Student loan forbearance has been in effect for about two and a half years since the start of the pandemic, but as the United States races towards normality, student loan forbearance continues to drag on, likely in reason of political interests. While abstention is a win for student borrowers, many including student loan providers like SoFi Technologies, Inc. (NASDAQ: SOFI), consider it a loss.
The student loan forbearance period due to expire on August 31 is expected to be extended until the end of 2022 due to inflationary pressures. However, I still believe SoFi, a student loan provider, is a buy. Investors expected an extension of the student loan forbearance period through 2023, as noted by the management team, and the dreaded outright cancellation of student debt ranging from $10,000 at $50,000 per borrower becomes less likely. Additionally, SoFi has managed to diversify its business away from student loans to the point where extending student loan forbearance through 2023 will have minimal effect on its growth. Finally, the resumption of student loan repayments after 2022 offers more growth potential for SoFi. Therefore, I continue to believe SoFi is a buy despite the likelihood of an extended student loan forbearance.
Extension of student loan forbearance
Although the Biden administration has not released a concrete decision regarding the extension of student loan forbearance, the extension, in my view, is very likely.
On March 20, 2020, shortly after the pandemic began under the Trump administration, student loan forbearance began citing a negative economic outlook. Then the Trump administration extended the forbearance period until January 31, 2021. After President Biden took office, student loan forbearance was extended 4 more times, until August 31, 2022 .
Any extensions made by former President Trump and President Biden were likely motivated by political interests. After initial student loan forbearance due to economic concerns, the Trump administration extended student loan forbearance weeks before the 2020 presidential election. Then, after President Biden was elected, the period of forbearance was extended, likely following President Biden’s promise to tackle student loans. All of the extensions cite economic issues, including pandemic-related recession risks, post-pandemic recovery, and high inflation, but I believe political interests also played a crucial role in these decisions, as the termination of the Student loan forbearance would have had a negative impact on approval rates and, ultimately, elections.
Now, as the crucial midterm elections loom in November 2022, I believe the Biden administration will once again extend the student loan moratorium. As of this writing, President Biden’s approval rating sits at 42%, while Democrats are desperate to retain 50 Senate seats. As such, it will be difficult for President Biden to end the abstention period, as the student loan forgiveness is widely supported by voters, especially as the midterm elections are fast approaching. . Thus, student loan forbearance will likely resume.
SoFi and student loan forbearance
Student loans were and remain a crucial part of SoFi’s business. To date, it’s true that SoFi has successfully diversified away from the student loan business due to student loan forbearance, but student loans will continue to be crucial to the company’s growth well into 2023 and beyond.
SoFi has successfully diversified outside of the student loan business. In the second quarter of 2020 and the second quarter of 2021, respectively, student loans represented around 44.5% and 29.2% of total loans disbursed before dropping to around 12.4% in the second quarter of 2022. Growth in revenue and expansion of SoFi’s earnings no longer tied to its student loan business, as the company continued to report improved efficiency and revenue growth despite student loan business dull. Also, the student loan forbearance extension is likely priced into the current SoFi stock price. After the Biden administration extended student loan forbearance through August 31, SoFi’s leadership team said it sees “no end to the moratorium in 2022” in April 2022. As such, the extension of the forbearance period is probably built in.
The student loan, while becoming less relevant to SoFi, continues to be important to the company’s future growth potential. The student loan industry has grown rapidly in the past; the continuation of student loans, expected after the midterm elections, will likely begin in 2023, which is a significant catalyst for SoFi, as investors set the price for SoFi, as the student loan industry will never rebound. SoFi’s product and membership growth rate continues to be high at 69% and 79%, respectively, in the second quarter of 2022, increasing cross-selling potential. When resuming student loans, SoFi can increase margins and growth through cross-selling. The majority of member growth comes from low-cost customer acquisition channels such as its financial services platform.
So when SoFi is successful in selling its high-margin student loan products to its existing customer base, SoFi’s growth and margin potential will be in a better position. Student loan forbearance won’t last forever, and when it does eventually end, SoFi is ready to capitalize on the opportunity.
Student loan forgiveness risk unlikely
One of SoFi’s biggest risks that investors pointed to was the potential for student loan forgiveness, as student loan forgiveness will impact SoFi’s future growth in 2023 and its bottom line. Student loans accounted for approximately 12.4% of total loans issued to SoFis in Q2 2022. Since President Biden took office, a blanket student loan forgiveness ranging from $10,000 to $50,000 has been suggested. However, I think this is unlikely.
First, widespread student loan cancellation will be met with strong opposition from the Republican Party and its constituents. A radical decision such as the general cancellation of student loans in times of inflation will be difficult. Moreover, while voters broadly support some level of student loan forgiveness or assistance, the overwhelming majority of voters, about 82%, believe fixing the system itself should be the top priority. The public thinks the system itself should be fixed instead of sinking billions, if not trillions, into student loan repayments, making it difficult to write off student loans across the board.
Additionally, President Biden, since taking office, has aggressively forgiven and forgiven student loan debt to a targeted demographic most in need of help. About $32 billion in student loans have been canceled since President Biden took office, and targeted loan cancellation is still ongoing. As such, the sudden change in direction the president has taken to address student loan issues seems unlikely.
Political agendas are often unpredictable and change daily. Thus, some uncertainty remains on the issue of student loan forgiveness. However, as of today, President Biden is highly unlikely to cancel student loans, thereby reducing investment risk on SoFi. Voters see fixing the system as a top priority while supporting some levels of student loan forgiveness or assistance, which President Biden is executing through targeted loan forgiveness. Therefore, for the Biden administration, a continuously targeted student loan forgiveness may be the best bet.
SoFi, despite its phenomenal earnings report, is experiencing downward pressure on stock prices, and I think this is an opportunity for long-term investors. SoFi has diversified away from the student loan sector, protecting itself from the likelihood of further extension of student loan forbearance. Additionally, with continued expansion in member and product growth, SoFi is poised to capitalize on the student loan markets once the forbearance period ends sometime after 2022. Finally, potential risks related general student loan cancellations are very unlikely at this time, reducing SoFi’s risk. . Therefore, I think SoFi is a buy today.