President Joe Biden’s decision to write off student debt for millions of Americans has added some wrinkles to the financial firms that have been built around these loans. The Biden administration announced Wednesday that up to $10,000 in student debt (or $20,000 for Pell Grant recipients) could be forgiven for borrowers below certain income thresholds. The announcement also indicates that payments, suspended since the beginning of 2020, will resume in January. The Department of Education is expected to release more details of the new curriculum in the coming weeks. The exact details will be important for banks, fintech companies and other financial companies exposed to the student loan industry. Here is an overview of some of the key areas of the market and the impact the changes could have on companies and their investors. Given that private and refinanced loans are not expected to be forgiven, and the restart of monthly payments could be a catalyst for many borrowers to consider restructuring their loans, Biden’s announcement could be a boon for refinancing companies. Many fintech companies offer student loan refinance options. One of the early winners of the new policy appears to be SoFi. The stock rose 4.5% on Wednesday and got an upgrade to buy Mizuho. “Advancing the end of the moratorium for [December] can help improve clarity and can also lead to increased refi demand in 4Q22, similar to what happened at the end of 4Q21. … With the $125,000 income cap, those with higher incomes have little benefit waiting to refinance,” Mizuho analyst Dan Dolev wrote in a note upgrading SoFi. . But it’s not just fintech companies that benefit from student loan refinancing. Some old school banks have also moved into this business, including Citizens Financial. “The net advantages and disadvantages of [the announcement] actually increases the opportunities for banks on the refi side,” said Brendan Coughlin, head of consumer banking at Citizens Financial. “And so we expect, sort of at the end of the fourth term in the first half of next year, to have a decent number of students who have the refi incentive who have recently graduated and are in the money . … I think there will be some activity in space. ” Other financial institutions may also offer student loan refinancing through a personal line of credit. Macroeconomic Considerations A potential downside of refinancing activity is rising interest rates. The Federal Reserve was below 2% when the pandemic hit, and after being cut to zero during Covid, the Fed is going back up again and its benchmark rate is expected to be well above 3% by the end of the year. that refinancing may not be as attractive to many borrowers who took out fixed-rate loans when rates and inflation were lower than when interest rates stabilize and start to fall, that demand will return. But right now, as I said in my comments, two-thirds of the eligible clientele that we see in the federal loan base, really – their interest rates on their loans current ones are less than what we can offer,” said Navient CEO John Remondi. during an earnings call last month, according to a FactSet transcript Navient bought student loan company Earnest in 2017. BTIG analyst Isaac Boltansky said in a note Thursday that Biden’s decision was “neutral to slightly negative for Navient…as it slightly reduces the size of the market that can be refinanced in the future” For Citizens, Coughlin said the higher rate environment limits refinancing should still be an attractive option for borrowers with higher incomes and good credit ratings. Additionally, for companies with other consumer finance companies alongside student loans, the change could affect credit quality for customers. “Forgiveness may temporarily improve the quality of subprime credit, but the resumption of payments adds to the deterioration of credit rationing risks in 2023,” wrote Sarah Wolfe, an economist at Morgan Stanley, in a note to clients on Wednesday. Coughlin said added that the cancellation raises questions about the behavior of borrowers in the future now that the government has already reduced student debt once.”When you go for a private student loan, the potential for this [cancelation] the advantage no longer exists, so will the students refrain from it and hope that the administration will do something more aggressive? I think it’s highly unlikely, but the attitude might be something that’s on a lot of students’ minds,” Coughlin said. Loan Officers Another piece of the student debt puzzle is the service companies. Navient transferred its federal student loan servicing business to Maximus late last year, but still operates with former federal family loans for education. Since many of these loans are held by individuals, they should not be forgiven, although some borrowers may be able to have them reclassified. “Given the fact that the announcement (at least at first glance) appears to be limited to loans held by the federal government (we should get confirmation of this when details are released in the coming weeks), it has less impact on FFELP loan holders such as Navient or Nelnet,” Credit Suisse analyst Moshe Orenbuch said in a note to clients. Nelnet, meanwhile, also handles student loans held by the federal government, which generates fee revenue for the company. Orenbuch said Biden’s announcement could be a “modest negative” for Nelnet, as borrowers whose full debt is forgiven will be removed from the student loan system. Scott Buchanan, executive director of the Student Loan Servicing Alliance, said the services would likely get additional revenue from the government for upgrading their systems to handle cancellation and other changes to student loan programs, which which could help offset the decline in service revenue. Nelnet’s stock fell about 1.2% on Wednesday when Biden’s plan was announced, and it’s down about 12% for the year. – CNBC’s Michael Bloom contributed to this report.
Here’s how Biden’s student loan cancellation affects lenders and services