Shares of Navient (NASDAQ:NAVI) are in the red following President Joe Biden’s decision to cancel $10,000 in student debt for individuals making less than $125,000 a year in income and for couples making less than $250,000 a year. Recipients of the Pell Grant who make less than $125,000 per year are eligible to have another $10,000 of student debt slashed. This news is unfortunate for NAVI stock, as the company operates as a student loan provider and collector. The company was first formed in 2014 by the split of Salle Mae into two entities: Navient and Sallie Mae Bank.
Navient warned that in the event of student loan payment reductions, it could experience an “increase in prepayments, which could be significant, of our existing education loan portfolio and could materially and adversely impact our profitability, results of operations, financial condition, cash flows or future business prospect.”
Student Debt Cancellation Weights on NAVI Stock
Credit Suisse analyst Moshe Orenbuch mentioned that Navient would take a hit if privately held Federal Family Education Loan Program (FFELP) loans become eligible for forgiveness. A New York Times article added that FFELP loans would be eligible for consolidation if they were “disbursed before June 30.” If FFELP loans are consolidated into federal direct loans, then they would be eligible for forgiveness. In a note to clients, Orenbuch explained:
If this is correct, it is likely that loans held by NAVI and NNI would be subject to the forgiveness program, and could even be more extreme if borrowers consolidate to take advantage of forgiveness — because the companies would lose the entire balance, not just the $10,000 amount forgiven.
He added that interest income from FFELP loans accounted for 37% of Navient’s second-quarter revenue. As a result, the analyst believes that the risk is higher for Navient than its competitor, Nelnet (NYSE:NNI). FFELP interest income accounted for about 23% of Nelnet’s Q2 revenue.
NAVI stock currently carries an average price target of $18.06 among nine firms with coverage of the stock. Of those nine firms, one of them has a “strong buy” rating, three have a “buy” rating, and the remaining five have a “hold” rating.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.