Source: CNBC
If you’re like me, you too borrowed significant amounts of money to receive higher education in the United States. And, like me, you’ve greatly benefited from the federal loan forbearance instituted through the CARES Act that was first passed by Congress in March of 2020. The CARES Act has granted more than 40 million student loan borrowers significant student loan relief for six months. The thing is… that six months has actually lasted close to two years. As of right now, forbearance has been extended through May 1, 2022.
Although the CARES Act is distinctly designed to be temporary student loan relief, student loan advocates are hoping that the next step in this evolution will be wide-scale student loan forgiveness.
Zack Friedman of Forbes writes that,
Biden supports $10,000 of student loan forgiveness for borrowers, but has never indicated any willingness to support up to $50,000 of student loan cancellation as Warren and Sen. Chuck Schumer (D-NY) have proposed. (Biden is ready to cancel student loans for millions of borrowers, but Congress hasn’t passed any legislation). Warren and Schumer’s proposal also limits student loan forgiveness only to federal student loan borrowers who earn up to $125,000. That means no student loan forgiveness for private student loans, and there would likely an income cap, which could be even lower than what Warren and Schumer proposed.
The Big Picture
This will undoubtedly be one of the most contentious issues in D.C. moving forward with massive implications on the U.S. economy. Student loan debt has been estimated to be approximately $1.56 million.
On paper, it sure is a nice idea for this amount of debt to vanish away. Young individuals and workers who once had crippling debt due to their student loans can begin their journey to building wealth and purchasing property rather than trying to pay back their loans.
However, with a price tag of $1.56 trillion, there will undoubtedly be some adverse effects on the economy and its markets. Rather than focusing on the pros and cons of what might happen with student loan cancelation or forgiveness, I’d like to focus on which companies are well-positioned if some level of student loan forgiveness is achieved.
Which Companies Will Stand Out
For starters, broader companies in the consumer market will benefit due to their existing demographic (young people) having more cash on them. That thesis wasn’t intriguing enough to explore, so I decided to stick to the student loan servicing industry. Similar to the accounting world, there is a presumed “Big Four” when it comes to federal loan assignment.
Nearly 90% of all federal student loans are currently assigned to one of these servicers: FedLoan Servicing (Pennsylvania Higher Education Assistance Agency), Great Lakes, Navient (NASDAQ: NAVI), and Nelnet (NYSE: NNI). The remaining 10% is allocated to nonprofit servicers.
However, in the wake of extended forbearance, some of these major federal student loan servicers have withdrawn from the United States federal student loan servicing system. In October of 2021, the Department of Education announced that it had approved a proposal by Navient to transfer its federal student loan portfolio to a new company – Maximus (NYSE: MMS).
The Department announced that
“Federal Student Aid (FSA) approved the request for Maximus to assume the Navient loan servicing contract,” said FSA Chief Operating Officer Rich Cordray in a statement. “We are confident this decision is in the best interest of the approximately 5.5 million federal student loan borrowers” who will be impacted by the transfer.
Navient isn’t the only company to retreat from federal loan servicing. The Pennsylvania Higher Education Assistance Agency (FedLoan) and Granite State have both ended their relationship with the government this year. With these three companies exiting the space, that leaves $16 million federal student loan borrowers to be assigned a new servicer.
In regards to the “Big Four,” this emigration leaves Nelnet and Great Lakes as the only remaining borrowers still taking on loans. Nelnet is actually the parent company of Great Lakes Higher Education Corporation – one of the other servicers in the “Big Four.” These two companies merged back in 2018 to bring their loan total to $397 billion for 13.4 million borrowers. With the servicer diaspora occurring today, Nelnet will be a major beneficiary as the only remaining publicly-traded company.
Source: MarketWatch
With Navient exiting the space, Nelnet is the ‘Big Man on Campus’
Nelnet is a Nebraska-based conglomerate that services $513.5 billion in loans for 15.8 million borrowers. For starters, Nelnet is extremely well-protected regardless of the outcome of student loan cancelation/forgiveness. The 1965 Federal Family Education Loan (FFEL) program established that if a borrower defaults on his or her student loans, the government will pay at least 97% of the principal and interest to the lender.
The Motley Fool’s Ryan Henderson introduced the Nelnet Buy position in an article from February of 2021. He writes,
Currently, Nelnet’s loan payback period extends out past 2030 and should result in more than $2 billion in cash flow based on Nelnet’s projections. Almost two-thirds of that cash flow is expected to come in the next five years if all goes according to plan.
If all goes well, Nelnet realizes $2 billion in returned loans over the next five years. If President Biden forgives these loans, their contingency plan will be the federal government assuming the responsibility of paying back their lenders. What’s 97% of $2 billion? The answer is quite a lot.
In addition to the loan funds they will realize over the next five years, Nelnet has three other business segments in addition to their servicing arm. Their four business arms are 1.) asset generation and management 2.) loan servicing 3.) education technology, services, and payment processes 4.) online industrial loan bank (Nelnet Bank).
Nelnet repurchased 1.6 million shares for $73 million in 2020 and raised its quarterly dividend by 10%. Nelnet owns a fiber-optic cable business called Allo Communications, an education software business called Nelnet Business Services, and recently acquired Catholic Faith Technologies – a SaaS provider of training platforms to churches and NPOs.
In terms of metrics that investors care about, Nelnet posted a 13.3% increase in December – beating the S&P 500 which returned 5.6%. Annually, Nelnet is up 38.7% over the S&P’s 26.9% return.
Source: Google Finance
Conclusion – Nelnet is a Buy
Moving forward, if you have a position in Nelnet, it’s definitely best to hold until the Biden administration makes the future of their industry more clear.
President Biden ran on the premise that his office would deliver some level of student loan forgiveness. Americans have heard figures ranging from $10,000 to $50,000 in forgiveness, but nothing tangible has come from that promise. While the Biden administration plays for time, major players within the federal loan servicing “Big Four” have completely abandoned the industry. With 16 million federal student loan borrowers set to be reassigned to a new servicer in the next year, I expect Nelnet to grab more of the industry share of borrowers.
Further, the 1965 Federal Family Education Loan program protects lenders tremendously (about 97%). You can’t get burnt betting on lenders – regardless if these loans are canceled.
If you were already on the stock before the news of its competitors’ exit, I’m happy for you. Smaller companies, such as Maximus, that are having federal loans reallocated to their balance sheets might be the larger beneficiaries of any executive order on the subject. That being said, I view Nelnet as a dominant player in a space that will be addressed by the federal government in the near term. Regardless of which direction the government goes, Nelnet will get paid. Because of that, among the diversification of their business as a whole, I recognize Nelnet as a Buy.