Ryan Chern

Student Loan Arbitrage

Disclaimer: NOT financial advice

Inspired by the recent news of Biden's student debt forgiveness, the following is a thought exercise of how one might try to execute interest rate arbitrage on student loans:


  • Be a student
  • Get a subsidized or unsubsidized loan, depending on what you qualify for

The Arbitrage

For the purposes of this example, we will assume that Student A takes out a $10,000 loan for their first semester of college.



  1. Apply for the FAFSA and get $10,000 deducted from your tuition bill via a student loan (actually slightly less due to the loan origination fee)
  2. Take the $10,000 you would have spent on tuition and buy Series I Savings Bonds (only available via KYC on Treasury website; max $10,000 per person)

Rates on August 25, 2022

  • Undergraduate direct loan interest rate = 4.99% (assuming resumption on January 1, 2023)
  • Loan origination fee ~= 1.00%
  • Series I Savings Bonds (rate ending December 31, 2022) = 9.62%


Today, August 25, 2022

  1. Apply for and use FAFSA proceeds, deducting $9,900 from your tuition bill ($10,000 * .99)
  2. Take $10,000 from your checking account and buy $10,000 worth of Series I Savings Bonds (minimum lockup = 1 year, lose last 3 months of interest if you withdraw before 5 years)

1 year, August 25, 2023

  1. Exit Series I Savings Bonds position, netting $664.42 in interest, for a total of $10,664.42 First 6 months: 10000 * (0.0962 * (6/12)) = $481
    Next 6 months: 10481 * (0.07 * (3/12)) = $183.42

Second period is 3/12 because you forfeit the last 3 months due to the early withdrawal penalty
7% interest rate for the second period is an estimate but likely ballpark correct

  1. Jan 1, 2023 - Aug 1, 2023: Monthly payment on student loan = $106.02
  2. Pay back student loan in full ($9,543.30), taking into account the 0% interest rate for the rest of calendar year 2022

Profit = 10664.42 - (106.02 * 6) - 9543.30 - 100 = $385 Technically, this is not a risk-free trade as the Series I Savings Bond could yield 0% interest (calculated semi-annually). However, it tracks inflation and this is highly unlikely.


Base-case = +$385 (profit relative to no arbitrage)

if no extension on student loan moratorium beyond December 31, 2022

Best-case = +$10,000

if there is a second round of student loan cancellation

Other Factors to Consider

Round 2 of Debt Cancellation

There is a chance that there will be a second round of student debt forgiveness similar to the multiple rounds of COVID stimulus. By executing this trade, you are entering into the Biden Student Loan Forgiveness Lottery.

Continued Moratorium on Student Loans

Should the moratorium continue (currently set to resume on January 1st, 2023), the government is effectively giving you an even longer interest-free loan. Borrowing at 0% is a pretty good deal, no matter how long it lasts.

Tax Considerations

I did not look into this much, but the education tax exclusion looks to be relevant as you are using the proceeds to pay for higher education.