In response to the pandemic and its pressures on the economy, the federal government paused student loan payments and interest accruals. The action gave millions of Americans a temporary reprieve. As part of the debt ceiling deal reached earlier this year, those same millions of Americans will soon have to begin repaying student loans. In a related matter, the Supreme Court recently ruled against President Joe Biden's efforts to forgive up to $20,000 in student loans for qualified borrowers.
The stocks of companies that specialize in student loans got a boost from the news that student loan payments will resume in October. SoFi Technologies (SOFI 3.69%), Navient (NAVI -0.25%), and SLM (SLM -0.14%) all saw their stock prices jump.
But only one of these three stocks is a long-term buy. Here's what you need to know.
The ever-evolving status of student loan forbearance and forgiveness
In March 2020, the federal government paused payments and interest accumulation on most federal student loans to provide immediate relief to households during a time of great economic uncertainty. Both the Trump and Biden administrations extended the interest-free student loan repayment pause multiple times over the last three years.
In August 2022, the Biden administration announced an unprecedented student loan forgiveness program using rules outlined in the 2003 HEROES Act that would permit the government to cancel $20,000 of education loans offered to Pell Grant recipients and $10,000 for non-Pell Grant recipients. These cancellations would've been available to borrowers with individual incomes of less than $125,000 or household incomes of less than $250,000.
In November, a federal court in Texas said the administration could not use the HEROES Act to initiate loan forgiveness in this instance. The 8th Circuit Court of Appeals followed this up and granted a nationwide preliminary injunction blocking the program until the Supreme Court made a ruling. Those seeking relief were dealt a couple of blows in the past month. First, as part of the bipartisan debt ceiling deal, lawmakers agreed to end the student loan forbearance program. Then the Supreme Court ruled against the debt forgiveness plan, saying that the HEROES Act does not specifically stipulate that the Secretary of Education can cancel $430 billion in federal student loan balances.
Image source: Getty Images.
How student lenders could benefit
Navient, SLM, and SoFi all provide loans for students and have been lenders of choice for refinancing many of these loans. With student loan payments set to restart in October, the thinking is that these lenders could see an uptick in business after a three-year drought.
For example, Navient saw student loan refinancing activity plummet from $5.1 billion in 2021 to just $1.7 billion last year. Meanwhile, in 2019, SoFi originated $6.7 billion in student loans. Last year it originated $2.2 billion, a 66% decline from pre-pandemic levels.
However, with loan payments set to restart, these lenders believe there is an opportunity to capitalize on borrowers looking to extend the duration of their loans and refinance them. This could boost the lenders' revenue and income and earn them higher interest income due to the current higher interest rate environment.
Here's why student lenders may not see a big refinancing boom
After getting turned back on its first effort, the Biden administration recently rolled out its plan B to provide relief to borrowers. One way is through a "12-month on-ramp." Student loan payments will continue, and interest will accumulate; however, any missed payments in the 12-month period will not be considered delinquent. This will give borrowers up to a year to restart payments without any impact on their credit scores.
The administration's new income-driven repayment program also helps cut many borrowers' obligations in half and is another way to bring relief to distressed borrowers. Because of these modifications, lenders may not see the big refinancing boom they hope for this year.
For that reason, student loan-focused companies Navient and SLM may not get as big a boost to their businesses. Not only that, but over the last several years, these lenders have seen stagnant growth on the top and bottom lines as they've failed to diversify their businesses.
SLM Revenue (TTM) data by YCharts
SoFi has done the best job of diversifying its revenue streams
On the other hand, SoFi Technologies, whose primary business was student loans when it began in 2011, has done a stellar job of pivoting and growing its business in other ways. The company expanded its personal lending business amid the pandemic. In 2022, the company originated $9.8 billion in personal loans, up 161% from pre-pandemic levels.
With its purchase of Golden Pacific Bancorp in 2022, SoFi qualifies as a bank and can now collect deposits, hold more of those loans on its books, and grow its net interest income. In the first quarter, SoFi's net interest income of $236 million was up 149% from the prior year. It also has an appealing technology business, which could give it a foothold in the growing banking-as-a-service sector, which some experts say could grow 17% annually through 2030.
SoFi has done a solid job of diversifying its income. While the ending of the student loan moratorium could give it a boost, its expansion beyond this business is why I would choose this student lender stock over the others to buy and hold for the long haul.
