After months of speculation over whether President Biden will pause or cancel student loan debt, a verdict was reached on August 25th after the President addressed the issue stating that the student loan forgiveness will be paused for another 4 months until December 30th. After which the President mentioned that students will need to start repaying outstanding pandemic-era student loans come January 2023.
Addressing the media from the White House, President Biden stated that using the authority Congress granted the Department of Education, his administration will look to wipe out at least $10,000 in outstanding federal student loans for the working and middle class - especially for those earning less or under $125,000 a year.
Additional efforts have been made for students coming from low-income families allowing them to qualify to receive a Pell Grant which would reduce their student debt to $20,000. Pell Grant recipients represent at least 60% of the more than 43 million Americans currently living with some form of federal student loan debt.
In his address on Wednesday Biden also mentioned that nearly 45% of all student loans have been fully canceled. The statement was met with some surprise and questions but on a lighter note, this represents at least 20 million people who have now been pardoned from the weight of federal student loans.
While repayments are set to restart in 2023 many argue that the widespread forgiveness could only add more constraints to the countries already worrisome inflationary conditions.
Regardless of which side of the fence one may sit when it comes to the topic of student loan forgiveness, executives in the student loan refinancing sector have been relatively vocal throughout the last few months over whether another student loan repayment pause would be beneficial.
At an earnings call earlier in August SoFi (NASDASQ:SOFI), CEO Anthony Noto claimed that the outlook for the months ahead would see the administration initiating another extension on the student-loan payment moratorium.
During the company's earnings call, chief financial officer of SoFi, Chris Lapointe said that “our outlook also assumes the federal student-loan payment moratorium will last until January 2023, which would result in a late Q4 2022 benefit based on the trend experienced in 2021.”
As one of the biggest private lenders in the country, SoFi Was among several other big-league lenders who initially lobbied Congress in March to restart payments.
Although this didn't get as much traction as thought, SoFi CEO went further by writing a blog post highlighting the issues with only extending student loan debt moratorium.
“The issues surrounding student lending needs fixing, and Washington needs to get unstuck and move forward. SoFi, stakeholders, and others across the industry are ready to help the President and Department of Education to address this issue head-on. It’s time for the Biden Administration to stop giving breaks to the rich and affluent and focus on providing permanent relief for those in severe hardship,” Noto wrote.
The idea that the President has been floating for several months means that companies such as SoFi, a leader in student loan refinancing, have been operating at less capacity. Higher interest rates and the soaring cost of living have only been some of the major headwinds experienced by SoFi and other industry leaders. During the second quarter of this year, SoFi saw less than $400 million in student loan originations.
The major loss in growth from student loan originations has led the company to reap more benefits from the potential of becoming a bank. In Q2 SoFi Technologies pulled more than $1.6 billion in deposits.
Other lenders and financial loan providers have also weighed in on the administration's decision to further pause student loans until the new year.
At an earnings call on July 27, Navient (NASDAQ:NAVI) CEO, Jack Remondi Already predicted that president Biden will not choose to restart payments on September 1.
Back in October 2021, Navient received approval from the Department of Education to permanently shut down its federal loan servicing operations. Since then more than 6 million of its federal borrowers have been transferred to a different student loan company, Maximus.
Remondi Was already speculating at the time that student loan repayments will be paused for another several months. It is difficult to understand whether Remondi is in support of Biden’s latest decision.
At the start of this year, Navient said it would be canceling the debt of 66,000 borrowers. This number would represent around 0.15% of America's student loan borrowers After the company was able to settle with several dozen states.
While some argue that student loan forgiveness would only be able to support a minority of Americans, loan forgiveness advocates have been lobbying Congress to provide more financial support for students in healthcare and medical professions.
A November 2020 poll found that 66% of healthcare workers have faced increased anxiety, depression, or stress due to the ongoing debt burden many carried throughout the pandemic. Moreover, around 48% of front-line workers and medical professionals say that they are still unable to afford their student loan repayments even after or during the covid-19 federal relief efforts were initiated.
In an interview with Alyssa Schaefer, General Manager and Chief Experience Officer of Laurel Road, a digital banking platform and brand of KeyBank which provides financial support for healthcare professionals and business leaders; Scheafer said that “The Biden Administration’s plan for student loan debt forgiveness enables middle- and working-class families who took out student loans to have more cash on hand for necessities and living expenses. However, there is no one-size-fits-all approach.”
Scheafer mentioned that although their primary focus is to provide healthcare professionals financial peace of mind, the $10,000 loan forgiveness which applies to most borrowers will have minimal impact on physicians and dentists looking to refinance.
“In some cases, refinancing a federal student loan during the forbearance period can be a way to generate long-term savings or lower monthly payments to allow more room in your budget. This is only applicable if you have private student loans and your credit score has improved,” said Scheafer.
Though the newest extension is set to expire in the coming year it still leaves a remaining list of unanswered questions that many feel will impact the future of student loan forgiveness programs and relief packages for many Americans.
Many agree that a less political approach needs to be taken when considering the cancellation of student loan debt, as some argue that the government should rather be focusing on the financial factors that play a key role in deciding whose student loan debt is forgiven and who is left out.
While several student loan grants and COVID-19 related relief packages are still running, most of them are set to expire within this year. This would leave millions of Americans to refinance their student loans once payments start in January next year.
What's more, is that Biden’'s decision and plan to cancel federal student loans have created a divide among democratic analysts and economics within the White House. Outside of government market experts have also initiated a heated debate over where the Biden plan could have a greater impact on economic performance and the student loan debt service provider industry.
In an earlier New York Times article it was found that both conservative And liberal economists were heavily divided on the plan to follow student loans. Conservatives have lashed out against the plan claiming it would only stoke higher inflation and cost taxpayers billions of dollars in new debt. The left wing on the other hand has argued that the new plan could be a lifeline for some graduates who have been struggling to repay their debt and cope with the soaring cost of higher education.
For both Democrats and Republicans the uncertainty lies in the hefty price tag of Biden's ambitious plans. Outside of the White House, independent analysts, such as The Committee for a Responsible Federal Budget and the University of Pennsylvania Penn Wharton budget model, have calculated a budget of somewhere between $444 billion and $600 billion over a decade.
On the stock market, student loan service providers including Navient (NASDAQ:NAVI) and Nelnet (NYSE:NNI) have already seen share prices tumble by 8.1%, in late-morning trading after an analyst from Credit Suisse said both service groups would be severely impacted by the federal student loan forgiveness plan.
Other market leaders such as SoFi Technologies (NASDAQ:SOFI) witnessed share prices trading 6% higher after the most recent loan repayment pause announcement, though stock prices are still down 50% year-to-date (YTD). The company is currently going through an even growth spurt, as loan origination volume has now fallen to only 25% of the average pre-pandemic level due to the ongoing federal student loan moratorium.
The performance of these companies will be closely watched by investors over the coming months, as many remain hawkish over the current federal student loan moratorium, against the backdrop of an uneasy economic cycle. Many may argue that this is the unfortunate cost of reducing the trillion-dollar student loan debt bill, yet failing to do so and restore stability would only inflict far greater pain on the economy.
There is still a lot of uncertainty surrounding the current situation but many private institutions and corporate executives are weighing in heavily, urging the government to restart the repayment process as soon as possible as a way to mitigate any further financial and economic headwinds.
Instead of having student loan forgiveness become a political game, The government should look to extend forgiveness to those in need And help lower the financial burden that millions of Americans are currently carrying. The sooner these Americans are freed from the shackles of financial strain, the easier it will be for them to start their lives, and boost their financial position within the greater economy.
