The financial-services company SoFi (NASDAQ: SOFI) recently announced it's cutting its earnings guidance for 2022. SoFi had previously told investors that it expected to generate $1.57 billion of revenue and $180 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year. Now it has chopped those numbers to $1.47 billion of revenue and EBITDA of $100 million. Here's why.
White House extends student loan moratorium
SoFi is a big player in student-loan refinancing. Recently, the White House officially extended its pause on most federal student-loan payments, which has been in place since the pandemic began in March 2020. The student-loan moratorium was supposed to expire in May after several extensions, but now the moratorium will be extended until the end of August.
Before the pandemic, student lending was SoFi's largest lending category. The fintech did nearly $6.7 billion of student-loan originations in 2019, many of which were borrowers refinancing their loans. But with student-loan payments on hold for a while now, borrowers are less incentivized to refinance. Student-loan originations at SoFi only came in at about $4.3 billion in 2021.
Based on management's estimates for the first quarter of this year, it's easy to see how SoFi's student-loan segment is a big financial contributor to the company.
The moratorium last year was supposed to expire on Jan. 31, but President Joe Biden extended it to May last December. If it had expired in January, SoFi projected it would have made an additional $35 million to $40 million of revenue in the first quarter and would have seen a boost to adjusted EBITDA of $20 million to $25 million.
Additionally, student-loan originations had been picking up in the fourth quarter when people expected the moratorium to expire in January. In Q4, SoFi generated nearly $1.5 billion of student-loan originations, its highest volume in the preceding six quarters.
On SoFi's fourth-quarter earnings call, Chief Executive Officer Anthony Noto said that demand for student-loan refinancing accelerated as consumers planned for the expiration of the moratorium and rising interest rates. However, Noto said that after the surprise extension at the end of December, demand tapered off in the final week of 2021.
A silver lining
The silver lining in all of this is twofold: Many analysts initially expected the moratorium extension to go all the way until 2023 rather than through August. In its press release, SoFi said its forecast baked in the fact that it expects the moratorium to extend beyond 2022. The other positive is that even with student lending running at less than half the pre-coronavirus level, the company still grew total loan origination volume in 2021. That means that once the moratorium expires, it could be a huge tailwind for the fintech company.
There are, however, still some moving pieces in this situation. For instance, perhaps consumers seeing all of the rate hikes the Federal Reserve is planning over the next two years will be more likely to refinance anyway. Also, with the moratorium now having been in effect since March 2020 and the consumer having been in solid financial shape for quite a while now, I do start to wonder how long this might last. After all, surging inflation and rising interest rates are expected to hurt more than help the consumer. While the hope is that the moratorium expires in August and turns into a tailwind, investors will likely want to be very conservative when trying to determine its expiration date.
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