After much debate, the U.S. government reached a deal on the debt ceiling limit in late May. Government officials agreed to restart student loan repayments as part of the bipartisan deal. Student loan payments were put on pause as part of pandemic relief policies put in place in March 2020. After being extended multiple times, repayments will resume for borrowers for the first time in three years.
Following the news, many student lending stocks popped higher. Navient (NAVI -0.25%) is one student lender whose stock jumped 30% in the days following the deal. The company is sure to benefit from the deal, but there are other factors you must consider before diving into the stock.
The history of the student loan forbearance
The student loan repayment freeze began in March 2020 at the beginning of the pandemic. This moratorium not only put loan payments on pause but also stopped the accumulation of interest to help borrowers weather the economic fallout from the pandemic. Since then, the measure has been extended on nine separate occasions, providing 44 million borrowers of federal loans some relief over the past three years.
Student loan repayments and potential student loan forgiveness have been much debated among politicians. When President Joe Biden and Speaker of the House Kevin McCarthy negotiated the debt ceiling deal, student loans were a hot topic. Biden and McCarthy finalized an agreement, passed by the House and Senate, that ends the moratorium on June 30, with payments set to restart around September or October.
Here's how Navient could benefit from this
Companies with exposure to student loans blasted off higher following the news. Since June 1, Navient has gained 21%, while SoFi, whose business was originally in student loan refinancing, jumped 27%. Investors were optimistic about the resolution of uncertainty about when repayments would begin for a good reason.
Navient provides educational loans to students and services student loans for itself and other third parties. Unlike SoFi, which has a more diversified business, Navient concentrates primarily on lending, refinancing, and servicing student loans. Over the last couple of years, Navient has seen student loan re-financings plummet from $5.1 billion in 2021 to $1.7 billion last year. The company said borrowers had little incentive to refinance in 2022 due to higher interest rates.
Now, with the ending of the student loan moratorium, Navient hopes there is an opportunity to capitalize on borrowers looking to extend the duration of their loans and refinance. This could potentially boost its revenue and income and earn it higher interest income thanks to the highest interest rates it can charge.
While the resumption of student loan payments could provide Navient with a boost, there are some other things you'll want to consider before jumping into this stock.
Image source: Getty Images.
Consider this before buying Navient
On the surface, Navient looks like a solid dividend stock with its 3.5% yield. The company has a large portfolio of FFELP loans totaling $42 billion, providing a predictable, consistent revenue stream.
However, its net income from FFELP loans is declining over time. That's because Congress passed legislation in 2010 that ended loan originations through the FFELP program. Since then, its portfolio and net income from that portfolio of loans has been gradually declining over time.
Navient also provides private student loans and refinancing loans to diversify its earnings. This portfolio totals $18 billion and is its primary source of new business. It also services loans, but in 2021, it sold its federal loan servicing contract for all loans made through the Department of Education and no longer has that as a reliable source of income.
The company tried diversifying earnings during the pandemic, earning fees on contracts to facilitate unemployment benefits, contact tracing, and vaccine administration. These revenue streams have dried up as well.
The company needs to figure out its next steps
Navient trades at a price-to-earnings (P/E) ratio of 5 and around its tangible book value. However, its revenue and net income have fallen 62% and 65% over the last decade, which seems to justify its cheap valuation.
While the recent student loan repayments may give its business a little boost, it has bigger fish to fry when figuring out how to grow and make money. For that reason, I would avoid buying this student lender stock.
