President Joe Biden announced Wednesday that his administration will forgive $10,000 of student debt to borrowers that make up to $125,000 per year, ending months of speculation on the matter. The President also announced that he would extend the student loan moratorium, which was supposed to end after this month, for a seventh time, allowing borrowers to put off making payments on federal student loans until the end of the year.
The situation is one that management and shareholders of SoFi Technologies (SOFI 1.01%) have been following closely, as student lending used to be one of SoFi's largest and most profitable products. With the decision, let's take a look at what this means for SoFi's business.
Getting clarity
Student loan refinancing is one of the first products introduced by the one-stop-shop financial services company when it launched more than a decade ago. The product was also SoFi's largest lending product prior to the pandemic, generating more than $2.1 billion of originations in the first quarter of 2020, which at the time more than doubled personal loan or mortgage originations.
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Since the student loan moratorium went into place at the beginning of the pandemic, student lending has really only been operating at about half of that capacity. In the second quarter of this year, SoFi did less than $400 million in student loan originations as higher interest rates proved to be another headwind. When President Biden announced the previous extension of the moratorium earlier this year, SoFi also cut its full-year guidance for 2022.
The $10,000 forgiveness and student loan moratorium are two different items but both have led to a huge decline in student loan refinancing at SoFi. The moratorium enables those with an outstanding federal student loan to pause their payments, which depressed refinancing activity because most borrowers won't refinance when they aren't making payments on their loan. The fact that President Biden has been floating the idea of some kind of forgiveness has also likely led to a decline in refinancing activity because, again, why switch over to a private loan when your federal loan might be forgiven?
As CEO Anthony Noto explained on SoFi's first-quarter earnings call this year, anyone that has already refinanced with the digital bank will not qualify for the forgiveness because they now have a private student loan. Noto also said at the time that he thought it would be great for SoFi's business if President Biden did announce $10,000 of relief for borrowers, primarily because the average loan being refinanced at SoFi prior to the pandemic was about $70,000.
There is a cohort of people that have been waiting and waiting and waiting for student loan forgiveness and they have not refinanced. And that's in our demographic as well. Once there actually is forgiveness, there is nothing to wait for anymore. You now know what the plan is, and you have to make a decision.
There will also likely be a good amount of people that start to refinance toward the end of the year in anticipation of the moratorium expiring because some borrowers haven't made loan payments for more than two years. There are still 48 million Americans with more than $1.75 trillion of student debt not factoring in the $10,000 forgiveness.
Is this good or bad for SoFi?
Ultimately, this is good news for SoFi, and shares rose following the announcement because it ends ongoing uncertainty for student loan borrowers and the company itself. Rising rates may slow things down a bit, but once the moratorium expires and the $10,000 forgiveness is made, SoFi's student lending business can get going again. Considering the student loan business only operated at 20% of its pre-pandemic capacity in the second quarter of this year there should be a lot more origination activity going forward, which bodes well for SoFi.
