While most of the world sighed in relief when the U.S. government reached a deal to increase the federal debt limit, many student loan borrowers were caught by surprise. Included in the provisions of the law was an end to the pause on student loan payments and accrued interest, this upcoming August. As a result, some 43 million Americans --17% of U.S. adults -- will have to start paying on the $1.6 trillion in loans they owe.
According to different estimates, this will result in cutting discretionary spending by as much as $10 billion per month for these borrowers. While some have increased their savings rate and are on a solid financial footing to move forward without any changes in their lifestyle, a large portion have just spent that "found" money every month, and are about to have to cut back.
That's not great for the companies that could be affected the most. Let's take a closer look at one company that could be impacted the most to the downside, as well as my favorite likely winner from the return of federal student loan payments.
Carnival could be a value trap
Carnival Corporation (CCL -0.66%) (CUK -0.88%) is on a roll. Over the past few years it's managed to come through the Coronavirus pandemic with a revitalized and growing fleet of amazing cruise ships. People love to cruise, and it's showing up in the company's results, which include record bookings and a return to adjusted positive cash flows.
Additionally, it may look like there's a ton of upside still; Carnival shares are still down almost 80% from the pre-Covid highs. That should mean a return to higher highs, right?
There's a lot more to the story investors need to know before being bullish on Carnival at these prices. As a starting point, Carnival issued a lot more stock to raise money during and since the pandemic, very nearly doubling its share count. Additionally, Carnival also took on a massive amount of debt to raise even more cash. As a result, Carnival's enterprise value -- what it would cost to buy a company and assume its debt, minus cash -- is actually above pre-pandemic levels.
CCL Enterprise Value data by YCharts
Carnival simply isn't as cheap as it looks. A significantly larger portion of its cash flows going forward will have to service debt, and the portion of the company a single share owns is significantly smaller.
Combine that with the 43 million Americans on track to take a $230 hit to their average discretionary monthly spending power, and Carnival's bookings could slow. With a far more leveraged business, and only just returning to cash-positive operations, investors should step lightly with Carnival.
SoFi's big opportunity
The end of the federal student loan payments suspension isn't great for consumer discretionary businesses, but SoFi Technologies (SOFI 3.69%) is positioned to be a huge winner as a result. A core part of its business prior to the pandemic, SoFi saw student loan growth basically stop in 2020. And while its customers have had to keep making payments, borrowers who still had a federal student loan had zero reason to refinance, with payments and interest accrual both suspended for the better part of the past three years.
But SoFi kept growing during this period, accelerating its plans to expand into other kinds of lending, including credit cards, home and auto loans, as part of its transition to becoming a chartered bank. Since the first quarter of 2020, SoFi has increased its member (what it calls customers) count 465%, to 5.7 million through the first quarter of 2023. It has grown the number of products those customers use by more than 8-times over the same period.
Its land-and-expand model is working. SoFi has almost doubled the number of lending products its customers use since the end of 2019, while financial services products customers have grown a massive 18 times.
For context, student loan originations fell from $6.7 billion in 2019 to $2.2 billion last year. And because of its expansion into more kinds of lending, it still grew loan originations modestly from the prior year.
Looking ahead, millions of borrowers will be looking for ways to lower their payments. SoFi is primed to be a huge beneficiary.
Keeping the long view
Like other events, it's important to understand the implications in the short- and long-term. In this situation, Carnival and other companies that count on strong discretionary spending and optimistic economic outlooks are generally built to deal with these cycles. And it's unlikely that this single event will upend Carnival. But it absolutely could take a bite out of future demand, especially in the near-term as consumers readjust to their new financial situation; if the company has to start revising down on its guidance or if bookings slow, the stock would likely take a hit. If that were to happen, it could turn into a stock to buy, from what I think is today, a stock best avoided on potential uncertainty as much as clear risk.
As for SoFi, I expect this event will be a long-term positive. The long-tail of student debt should remain a source of new customer relationships for years, and it keeps proving it can expand relationships over time. While this event may have a more uncertain impact on Carnival, the odds are incredibly favorable that SoFi's bottom line will benefit for years to come.
