Sallie Mae (SLM), trading as SLM Corp, operates in the education loans market. It provides private student loans to help people pay for college and obtain a degree or other professional training. Sallie Mae may benefit from President Joe Biden’s decision to forgive federal student loans for some borrowers. Under Biden's loan forgiveness program, those who made federal loan payments since March 2020 are eligible for refunds. Borrowers who took a mix of federal and private student loans can use such refunds to make their private loan payments, thus benefiting entities like Sallie Mae.
Sallie Mae has an interesting history. It started in 1972 as a government entity working on the federal education loans program. At some point, Sallie Mae shifted its focus to the private student loans market and emerged as a leader in that space.
Why do Students Prefer Sallie Mae's Education Loans?
The private student loans market is highly competitive. Sallie Mae has sought to stand out by offering attractive features to borrowers. For example, the lender says that it offers the lowest fixed and variable interest rates on education loans. It also charges borrowers fewer additional costs compared to other lenders. For example, Sallie Mae does not charge loan origination fees.
Sallie Mae also offers many loan options, and applicants stand a high chance of approval. For example, the approval rate is more than 90% for returning borrowers on the cosign program. Sallie Mae loans can cover up to 100% of college attendance costs.
Moreover, the company offers the Mae Accelerate card that earns cashback on purchases. Borrowers can use the cashback rewards to reduce their student loan debt.
Biden’s Student Loan Forgiveness is a Blessing in Disguise for Sallie Mae
The President has detailed a plan to cancel up to $20,000 in federal student loans for eligible borrowers. The government relief plan targets low-income borrowers with up to $125,000 in annual earnings. Biden’s relief plan is expected to wipe out outstanding student loan balances for millions of borrowers.
While many people are happy with Biden’s student loan cancellation plan, others have complained that it is unfair. A major argument against the plan is that it would encourage people to borrow from the government and expect their debts to be forgiven. The President’s student loan forgiveness does not include private loans. As a result, it may also seem that the action could discourage borrowing from private lenders like Sallie Mae.
Despite the risk of Biden’s plan diminishing the appetite for private student loans (as more borrowers turn to entities where they could secure relief), it may still benefit Sallie Mae.
Many student borrowers hold a mix of federal and private student loans. For those people, relief from the federal side may leave them with more money to direct toward paying down their private loans. Moreover, students who paid off their federal loans during the pandemic may get a refund as part of Biden’s forgiveness plan. Those students could use the refund to tackle their private loans. As a result, Sallie Mae may see an increase in repayments or at least a reduction in defaults.
Another potential benefit is that Sallie Mae may end up with a better quality loan portfolio for the secondary market sale. In Q2 2022, Sallie Mae made a $240 million profit from the sale of $2.1 billion in student loans. The company may make more money from secondary market loan sales if Biden’s plan results in low default rates its portfolio.
Sallie Mae Serves a High-Demand Market
To stand a chance to secure a well-paying job in the highly competitive labor market, you need at least a bachelor’s degree. Therefore, many people are going to college to improve their job prospects. At the same time, college costs are rising.
As a result, families are increasingly relying on loans to fund college education. For student loan providers like Sallie Mae, that means more business. The company provides loans for both undergraduate and graduate programs.
In Q2 2022, Sallie Mae delivered earnings that exceeded Wall Street expectations. The company repurchased 20 million shares of its stock for $360 million in the quarter. It has $753 million remaining under the existing repurchase authorization for future share buybacks.
Is SLM a Good Buy?
Although Sallie Mae has dipped more than 20% year-to-date, Wall Street professionals remain highly bullish on the stock. According to TipRanks’ analyst rating consensus, SLM stock is a Strong Buy. The average Sallie Mae price target of $20.21 implies 35.1% upside potential.
Sallie Mae stock is seeing favorable mentions on financial blogs. TipRanks data shows that financial blogger opinions are 100% Bullish on SLM, compared to a sector average of 68%.
As a market leader, Sallie Mae stock might be a great investment for those seeking exposure to the student loans industry. Biden’s federal loan cancellation plan may end up making Sallie Mae’s loan portfolio more attractive to secondary market investors. Finally, the increasing focus on a degree for jobs will continue to fuel demand for student loans and benefit Sallie Mae.
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