Investment Idea for Student Debt

Market volatility and government policy intervention associated with the Covid-19 pandemic have complicated the investment environment – but they’ve also created some new investment opportunities. Hours after being sworn in, President Joe Biden instructed the US Department of Education to extend the pause on federal student loan payments and keep interest rates at 0% until at least September 30, 2021. We continue to stand by our investment idea, first published in July 2020. Student loan borrowers who are in a financial position to make their regular payments should take full advantage of the pause until payments resume.

• There is a temporary halt on payments due on federal student loans, and the interest rate has been reduced to 0%.
• This provision now runs through September 30, 2021.

This creates a unique opportunity for a “carry trade,” where deferred federal student loan payments can be invested in any asset yielding more than 0%. When the provision expires, excess earnings from the investment can then be used to pay down debt faster, helping investors put themselves or their family members in a better financial position coming out of the crisis.

Paying Down Debt
The prospect of paying down – or extinguishing – high-interest debt can be very attractive. More than 45 million Americans hold student loans averaging $31,000 – and national data shows that more than a third of student loan borrowers are over 40 years old (Figure 1). You or someone you know could potentially benefit from this approach.

Figure 1: Total Student Loan Balances by Age Group

Source: New York Fed Consumer Credit Panel/Equifax

The Current Opportunity – Capitalizing on 0%
The government-issued student loans that support both undergraduate and graduate tuition have fixed interest rates ranging from 3.8% to 6.8% in the last decade (Figure 2). But today, that borrowing rate is temporarily 0%.

Figure 2: Federal Student Loan Interest Rates by Year Issued

Source: savingforcollege.com

Notably, President Biden’s $1.9 trillion stimulus plan did not mention student loan debt cancellation. Democrats have proposed forgiving between $10,000 and $50,000 of student loans per borrower.

Our Washington consultants are skeptical cancellation will happen at all. Biden appears unlikely to pursue this via executive order, and forgiveness, even at the $10,000 level, likely doesn’t have the bipartisan support needed to pass Congress.

That’s why now may be a good time to discuss a student loan debt reduction strategy with your financial professional, while payments and interest remain on hold. Although paying down debt isn’t a particularly exciting investment opportunity, it’s certainly a practical plan that can offer added peace of mind for the future.