After a political showdown that practically lasted into the 11th hour, the debt ceiling agreement has strong investment market implications for SoFi Technologies (NASDAQ:SOFI). Buried in the granularity of the 99-page bill sits a proposal to effectively reinstate government student loan repayments. As a result, SOFI stock returned double digits for the midweek session, up nearly 13% at the time of writing.
As Barron’s pointed out, a student loan payment freeze materialized for over three years in response to the Covid-19 pandemic. While the emergency measure protected millions of Americans amid an unprecedented crisis, the action ironically risks sparking a moral hazard. That’s the same contention that undergirds much criticism of raising the debt ceiling.
Still, for SoFi Technologies, the news could be a longer-term catalyst. Investors felt more optimistic about SOFI stock as reinstating student loan repayments should bolster its underlying refinancing business. Still, investors should be cautious about getting ahead of the political development.
SOFI Stock Rises on Business Diversification
With President Joe Biden and House Speaker Kevin McCarthy reaching a tentative deal on Saturday, they did so before the June 5 “X date.” That’s the time when both the Congressional Budget Office and the U.S. Department of the Treasury warned that the U.S. may no longer be able to pay its bills.
While certainly threading the needle, the House of Representatives is scheduled to vote on the debt ceiling deal. The latest news from CNN reported that McCarthy stated that a majority of Republicans will vote for the bill. Therefore, SOFI stock popped higher on anticipation of substantive political momentum.
If passed, the debt bill will have enormous implications for SoFi’s business diversification. Since the Covid-19 crisis, personal loan originations spiked, dominating the company’s lending portfolio. Such a circumstance isn’t surprising given the student loan payment freeze along with fading interest in home mortgages and refinancing.
Worrying Questions Remain
Nevertheless, investors shouldn’t jump aboard SOFI stock without considering the serious risks involved. For one thing, CNN reports that Democrats are not as gung-ho as their counterparts regarding the debt deal. As the news agency stated:
“If the House passes the bill as expected, it would next need to be passed by the Senate before it can be sent to President Joe Biden to be signed into law. In the Senate, any one lawmaker can delay a swift vote and Senate Majority Leader Chuck Schumer has told lawmakers to prepare for the possibility of votes Friday or over the weekend.”
Another broader level concern for the economy is that credit rating agencies could still downgrade U.S. debt. Back in 2011, Standard and Poor’s downgraded the nation’s debt for the first time. If consequences materialize from this dynamic, the matter could still impose headwinds for SOFI stock.
Perhaps most pressingly, interest rates are sky-high compared to what they were just a few years ago. Therefore, lenders may incur a declining addressable market if higher borrowing costs impact collegiate ambitions.
On the date of publication, Josh Enomoto did not have (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.