The Student Loan Arbitrage Play of 2020

Many of us out there are in a similar situation where we have student loan debt. Fortunately, as part of the Government’s response to COVID, they decided to put all our Federal student loans on forbearance.

This included two big things:

  • Suspend all student loan payments
  • 0% Interest rates during this period.

Should you continue to pay off your student loans during this period?

Well the answer depends on your own financial situation. But if the Government says you don’t have to and the interest rates are at 0%, there’s no harm in holding onto your cash in case of more dire emergencies during the pandemic (in addition to the emergency fund you already have of course).

Some of us may also want to take the money that would have gone towards our student loans, and invest it instead.

This is where you have an opportunity to make some money off of arbitrage plays.

Arbitrage Investing in CDs

Step 1: Find an alternative investment vehicle that provides a higher return than 0%.

That’s really all you need. Literally anything that provides any return will do.

If you have an account with Ally Bank, these are the following CDs they offer:

In detail, the following rates are offered for terms less than 1 year:

  • 3 Months: 0.20%
  • 6 Months: 0.25%
  • 9 Months: 0.30%
  • 12 Months: 0.60%

Of course these are very very low rates. If your monthly payment was $500 and you stuck that into a 3-month CD, you would return $0.25 over those 3 months. Which isn’t hardly worth the effort.

An alternative would be to buy Government treasury bills directly. Now these are the rates in December and you’d have to hold all the way to maturity to realize the full potential of the rates, but they are a possible alternative that returns 2-3x more than CDs.

In conclusion, if you really don’t want to pay off your student loans just yet, these are just a few options where you can make a little bit of money.

Arbitrage Investing in the Market

If you subscribe to the notion that the market annual average return is around 8-10% (which you should, it’s historically and statistically accurate), then you might consider sticking your money into that instead.

Now, remember that student loans went into forbearance on March 13, 2020.

If you had stuck your $500 monthly payment into the market on that day,¬†you would’ve made around 50% of your investment by December, for a total value of $750. Now this is much higher than the expected 8-10%, and it seems that given the conditions of the pandemic, the market has given much higher returns.

Now this sounds a lot more promising, but it does come with market risk.

What if COVID second wave had crashed the market again?

There’s a lot of uncertainty during these times.

Given that, it’s up to you to decide your own personal risk tolerance and your future ability to pay back these loans once the forbearance period is over. For now, forbearance has been pushed back until January 31, 2021. We don’t know if this is the last time they’re postponing it or if they will give us another extension.

But it’s good to always be ready with some cash to make monthly payments should this period end.

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1 thought on “The Student Loan Arbitrage Play of 2020”

  1. The big question is whether some student loan forgiveness actually takes place as the new administration has alluded to. I think there are a lot of hurdles on that yet (are they overly rewarding the wealthier population who can even consider college to begin with?), but if I still had student loans I would be slow-playing–and slow-paying–that situation until we get clarity on any debt forgiveness plans.

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