With the Biden administration expected to announce on Wednesday the cancellation of about $10,000 in federal student loans, one analyst expects the move to be negative for loan servicers
President Joe Biden is expected to announce his student loan debt plan on Wednesday. It is expected to cancel up to $10,000 in federal student loans for each borrower with an income limit of $125,000. Biden may also extend the moratorium on debt payments for a fifth time. The current suspension is currently set to expire on August 31st.
Nelnet (mark: NNI) and
(NAVI) are two publicly traded student loan servicers and collectors. Both stocks have fallen this year, with Nelnet down 12% and Navient down 23%.
Ed Groshans, an analyst with Compass Point Research, wrote in a research note that he expects the pause in student loan payments to continue through Dec. 31 or Jan. 31, and student loan write-offs “would likely be negative for Nelnet and Navient.” .
Groshans said Nelnet reported in a recent filing that it services student loans for 15.4 million borrowers. Groshans noted how the company said the $10,000 forgiveness would reduce the number of borrowers served by Nelnet by about 4.3 million.
Groshans also said that “if prepayment speeds were two, four or 10 times faster than its current projections, its estimated cash flow of $1.72 billion would be reduced by $0.13 billion, $0.33 billion and 0.58 billion dollars respectively.’
Nelnet said in its filing that “some fluctuation in prepayment levels is expected, although extraordinary or widespread increases in prepayment rates could have a material adverse effect on our revenues, cash flows, profitability and business prospects and, as a result, adversely affect our business, financial condition and results of operations.”
Groshans also cited a recent filing by Navient in which the company laid out the risks to its business if student loans are canceled.
“If a broad-based student loan forgiveness plan … is implemented, it would likely result in an increase in prepayments, which could be material, on our existing student loan portfolio and could materially and adversely affect our profitability, results of operations, our financial condition, cash flows or future business prospects,” Navient said.
Nelnet and Navient aren’t the only stocks at risk of feeling the sting of student loan forgiveness.
( SOFI ) cut its full-year guidance after pushing through the latest student loan moratorium on Aug. 31. The stock is down 61% in 2022 since opening trading on Wednesday.
Not all student loan providers are expected to be adversely affected by the potential student loan write-off. Barclays analyst Mark DeVries wrote on Wednesday that
Discover Financial Services
(DFS) “are better insulated since they originate and own private student loans, which should not be affected by any forgiveness, although they could benefit from deleveraging student borrowers.”
Write to Angela Palumbo at firstname.lastname@example.org