Why the new debt deal is great news for SoFi investors

Students will need to start paying back their debt for the first time in more than three years as part of the new debt ceiling deal.

The prospect sent shares of SoFi (SOFI), one of the nation’s leading student loan lenders, soaring on Wednesday as Wall Street becomes increasingly confident the deal will be signed.

“We view this as an incremental positive for SoFi, as borrowers will need to start making payments again and some may look to extend the duration of their loans through SoFi’s student loan refinance product, which has seen lack of cluster origination volumes since the start of the moratorium in 2020,” Wedbush Securities managing director David Chiaverini wrote in a note to clients on Wednesday.

While SoFi had originally planned for the moratorium to be lifted on June 30 as scheduled, the debt ceiling deal could bring finality to a student debt moratorium that has been extended multiple times since the government first paused federal student loans as part of pandemic relief benefits in March 2020.

The extensions materially altered SoFi’s business. In the first quarter of 2023, SoFi’s student loan volume decreased by more than 50% from pre-pandemic levels, according to a company release. The student loan unit, which represented nearly 30% of the company’s loan volume in the first quarter of 2022, represented just 15% in the first quarter of 2023.

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

The student loan moratorium has contributed to downbeat sentiment surrounding shares of SoFi, a technology-focused personal finance company that went public in 2021. After an initial bump in the months following the IPO, the stock tumbled from its November 2021 high.

But the upbeat sentiment in student loans sent shares rebounded on Wednesday as the stock rose nearly 13%.

SoFi CEO Anthony Noto explained during the company’s most recent call that he sees SoFi in the student loan business in two ways. The firm provides direct private student loans and also provides student refinancing options.

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

“We do think that there is still a large TAM that we can go after, given where we can price the loans today,” Noto said on the company’s most recent call. “So we do expect to see an uptick in demand, but probably not to the levels that we saw back in Q4 of 2019.”

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

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

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

“What we saw when rates were low is that our student loan refinancing business really benefits as people can refinance their federal loans into lower rate loans and capture savings there,” Noto said at the JPMorgan Global Technology, Media and Communications Conference on May 24. So that business would be very robust in a lower-rate environment.

Josh is a reporter for Yahoo Finance.

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