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Student loan forgiveness a boon for private lenders SLMA, SoFi

By Kevin Donovan

20:19, 24 August 2022

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SLM
SLM Corporation
16.81 USD
-0.34 -1.990%
SOFI
SoFi Technologies Inc.
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-0.12 -2.630%

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Protestors for student loan debt forgiveness
SLM, SoFi could benefit from stronger borrower credit after student debt forgiveness - Photo: Shutterstock

US President Joe Biden’s long-anticipated student loan-debt forgiveness plan announced on Wednesday is seen as a boon to private student lenders SLM Corp. (SLM), commonly known as Sallie Mae, and SoFi Technologies (SOFI), as the lowered borrower debt burden is expected to improve the credit quality of their portfolios.

SLM Corp (Nasdaq: SLM) YTD

SLM Corp (Nasdaq: SLM) YTDSLM Corp (Nasdaq: SLM) YTD - Photo: TradingView

Critics of the plan, however, say debt forgiveness sends the wrong message about personal responsibility, does little to correct the underlying high tuition costs, and will increase near-record high inflation.   

“This could help Sallie Mae as borrowers get some relief from their federal student loan debt,” said Wedbush Securities analyst Peter Winter. “I think that’s also why you saw SoFi rally a bit today, this should improve the loan portfolio’s credit quality and the end of the moratorium ends and student loan payments start up again.”

SLM Corp. (SLM) stock traded relatively unchanged on the day, to $14.88 per share, versus the $14.87 opening share price. Sallie Mae stock trades on the Nasdaq exchange under the ticker SLM. SoFi stock jumped 11.3% to $6.877 per share versus Tuesday’s 6.17 closing share price. SoFi stock trades on the Nasdaq exchange under the ticker SOFI.

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SLM Corp. (Nasdaq: SLM) price chart

Debt forgiveness plan

Under the plan, borrowers with federally held student loan debt and an income under $125,000, or $250,000 for married couples filing jointly. Additionally, borrowers under the Pell Grant program for lower-income borrowers are eligible to have $20,000 of student-loan debt wiped clean.

Up to 40 million borrowers are eligible for debt forgiveness at a cost to US taxpayers estimated between $330bn and $380bn. Additionally, the suspension of student loan payments, instituted in the aftermath of the Covid-19 outbreak, will be lifted as of year-end.

Biden, who promised to take action on student-loan debt while campaigning for president, was under political pressure from some within his own party to take action to boost his party’s chances in the mid-term elections.

“The problem, as a policy, is what happens, not in 10 years but next year,” said Scott Buchannon, Executive Director of the Student Loan Servicing Alliance, a trade group representing the $1.50 trillion (£1.27 trillion) student loan servicing industry. “By 2026 student loan debt will be back to current levels.” A study by the Committee for a Responsible Federal Budget found that, at the $10,000 per-borrower threshold, student loan debt would return to current levels by 2026.

Impact on student lenders

What differentiates Sallie Mae and SoFi from other student lenders, such as NelNet (NNI) and Navient (NAVI), is the lack of exposure to the federal loans, which are being forgiven. Sallie Mae loans are private, generally made to post-graduate students, while SoFi’s portfolio consists of refinanced federal student loans with lower monthly payments generally originated after the loan is in repayment.

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SoFi Technologies Inc. (Nasdaq: SOFI) price chart
 

Wedbush’s Winter thinks Sallie Mae stock, trading 26.7% down from the $20.14 price in June, is currently cheap and has an Outperform rating and a $20 per-share price target based on a seven-times earnings multiple.

“Sallie Mae stock really came under pressure after the earnings reported increased net charge-offs and lower portfolio sale gains on sale,” Winter added. They altered their loan forbearance policy more in-line with [US Securities and Exchange Commission] guidelines and charge-offs are expected to decline after the third quarter.”

SoFi Technologies Inc (Nasdaq: SOFI) YTD

SoFi Technologies Inc. (Nasdaq: SOFI) YTDSoFi Technologies Inc. (Nasdaq: SOFI) YTD - Photo: TradingView

Winter noted how Covid spurred drop-out rates higher, due to financial hardship. Additionally, a Covid-related staff shortage in the collections department has been corrected and is now fully staffed.

“The certainty that loan payments are going to begin again should be good for both Sallie Mae and SoFi,” Winter added.

Fintech SoFi Technologies (SOFI), a diversified consumer finance company, originated 12.4% of its total second-quarter loan originations in student loans and holds 38.4% of its loan portfolio in the sector, according to its most recent Form 10-Q filing.

Inflationary concerns of plan

The aforementioned CRFB study found the increased government spending needed to pay the forgiven loans would virtually offset any disinflationary measures included in the recently passed Inflation Reduction Act (IRA).

Simply extending the current repayment pause through the end of the year would cost $20bn – equivalent to the total deficit reduction from the first six years of the IRA, by our rough estimates,” the CRFB said. “Cancelling $10,000 per person of student debt for would cost roughly $230 billion.

Combined, these policies would consume nearly 10 years of deficit reduction from the Inflation Reduction Act,” the CRFB concluded.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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