Justin Sullivan
Introduction
Student loan forbearance has been in effect for about two and a half years since the start of the pandemic, yet, as the U.S. races towards normality, student loan forbearance continues to drag on likely due to political interests. While forbearance is a win for student loan borrowers, many, including student loan providers like SoFi Technologies, Inc. (NASDAQ:SOFI), see it as a loss.
The student loan forbearance period set to expire on August 31st is likely to be extended through the end of 2022 citing inflationary pressures. However, I continue to believe that SoFi, a student loan provider, is a buy. Investors have been expecting an extension of the student loan forbearance period through 2023 as noted by the management team, and the feared outright student debt cancellation ranging from $10,000 to $50,000 per borrower is becoming less likely. Further, SoFi has successfully diversified its business away from student loans to the point where the extension of student loan forbearance through 2023 will have a minimal effect on its growth. Finally, the resumption of student loan payments after 2022 provides more growth potential for SoFi. Therefore, I continue to believe SoFi is a buy despite the likelihood of student loan forbearance extending.
Student Loan Forbearance Extension
Although the Biden Administration has not published a concrete decision regarding student loan forbearance extension, the extension, in my opinion, is highly likely.
On March 20th, 2020, briefly after the start of the pandemic under the Trump Administration, student loan forbearance began citing negative economic outlooks. Then, the Trump administration extended the forbearance period to January 31, 2021. After President Biden took office, student loan forbearance has extended 4 more times, to August 31st, 2022.
All of the extensions done by both former President Trump and President Biden have likely been motivated by political interests. After the initial student loan forbearance on economic worries, the Trump Administration extended the student loan forbearance weeks before the 2020 presidential election. Then, after President Biden was elected, the forbearance period was extended likely as a result of President Biden’s promise to tackle student loans. All of the extensions cite economic woes including recessionary risks from the pandemic, recovery from the pandemic, and high inflation, but I believe that political interests also played a crucial role in these decisions as termination of student loan forbearance would have had a negative impact on approval rating and ultimately elections.
Today, as the crucial midterm election looms in November 2022, I believe the Biden Administration will once again extend the student loan moratorium. At the time of writing, President Biden’s approval rating sits at 42%, while the democrats desperately need to maintain 50 seats in the Senate. As such, it will be difficult for President Biden to end the forbearance period as student loan forgiveness is widely supported by the voting public, especially as the midterm election is just around the corner. Thus, student loan forbearance will likely resume.
SoFi and Student Loan Forbearance
Student loans were and remain a crucial part of SoFi’s business. As of today, it is true that SoFi has successfully diversified away from the student loan business as a result of student loan forbearance, but student loans will continue to be crucial for the company’s growth through 2023 and beyond.
SoFi has successfully diversified away from the student loan business. In 2020Q2 and 2021Q2, respectively, student loan originations accounted for about 44.5% and 29.2% of the total loan originations before dropping to about 12.4% in 2022Q2. SoFi’s top-line growth and bottom-line expansion are no longer tied to its student loan business as the company continued to report better efficiencies and revenue growth despite lackluster student loan business. Further, the student loan forbearance extension is likely priced into SoFi’s current stock price. After the Biden Administration extended the student loan forbearance to August 31st, SoFi’s management team has said that they see “no end to the moratorium in 2022” in April 2022. As such, the extension of the forbearance period is likely priced in.
Student loan, despite it becoming less relevant for SoFi, continues to be important for the company’s future growth potential. The student loan business has been growing fast 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 are pricing SoFi as the student loan business will never revive. SoFi’s product and member growth rate continue to be strong at 69% and 79%, respectively, in 2022Q2 increasing the cross-selling potential. Upon resumption of student loans, SoFi can expand its margins and growth through cross-selling. The majority of the member growth came from low customer acquisition cost channels such as its financial services platform.
Thus, when SoFi succeeds in selling its high-margin student loan products to its existing customer base, the growth and margin potential of SoFi will be in a better position. Student loan forbearance will not last forever, and when it eventually ends, SoFi is ready to capitalize on the opportunity.
Student Loan Forgiveness Risk Unlikely
One of SoFi’s biggest risks that investors have pointed out was the potential of Student loan cancellation as the cancellation of student loans will impact SoFi’s future growth in 2023 and its bottom line. Student loans accounted for about 12.4% of total loan originations for SoFi in 2022Q2. Since President Biden took office, a general student loan cancellation ranging from $10,000 to $50,000 has been suggested. However, I believe this to be unlikely.
First, a widespread cancellation of student loans will be met with strong opposition from the Republican party and its constituents. A radical decision such as the widespread student loan cancellation in times of an inflationary environment will be challenging. Further, although the voters widely support some levels of student loan forgiveness or assistance, the overwhelming majority of the voting public, about 82%, believes that fixing the system itself should be the top priority. The public believes the system itself should be fixed instead of plunging billions if not trillions of dollars into repaying student loans, making general cancellation of student loans challenging.
Further, President Biden, since he took office, has been aggressively forgiving and canceling student loan debt to a targeted demographic needing the most assistance. About $32 billion dollars in student loans have been forgiven since President Biden took office, and the targeted loan forgiveness is still ongoing. As such, the sudden change in the direction the President has been taking to tackle student loan problems seems unlikely.
Political agendas are oftentimes unpredictable and changing on the daily basis. Thus, some uncertainty remains regarding the question of student loan forgiveness. However, as of today, it is highly unlikely for President Biden to cancel student loans, effectively reducing investment risks on SoFi. Voters view fixing the system as a top priority while also supporting some levels of student loan forgiveness or assistance, which President Biden is executing through targeted loan forgiveness. Therefore, for Biden Administration, continually targeted student loan forgiveness may be the best choice.
Summary
SoFi, despite its phenomenal earnings report, is seeing a downward stock price pressure, and I believe this is an opportunity for long-term investors. SoFi has diversified away from the student loan business shielding itself from the likelihood of another extension of student loan forbearance. Further, through continual expansion in member and product growth, SoFi is ready to capitalize on student loan markets once the forbearance period finally ends sometime after 2022. Finally, the potential risks from the general student loan cancellation are highly unlikely at the moment reducing SoFi’s risk. Therefore, I believe SoFi is a buy today.
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