Student Loan Hacking: How to Leverage Federal Forbearance

The COVID-19 pandemic has left a wake of damage throughout our society, from taking loved ones too soon to the millions of jobs lost due to restrictions intended to limit the virus’ spread. To stem the economic impact, the federal government has taken numerous unprecedented steps. One of these steps was to place all federal student loans into a forbearance period, which President Biden has recently extended through the end of September, 2021.

Though not everyone will find themselves in a position to continue payments, my wife and I have been blessed enough to still have a steady W-2 income in addition to our small rental property portfolio. We are dedicated to a life of financial independence and will not be taking this respite from debt payments as an opportunity to spend more on consumption. Instead, we have made plans to continue making payments to eliminate this debt as quickly as possible.

Instead of making payments on a debt currently carrying 0% interest, we have recently decided upon a strategy of investing these bi-weekly “loan payments” until these student loan payments resume. Until that time, we will earn a spread on our investment returns that will be ours to keep.

Here is an example:

Let’s say we are making aggressive debt payments of $5,600 per month. Since federal student loans are currently accruing 0% interest, these early payments earn us no “return” other than reducing the principal and translate to a net zero on overall net worth. Under a new scenario, this money is invested into a 5% bond until September 30, 2021. Over the next 6 months, $44,800 is saved and an interest of $848.22 is earned. With a 10% rate, $1,713.08 is earned.

Though seemingly insignificant in the long term, this spread accomplishes two things. First, it is still money back in our pocket. Second, it exercises the saving and investing muscle that will carry us to long term wealth long after our student loans have been repaid. As investors, we must continue to look for arbitrage opportunities and ruthlessly take advantage of efficiencies that have the potential to snowball into good habits and long-term wealth.