those savings are concrete, and you can calculate them before you borrow anything.
These numbers become murkier for investments, which involve risk. Your investment may gain value, but it’s also possible to lose some or all of what you invest, especially with something as volatile as cryptocurrency.
The price of bitcoin, for instance, has fluctuated over the past year. As of this post, the price is significantly less than the high-water mark of nearly $20,000. Bitcoin was as low as $7,362 earlier this month, according to the digital currency exchange Coinbase.
Let’s say you diverted money from student loan payments or a traditional college savings account toward bitcoin at the height of its value. Just two months later, you would have lost more than 60 percent of the money — and you would still have student loan or tuition bills to pay.
Selling Low
That kind of loss is scary, but the rapid gains of bitcoin may make the risk worthwhile for some. As debt totals continue to rise annually, anything that helps students mitigate their borrowing is worth investigating.
[Learn about using an IRA to pay for college tuition.]
Consider the low value for bitcoin from earlier in February. Yes, it was down around 60 percent from the all-time high. But it was still seven times more than the bitcoin price in February 2017.
Some experts believe bitcoin’s value could reach $60,000 this year. If that happens — and remember it’s a big if — reaping those gains would offer students and their families a much better funding option than student loans. Essentially, it would be $50,000 in extra money for college after taxes.
At least one New York University student has already taken advantage of the price spike to cover tuition. On the other hand, this unprecedented volatility means you could cash out too early, such as the person who bought two pizzas in 2010 for 10,000 bitcoins. Today that would be worth more than $100 million.
With that, you may want to roll the dice, hold onto your cryptocurrency and still borrow loans. Under the best-case scenario, you could pay off what you owe with the proceeds, as some borrowers reported doing when bitcoin’s value spiked.
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Pros, Cons of Using Cryptocurrency to Pay for College originally appeared on usnews.com
