The move by President Joe Biden to cancel student debt for millions of Americans has added some wrinkles to the financial businesses that have built up around those loans. The Biden administration announced on Wednesday that up to $10,000 in student debt (or $20,000 for Pell Grant recipients) could be forgiven for borrowers under certain income thresholds. The announcement also said that payments, paused since early 2020, will restart in January. The Department of Education is expected to release more details about the new program in the coming weeks. The exact details will be important to banks, fintech companies and other financial firms that are exposed to the student loan business. Here’s an overview of some of the key areas of the market and how the changes could impact the companies and their investors. The refinancing business Because private and refinanced loans are not expected to be subject to forgiveness, and the restart of monthly payments could be a catalyst for many borrowers to explore restructuring their loans, Biden’s announcement could be a boon for refinancing businesses. Many fintech companies offer student loan refinancing options. One early winner of the new policy appears to be SoFi . The stock rose 4.5% on Wednesday and got an upgrade to buy at Mizuho . “Pulling forward the end of the moratorium to [December] can help improve clarity, and may also result in a pull-forward in refi demand in 4Q22, similar to what occurred in late 4Q21. … With the cap put on income of $125K, those with higher income have little benefit of waiting to re-finance,” Mizuho analyst Dan Dolev wrote in a note upgrading SoFi. But it is not just fintech companies that benefit from student loan refinancing. Some old-school banks have also reached into that business as well, including Citizens Financial. “The net pros and cons of [the announcement] actually increases the opportunity for banks on the refi side,” said Brendan Coughlin, the head of consumer banking at Citizens Financial. “And so we do expect, in sort of late fourth quarter into the first half of next year, for there to be a decent number of students who have the refi incentive that have recently graduated and are in the money. … I think there will be a little bit of a burst of activity in the space.” Other financial institutions can also offer student loan refinancing as part of a personal line of credit. Macro considerations One potential drawback to the refinancing business is rising interest rates. The Federal Reserve’s target policy rate was below 2% when the pandemic hit. After being slashed to zero during Covid, the Fed is hiking again, and its benchmark rate is widely expected to be above 3% by the end of the year. That shift means that refinancing may not be as attractive to many borrowers who took out fixed-rate loans when rates and inflation were lower. “We expect as this new crop of borrowers are going to school and borrowing the Grad PLUS programs at higher interest rates, that as interest rates stabilize and begin to come down, that demand will return. But right now, as I said in my comments, two-thirds of the eligible customer base that we see in the federal loans base, really — their interest rates on their current loans are below what we can offer,” Navient CEO John Remondi said on an earnings call last month, according to a FactSet transcript. Navient purchased student loan company Earnest in 2017. BTIG analyst Isaac Boltansky said in a note on Thursday that Biden’s move was “neutral to slightly negative for Navient … as it marginally reduces the size of the market that can be refinanced in the future” For Citizens, Coughlin said that the higher rate environment does limit refinancing but should still be an attractive option for borrowers with higher incomes and good credit scores. Additionally, for businesses with other consumer credit businesses beside student loans, the change could affect credit quality for customers. “Forgiveness could temporarily improve subprime credit quality, but resumption of payments adds to credit deterioration risks in 2023,” Morgan Stanley economist Sarah Wolfe wrote in a note to clients on Wednesday. Coughlin added that the cancellation does raise some questions about borrower behavior going forward now that the government has already trimmed student debt once. “When you refi to a private student loan, the potential of that [cancellation] benefit doesn’t exist anymore, so will students hold back on that hoping the administration does something more aggressive? I think that’s highly unlikely, but attitudinally could be something that is in a lot of students’ minds,” Coughlin said. Loan servicers Another piece of the student debt puzzle is the servicing companies. Navient transferred its federal student loan servicing business to Maximus late last year, but does still work with old Family Federal Education Loans. Because many of those loans are privately held, they are not expected to be forgiven, though some borrowers may be able to get those loans reclassified. “Given the fact that the announcement (at least on its face) appears to be limited to loans owned by the Federal Government (we should get confirmation of this when the details are released over the coming weeks) it has less of an impact on holders of FFELP loans such as Navient or Nelnet ,” Credit Suisse analyst Moshe Orenbuch said in a note to clients. Nelnet, meanwhile, also services federally held student loans, which generates fee revenue for the firm. Orenbuch said that 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, the executive director of the Student Loan Servicing Alliance, said that servicers will likely get additional revenue from the government for upgrading their systems to handle the cancellation and other changes to student loan programs, which could help offset the decline of servicing revenue. Nelnet’s stock fell roughly 1.2% on Wednesday when Biden’s plan was announced, and it is down about 12% for the year. — CNBC’s Michael Bloom contributed to this report.
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