Student Loan News May Not Save the Day for SoFi Stock

Stocks to sell

Recent news regarding student loans is throwing SoFi (NASDAQ:SOFI) stock back into the spotlight. With the unveiling of President Joe Biden’s student debt relief plan, shares in the fintech firm have moved higher on the news.

Why? Along with providing targeted debt relief, the White House’s plan brings an end to the student loan moratorium, which has been in place since the start of the pandemic. For investors who are bullish on SoFi, this points to the company’s student loan refinancing business getting back to firing on all cylinders.

In turn, it will enable the company to grow its revenue faster than previously expected. More importantly, the company could hit profitability faster as well. Yet before you dive in, keep something in mind. While up on the announcement, this development may fail to send this hard-hit stock back up near prior price levels.

SOFI Stock and Biden’s Student Loan Relief

Since going public last year, much of the focus with SoFi has been on its ambitious plans to “disrupt” the financial services industry and give traditional lending institutions a run for their money. It’s done so by moving into areas like personal loans, mortgages, brokerage services and even crypto.

But, as you likely know, this “fintech supermarket” got its start in the private student loan industry. The Covid-19 pandemic, and the resultant moratorium on federal student loan repayments, was a headwind for its legacy business. Not having to make payments, borrowers had no incentive to refinance their government-backed loan with a private third party.

Per investors bullish on the stock, however, demand will soon come back with a vengeance, as the moratorium will end on Dec. 31, 2022. That’s why SOFI stock is again moving higher.

That said, while moving higher, the stock didn’t exactly experience a spike, as it did following its Q2 earnings report. Instead, shares are up just a few percentage points. This may be due to the fact that there are potential negatives from this relief plan as well as existing concerns.

This News Could Ultimately Fail to Move the Needle

SOFI stock fans may think that shares are on the verge of a comeback. However, that’s hardly for certain. The $10,000 in student loan relief for non-Pell Grant recipients and up to $20,000 in debt relief for Pell Grant recipients may be just the start. The Biden administration is looking to push for other changes to make student debt more manageable for borrowers.

Proposed changes include lowering the minimum payment on income-driven repayment plans, a shortened timeframe (10 years) for forgiveness of balances of $12,000 or less and a proposed change to no longer tack on unpaid monthly interest onto the principal of income-driven repayment balances.

There’s no guarantee these extra proposals will become official, but any of them would disincentivize borrowers from refinancing with a private lender like SoFi. This calls into question the catalyst mentioned above. Even if none of these are put in place and refinancing picks back up next year, other issues could outweigh this.

There are several issues, including the impact of a potential recession on its expansion into other areas of lending. A key one, though, is valuation. The positives of this news may already be priced into shares.

The Takeaway on SOFI Stock

SoFi stock continues to earn a D rating in my Portfolio Grader. As I argued earlier this month, shares trade at a premium valuation, even when accounting for future growth. To move substantially higher, profitability will need to arrive sooner, and to a greater extent, than currently anticipated.

Yet, as further action from the executive branch regarding student loans may keep on reducing the need for borrowers to refinance, a greater-than-expected acceleration of its growth may fail to arrive.

It will be very difficult for the stock to make much of a further leap. Forget about a full return to its past high of $24.65 per share. A partial recovery back to double-digit price levels may be out of reach. The stock could remain stuck at its current mid-single-digit trading range.

With student debt relief doing little to change the story, investors should continue to hold off on SOFI stock.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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