If you are like me, you also borrowed large sums of money to get a higher education in the United States. And like me, I’ve benefited greatly from the federal loan forbearance enacted through the CARES Act that was first passed by Congress in March 2020. The CARES Act has given more than 40 million student loan borrowers a significant six-month student loan forgiveness. The thing is… that six months has lasted nearly two years. As of now, patience has been extended until May 1, 2022.
Although the CARES Act is clearly designed to act as a temporary student loan forgiveness, student loan advocates hope that the next step in this evolution will be broad-based student loan forgiveness.
Zach Friedman of Forbes magazine wrote:
Biden supports $10,000 student loan forgiveness for borrowers, but has never indicated any willingness to support up to $50,000 student loan forgiveness as suggested by Warren and Senator Chuck Schumer (D-NY). (Biden is willing to cancel student loans for millions of borrowers, but Congress has not 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. This means there is no student loan forgiveness for private student loans, and there is likely to be an income cap, which may be lower than what Warren and Schumer suggested.
The Big Picture
This will undoubtedly be one of the most contentious issues in Washington as it moves forward with enormous repercussions for the US economy. Student loan debt is estimated to be approximately $1.56 million.
On paper, it’s definitely a good idea for that amount of debt to go away. Young individuals and workers who have had crippling debt due to their student loans can begin their journey of building wealth and buying real estate instead of trying to pay off their loans.
However, at $1.56 trillion, there will undoubtedly be some negative effects on the economy and its markets. Instead of focusing on the pros and cons of what might happen with student loan forgiveness or forgiveness, I like to focus on companies that are in good standing if a certain level of student loan forgiveness is achieved.
Companies that will stand out
For starters, broader companies in the consumer market will benefit because there is a (young) demographic that has more money on it. This thesis wasn’t interesting enough to explore, so I decided to stick with the student loan service industry. Similar to the accounting world, there are the supposed “Big Four” when it comes to federal loan allocation.
Currently, approximately 90% of all federal student loans are allocated to one of these servants: FedLoan Service (Pennsylvania Higher Education Assistance), Great Lakes, Navient (NASDAQ: NAVI), and Nelnet (NYSE: NNI). The remaining 10% is allocated to non-profit service providers.
However, in the wake of extended patience, some of the major federal student loan service providers withdrew from the US Federal Student Loan Service system. In October 2021, the Department of Education announced that it had approved a proposal from Navient to transfer its federal student loan portfolio to a new company – Maximus (NYSE:MMS).
The department announced that
“Federal Student Aid (FSA) has approved Maximus’ request to take over the Navient loan service contract,” said Rich Cordray, FSA’s chief operating officer, in a statement. “We are confident that this decision is in the best interest of the approximately 5.5 million federal student borrowers” who will be affected by the transfer.
Navient isn’t the only company to drop out of the federal loan service. Pennsylvania Higher Education Assistance (FedLoan) and Granite State ended their relationship with the government this year. With these three companies out of space, that leaves $16 million for federal student loan borrowers to be assigned a new service.
Regarding the “Big Four”, this migration left Nilent and the Great Lakes as the only remaining borrowers still borrowing. Nelnet is actually the parent company of Great Lakes Higher Education – another employee of the “Big Four”. The two companies merged again in 2018, bringing their total loans to $397 billion to 13.4 million borrowers. With the service diaspora taking place today, Nelnet will be the main beneficiary as the only company remaining to be publicly traded.
With Navient out of space, Nelnet becomes ‘Big Man on Campus’
Nelnet is a Nebraska-based company that provides $513.5 billion in loans to 15.8 million borrowers. For starters, Nelnet is very well protected regardless of the student loan cancellation/forgiveness outcome. The 1965 Federal Family Education Loan (FFEL) Program mandated that if a borrower defaulted on their student loans, the government would pay at least 97% of principal and interest to the lender.
Ryan Henderson of The Motley Fool introduced the Nelnet purchase site in an article from February 2021. He writes,
Currently, the repayment period of the Nelnet loan extends beyond 2030 and should generate cash flow in excess of $2 billion based on Nelnet’s forecast. Nearly 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 loan repatriations over the next five years. If President Biden waives these loans, his contingency plan will be for the federal government to take responsibility for repaying its lenders. What is 97% of $2 billion? The answer is very much.
In addition to the loan money they’ll generate over the next five years, Nelnet has three other business segments in addition to their service arm. Their four business arms are 1.) Asset Creation and Management 2.) Loan Service 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 company called Allo Communications, an education software company called Nelnet Business Services, and recently acquired Catholic Faith Technologies — a SaaS company that provides training platforms to churches and nonprofit organizations.
In terms of the metrics investors are interested in, Nelnet posted a 13.3% increase in December — outpacing the S&P 500 that returned 5.6%. Annually, Nelnet is up 38.7% compared to Standard & Poor’s return of 26.9%.
Source: Google Finance
Conclusion – Nelnet is a buy
Going forward, if you have a position at Nelnet, it’s definitely better to keep it until the Biden administration makes the future of their industry more clear.
President Biden ran on the understanding that his office would offer some level of student loan forgiveness. Americans have heard numbers ranging from $10,000 to $50,000 as forgiveness, but nothing concrete has come from that promise. While the Biden administration is playing catch-up time, the major players in the “Big Four” federal loan service have abandoned the industry entirely. With 16 million federal student borrowers due to be reassigned to a new service next year, I expect Nelnet to capture more of the industry’s share of borrowers.
Furthermore, the 1965 Federal Family Education Loan Program protects lenders significantly (about 97%). You can’t bet the lenders – regardless of whether these loans are cancelled.
If you were already on the exchange before the news of its competitors exit, I’m glad for you. Smaller companies, such as Maximus, that have reallocated federal loans to their balance sheets may be the biggest beneficiaries of any executive order on the subject. However, I see Nelnet as a dominant player in the space that the federal government will take up in the near term. No matter which direction the government takes, Nilent will get its money. Because of that, among the diversification of their business as a whole, I recognize that Nelnet is a buying company.