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. One of these relates to the CARES Act provisions for federal student loans:

• There is a temporary halt on payments due on federal student loans, and the interest rate has been reduced to 0%.
• This provision currently runs through September 30, 2020, but ongoing discussions in Washington may extend the payment and rate relief beyond the fall.
• The American Council on Education, representing 1,700 colleges and universities, proposes relief “until June 30, 2021, or until the unemployment rate falls below 8% for three consecutive months.”¹

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 0%.

Figure 2: Federal Student Loan Interest Rates by Year Issued

Source: savingforcollege.com

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.