Why the new debt deal is great news for SoFi investors

Students will have to start paying off their debt for the first time in more than three years under the new debt ceiling agreement.

That prospect sent shares of SoFi (SOFI), one of the nation’s top student lenders, soaring on Wednesday as Wall Street grows more confident the deal will get done.

“We view this as an added benefit for SoFi as borrowers will have to start making payments again and some may seek to extend the term of their loans through SoFi’s student loan refinance product, which has seen origination volumes. lackluster since the moratorium began in 2020,” Wedbush Securities managing director David Chiaverini wrote in a note to clients on Wednesday.

While SoFi had initially expected the moratorium to be lifted on June 30 as planned, the debt cap agreement could make final a student debt moratorium that had been extended several times since the government suspended for the first time federal student loans under pandemic relief benefits in March 2020.

Extensions have significantly changed SoFi’s business. In the first quarter of 2023, SoFi’s student loan volume was down more than 50% from pre-pandemic levels, according to a company statement. The student loans unit, which represented nearly 30% of the company’s loan volume in the first quarter of 2022, represented only 15% in the first quarter of 2023.

“The moratorium on federal student loan repayments continues to weigh on the business,” the company noted in its May 1 first-quarter statement.

The student loan moratorium has helped weigh on shares of SoFi, a tech-focused personal finance company that went public in 2021. After an initial bump in the months following the IPO, the stock fell from its peak in November 2021.

But bullish student loan sentiment sent stocks rebounding on Wednesday as the stock rose nearly 13%.

SoFi CEO Anthony Noto explained on the company’s last call that he sees SoFi in the student loan business in two ways. The company offers direct private student loans and also offers student refinance options.

SoFi is one of many private options that compete with public student loan offerings. Despite the government’s ongoing involvement in the student debt process, Noto and Sofi still see an opportunity in the space this year.

“We believe there is still a large TAM we can pursue given where we can assess loans today,” Noto said on the company’s latest call. “So we expect to see an increase in demand, but probably not to the levels we saw in the fourth quarter of 2019.”

General exterior view of SoFi Stadium, future home of the Los Angeles Rams, Saturday, August 29, 2020, in Inglewood, Calif.  (AP Photo/Kyusung Gong)

General exterior view of SoFi Stadium, future home of the Los Angeles Rams, Saturday, August 29, 2020, in Inglewood, Calif. (AP Photo/Kyusung Gong)

Rising interest rates will limit earnings for now, Noto said. But when interest rates come back down, Noto says there will be more demand for student loan refinancing.

“What we’ve seen when rates have been low is that our student loan refinance business really benefits because people can refinance their federal loans to lower rate loans and save money there,” said Noto at the JPMorgan Global Technology, Media and Communications Conference on May 24. This activity would therefore be very robust in a low rate environment.

Josh is a reporter for Yahoo Finance.

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