In a much-anticipated development, President Joe Biden announced Wednesday that many Americans may have up to $10,000 in federal student loan debt forgiven. Further, the amount of debt forgiveness increases to $20,000 if impacted individuals qualified for Pell grants. In turn, shares of SoFi Technologies (SOFI) increased conspicuously as the announcement eliminates certain vagaries. At the same time, this may only be a partial solution for SOFI stock.
Below are the details of the debt forgiveness program according to the AP:
You qualify to have up to $10,000 forgiven if your loan is held by the Department of Education and you make less than $125,000 individually or $250,000 for a family. If you received Pell grants, which are reserved for undergraduates with the most significant financial need, you can have up to $20,000 forgiven. If you are a current borrower and a dependent student, you will be eligible for relief based on your parents' income, rather than your own.
In addition, the AP noted that the “payment freeze will be extended one last time, until Dec. 31. The freeze started in 2020 as a way to help people struggling financially during the COVID-19 pandemic and it's been extended several times since. It was set to expire Aug. 31.”
Following the press release, SOFI stock managed to close Wednesday up 4.54% against the prior session. As well, trading in extended hours saw shares move up 2%. Generally, investors are bullish on the financial technology (fintech) firm because the announcement provides clarity on the student debt matter, essentially pushing students to make a decision regarding refinancing initiatives for any remaining debt.
Still, it’s not quite the long-term catalyst for SOFI stock that some investors might believe it is.
The Math Behind Consumer Behaviors
Following SoFi’s robust results for its second quarter, seemingly many onlookers were encouraged with the forward implications. With net revenue surging 57% on a year-over-year basis and the company gaining 450,000 members in the quarter, the understanding was that SOFI stock would swing higher.
However, I presented a warning about a single detail that most experts were seemingly ignoring. While I can’t claim prescience in all matters, it’s interesting to note that between the date of my warning and the close of the Aug. 24 session, SOFI stock dropped nearly 22%.
Below is the alert I issued:
Among the three loan origination programs, personal loans represent the biggest segment and the only one that has seen increases on a last-12-month (LTM) basis compared to 2020 results.
- Student loan originations: $4.93 billion in 2020, $4.29 billion in 2021, $3.81 billion LTM
- Personal loan originations: $2.58 billion in 2020, $5.39 billion in 2021, $7.78 billion LTM
- Home loans originations: $2.18 billion in 2020, $2.98 billion in 2021, $2.09 billion LTM
In other words, while student loans and home loans suffered LTM-vs-2020 losses of 23% and 4%, respectively, personal loans tripled during the same period. No matter what your feelings of SOFI stock are, this is a matter worth serious investigation for prospective participants.
Setting aside the personal loan origination challenge, it’s intriguing to note that in the home loans segment, originations increased from $2.18 billion in 2020 to $2.98 billion a year later. However, during the LTM period, home loans dipped down to $2.09 billion, even below 2020’s level.
What does that tell us? Simply, as economic paradigms shift (with housing, the paradigm is rising interest rates), consumers adjust their behaviors. And that is extremely significant regarding student loans.
No Vacuums for SOFI Stock
Although the provision-of-clarity argument presents an interesting bullish case for SOFI stock, it’s arguably not interesting enough. Yes, it’s true that people have been seeking some answers from the White House regarding the matter. But just because a long-awaited answer arrived doesn’t necessarily mean SoFi’s problems will disappear.
Of course, my opinion may very well be in the minority. The Motley Fool contributor Bram Berkowitz pointed out the following. “Rising rates may slow things down a bit, but once the moratorium expires and the $10,000 forgiveness is made, SoFi's student lending business can get going again. Considering the student loan business only operated at 20% of its pre-pandemic capacity in the second quarter of this year there should be a lot more origination activity going forward, which bodes well for SoFi.”
While there should be more origination activity going forward, this thesis assumes that all other things in the economy are equal. They’re not. In fact, administrators within the education spectrum have voiced concerns that rising rates will hurt broader academic infrastructures. Put another way, fundamental catalysts don’t occur in a vacuum for the exclusive benefit of student loan providers.
Specific to SOFI stock, college costs have soared multiple times the rate of inflation over the last 50 years. At a certain point, if rates continue to rise – which appears to be the strategy that the Federal Reserve intends to deploy – then student loan originations will decline over the long run as people reassess the cost-benefit profile.
If consumer behavior is liable to shift in the housing market, the student loan market should prove no different.
Don’t Buy the Obvious Trade
No matter what, investors should conduct their own due diligence, whether for SOFI stock or any other investment opportunity. I’m merely presenting an idea. Your research may lead to a different conclusion.
However, if I may present an aphorism, it’s that you should think twice before following the obvious trade. Maybe the obvious might work out, who knows? However, many times, betting on the same horse as everyone else tends to create less-than-desirable outcomes.
More Stock Market News from Barchart
/Microsoft%20Corporation%20logo%20on%20sign-by%20Jean-Luc%20Ichard%20via%20iStock.jpg)
/Palantir%20(PLTR)%20by%20Piotr%20Swat%20via%20Shutterstock.jpg)