An estimated $5-$10 billion in consumer spending power is set to be redirected toward federal student loan payments, impacting millions of borrowers. This shift will have winners and losers in the market.
43 Million Americans to Repay $1.6 Trillion in Student Loans
The U.S. government’s decision to end the pause on student loan payments and accrued interest caught many borrowers by surprise. Approximately 43 million Americans, accounting for 17% of U.S. adults, will now have to start repaying the $1.6 trillion in loans they owe.
This change is expected to result in a reduction of discretionary spending by up to $10 billion per month for these borrowers. While some individuals have sufficient savings and financial stability to adjust without affecting their lifestyle, a significant portion relied on the extra funds and will now have to cut back.
This development has implications for companies in the market, with some facing potential negative impacts. In this article, we’ll take a closer look at a company that could be heavily affected and identify a potential winner in light of the return of federal student loan payments.
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Revitalized and Sailing Strong Through Pandemic Challenges
Carnival Corporation (CCL 0.25%) (CUK 0.21%) is currently experiencing a positive trajectory. Despite the challenges posed by the pandemic, the company has managed to revitalize its cruise ship fleet, resulting in record bookings and a return to positive cash flows.
While Carnival’s shares are still down nearly 80% from pre-Covid levels, signaling a potential opportunity for growth, there are important considerations to keep in mind. Carnival significantly increased its stock issuance to raise funds during and after the pandemic, almost doubling its share count. Additionally, the company took on substantial debt to bolster its cash reserves. As a result, Carnival’s enterprise value, which accounts for assumed debt and subtracts cash, is now higher than pre-pandemic levels.
In reality, Carnival may not be as attractively priced as it appears. A larger portion of its future cash flows will be allocated to servicing debt, reducing the value attributed to each share. Combined with the 43 million Americans facing a $230 reduction in their average monthly discretionary spending power, Carnival’s bookings could face a slowdown. Given its higher leverage and recent return to positive cash flows, investors should approach Carnival with caution.
On the other hand, the end of the federal student loan payment suspension presents a significant opportunity for SoFi Technologies (SOFI -2.47%). SoFi, which experienced a decline in student loan growth during the pandemic, is positioned as a potential major winner. As part of its transition to becoming a chartered bank, SoFi has expanded into other forms of lending, including credit cards, home loans, and auto loans. This strategy has driven substantial growth in its customer base and the number of products utilized by these customers.
Despite a decline in student loan originations from $6.7 billion in 2019 to $2.2 billion in the previous year, SoFi’s expansion into diverse lending areas has allowed it to modestly increase loan originations. Looking ahead, millions of borrowers will seek ways to reduce their payments, presenting SoFi with a prime opportunity to benefit from this demand.
It’s essential to consider both the short- and long-term implications of these events. While companies like Carnival, heavily reliant on strong discretionary spending and positive economic outlooks, are built to withstand market cycles, this event could dent future demand, especially in the near term. Any downward revisions in guidance or a slowdown in bookings could negatively impact Carnival’s stock. On the other hand, SoFi is likely to experience long-term benefits from the sustained presence of student debt, as it continues to expand its customer relationships and product offerings.
In conclusion, investing in Carnival Corp. should be approached with caution, given the potential uncertainties and risks associated with the current situation. On the other hand, SoFi stands to gain from the resumption of federal student loan payments, with favorable prospects for its bottom line in the years to come.
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