Media outlets are reporting that President Joe Biden will soon decide on whether to extend the student loan payment moratorium and whether to grant some level of forgiveness on outstanding federal student loans. The unknown surrounding these two decisions has dogged SoFi Technologies (NASDAQ: SOFI) for the last two years, considering the company was founded on the student loan business and used to be one of SoFi’s largest and most profitable business lines.
Let’s take a look at why this upcoming catalyst could be huge for SoFi’s business.
A potential ramp of student lending
In early 2020 at the onset of the pandemic, a moratorium went into place that paused payments on federal student loans. Since then there have been numerous extensions of the moratorium, which President Biden earlier this year extended to Aug. 31. The moratorium has been a huge drag on SoFi’s student lending business because significantly fewer borrowers refinance their student loans when they don’t need to make payments on their current loans.
In the first quarter of 2020 prior to the moratorium, SoFi originated more than $2.1 billion of student loans. Since then the best SoFi has done is about $1 billion of student loan originations, aside from the fourth quarter of 2021 when SoFi originated nearly $1.5 billion. However, that only happened because people thought the moratorium was going to expire at the end of 2021. In SoFi’s recently reported second quarter, it originated less than $400 million of student loans, a mere shadow of what the business used to be.
In its financial assumptions for this year, SoFi expects the moratorium to once again be extended until January, so if President Biden lets it expire at the end of the month, SoFi is likely to raise its guidance.
Student loan forgiveness
Another question that has been on the mind of investors is how some potential student loan forgiveness may impact SoFi’s student lending business going forward. Biden has talked about the possibility of forgiving $10,000 on student loans, although it could be based on income or capped to borrowers of a certain income level.
As CEO Anthony Noto has touched on in the past, anyone who has refinanced with SoFi would not be eligible for this forgiveness because they now have a private student loan. Furthermore, student loans are fairly large. Prior to the moratorium, the average size of a student loan at SoFi was about $70,000, and college hasn’t gotten any cheaper in recent years, so a $10,000 student loan forgiveness would not be the end of the world and leaves SoFi plenty of opportunity.
Additionally, the anticipation of forgiveness has resulted in many federal student loan borrowers waiting to see the outcome. After all, if you think you can get $10,000 in relief, wouldn’t you want to wait? If there is some level of relief, it will likely provide the insight that borrowers need and could push many that have been waiting for the relief to go ahead and refinance.
Giving the business clarity
With the moratorium in place, SoFi’s student loan business has been operating at about 50% capacity for two years now. While it very well could be extended again, the end of the moratorium could open the floodgates and enable the digital bank to pick up with student lending where it left off before the moratorium. That would be a nice complement to SoFi’s personal lending and mortgage businesses, both of which have ramped up in recent years. If the moratorium is allowed to expire in August, expect management to raise guidance.
And then if President Biden declares some level of forgiveness, this would likely give borrowers that have been sitting on the sidelines the information they need to refinance.
Either way, if you are a SoFi shareholder you are looking for clarity, because clarity moves the business forward and allows student lending to resume sooner rather than later, which would ultimately lead to more revenue and higher profitability for the company.