The Biden administration on Wednesday announced the cancellation of $10,000 in federal student loan debt. An analyst expects the move to be negative for creditors
President Joe Biden announced his student loan debt plan on Wednesday. The cancellation includes $10,000 in federal student loan debt for each borrower with an income ceiling of $125,000 or couples earning less than $250,000 a year. Those who receive federal Pell Grants and earn less than $125,000 per year are eligible for full pardons of up to $20,000.
Biden also extended the debt payment suspension until December 31.
“I have made a commitment to provide student debt relief and I am honoring that commitment today,” President Biden said during a Wednesday afternoon news conference.
“I believe my plan is responsible and fair. It focuses the benefit on the middle class and working families, and helps current and future borrowers, and will fix a badly broken system. And these actions build on my government’s effort to make college more accessible in the first place,” Biden said.
Nelnet (code: NNI) and
(NAVI) are two publicly traded student loan providers and collectors. Both stocks are down this year, with Nelnet down 12% and Navient down 23%. Both were trading lower on Wednesday.
Ed Groshans, an analyst at Compass Point Research, wrote in a research note that student loan forgiveness “would likely be negative for Nelnet and Navient.”
Groshans said Nelnet reported in a recent document that it services student loans for 15.4 million borrowers. Groshans noted how the company said $10,000 of forgiveness would decrease 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 your current projections, your estimated lifetime cash flow of $1.72 billion would decrease by $0.13 billion, US $0.33 billion and $0.58 billion, respectively.”
Nelnet said in its filing that “some variability in prepayment levels is expected, although extraordinary or prolonged increases in prepayment rates could have a materially adverse effect on our revenues, cash flows, profitability and business prospects and , as a result, could materially adversely affect our business, financial condition and results of operations.”
Groshans also cited a recent Navient document in which the company laid out the risks to its operations if student loans were cancelled.
“If a comprehensive student loan forgiveness plan … is implemented, it will likely result in an increase in prepayments, which could be significant, from our existing educational loan portfolio and could materially and adversely affect our profitability, results of operations, financial condition, cash flows or future business prospects,” said Navient.
Nelnet and Navient aren’t the only stocks at risk of feeling the pinch of student loan forgiveness.
(SOFI) lowered its full-year guidance after the latest student loan moratorium was pushed back to August 31. Coming into Wednesday’s trading, the stock is down 61% in 2022.
Not all student loan providers should be adversely affected by possible student loan forgiveness. Barclays analyst Mark DeVries wrote on Wednesday that
Discover financial services
(DFS) “are better isolated as they originate and hold private student loans, which should not be affected by any forgiveness, although they may benefit from a deleveraging of student borrowers.”
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