This Lender Will No Longer Serve Federal Student Loans: What It Means For His Business
Navigate (NASDAQ: NAVI) recently announced that it would stop handling federal student loans, moving its student loan accounts belonging to the US Department of Education to Maxim. Navient’s transfer of its service portfolio follows the decision by the Pennsylvania Higher Education Assistance Agency and Granite State to end their relationship with the government that administers federal student loans earlier this year.
Last year, the government provided student loan relief to students receiving federal loans in the early stages of the coronavirus pandemic, a measure that was extended until January 2022. Although this had an effect on these loan managers, the main reason companies are leaving the business now is probably due to increasing federal government oversight.
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Increased Fed Watch Over Student Loans
The Biden administration has made it clear that it is cracking down on companies it sees as taking advantage of consumers. One aspect of this is the increasing scrutiny of lenders and student loan service providers.
In an effort to protect student borrowers, the federal government is looking to add performance and accountability measures – and it has made this a central part of renewing service contracts with private companies. Some believe these additional measures are the reason Navient and others are withdrawing from the business of federal loan management altogether.
Navient manages federal loans for 5.6 million accounts receivable under its service contract with the Department of Education, but those service fees only represent 6% of the company’s total revenue. Not only that, but the management income has been declining for the lender for a few years now. In 2016, it brought in $ 289 million to the federal education loans department, but by 2020 that number has fallen 28% to $ 208 million.
Navient is already under intense government scrutiny, dealing with lawsuits from the Consumer Financial Protection Bureau and various state prosecutors over the past few years. The main accusation is that the lender did not provide borrowers with relief options and instead directed borrowers to more expensive repayment programs. In view of the wider uncertainty surrounding increased regulation of federal student loans, Navient made the decision to abandon the federal loan service altogether while focusing on lending and servicing loans. private.
Where will Navient go from here?
Last year, with student enrollment declining, Navient made an effort to increase its income from other sources. The lender was able to pivot and collect fees on contracts related to the coronavirus pandemic, including granting unemployment benefits, finding contracts and administering vaccines. As a result of these efforts, other income amounted to $ 480 million in the first half of this year, compared to $ 85 million in the first half of 2020.
While Navient has been creative in generating income in the midst of the pandemic, my main concern is what he will do to drive long-term growth. One thing that has helped keep its stock price on the rise is its massive share repurchase programs, which have reduced its outstanding shares by 56% since 2014. However, since the end of 2014, it has seen its total sales decline to 7.1% compound annual. while its net income fell at an annual rate of 2.8%.
Uncertainty about the future of higher education makes it difficult for the company to forecast, with much debate over the student loan debt burden and what the federal government can do in response. While Navient looks like a high value stock with a price / earnings ratio of 3.8 and a strong dividend yield of 3.3%, it’s hard for me to be optimistic about the company unless there is a clear direction on how the business will develop from here. .
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Courtney Carlsen has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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