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CORRECTED: College students are investing in bitcoin with financial aid money

  • More than 20 percent of students report that they've invested in cryptocurrencies with their student loans.
  • Experts say that's a dangerous move.

(Editor's note: A spokesman CNBC cited for this article from Student Loan Report, Drew Cloud, is not a real person, according to The Chronicle of Higher Education and confirmed by CNBC. In an article published April 24, the Chronicle reported that Cloud was in fact a fake entity created by the parent company of Student Loan Report, Shop Tutors, which also does business as LendEDU. In an effort to provide transparency, CNBC is preserving the original report published on March 23. Here it is:)

A member of bitcoin trading club poses with bitcoin medals at the club's meeting in Tokyo.
Yoshikazu Tsuno | AFP | Getty Images
A member of bitcoin trading club poses with bitcoin medals at the club's meeting in Tokyo.

Tuition paid, textbooks bought…time to buy bitcoin?

More than 20 percent of college students use their financial aid money to invest in cryptocurrencies, according to new findings by The Student Loan Report, a website for student loan information.

The site polled 1,000 current college students with loan debt this month. The survey did not ask how much students were investing and many could be buying only smaller amounts.

"I was definitely surprised," said Drew Cloud, The Student Loan Report's founder.

"Living on a tight budget, one would think students would spend that money on groceries, rent or school supplies rather than bitcoin and ethereum."

Undergraduate students received on average around $4,600 in federal loans in the 2016-2017 academic year, according to the College Board.

A student who spends their student loans on cryptocurrencies is violating their agreement with the government, said Elyssa Kirkham, of Student Loan Hero, a website for managing student loans.

"If you invest the student loans in cryptocurrency and lose money, you will still owe the student loans." -Mark Kantrowitz, a student loan expert

"Investing is not an educational expense, so it's against the rules to use your student loan money to buy cryptocurrencies, " Kirkham said.

Plus, any gains are likely to be offset, she said, by the taxes a student would have to pay on them along with the fees and interest that come with student loans.

She did suggest an alternative.

"If you end up with extra funds, you can return those through your bursar's office to cancel out some of your debt. That's the wisest option."

A spokesman for the U.S. Department of Education echoed that message: "Federal student aid funds are to be used only to help meet the costs of attending an eligible institution of higher education. Investing is not considered an appropriate use of federal student aid funds."

Cryptocurrencies are certainly on the minds of college students.

Courses on the digital tokens are now available at a number of colleges. At the Massachusetts Institute of Technology, students meet weekly at the Bitcoin Club. A company called Campus Coin is working to establish cryptocurrencies as a medium of exchange at colleges across the country.

But there's a big difference between learning and experimenting, and putting your financial health at risk by using borrowed money to invest in a digital currency that could not exist in a few months.

"If you invest the student loans in cryptocurrency and lose money, you will still owe the student loans," said Mark Kantrowitz, a student loan expert. "And, where will you get the money to pay for college costs?"

To be sure, students aren't the only ones using debt to get into cryptocurrencies.

Nearly 20 percent of all people who own cryptocurrencies went into arrears to invest in them, according to a recent survey of 3,000 people by CoinDesk, a digital tokens information company.

"Investing from a credit card or a loan is a terrible idea as these assets are extremely risky and volatile," said Christian Catalini, an assistant professor at Massachusetts Institute of Technology who researches blockchain technology and cryptocurrencies.

He added, "Nobody should invest any amount in this space that they cannot afford to lose immediately."

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CORRECTION: A spokesman CNBC cited for this article from Student Loan Report, Drew Cloud, is not a real person, according to The Chronicle of Higher Education and confirmed by CNBC. In an article published April 24, the Chronicle reported that Cloud was, in fact, a fake entity created by the parent company of Student Loan Report, Shop Tutors, which also does business as LendEDU. In an effort to provide transparency, CNBC is preserving the original report published on March 23.