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This Lender Will No Longer Service Federal Student Loans: What That Means for Its Business

Navient (NASDAQ: NAVI) recently announced that it would step away from servicing federal student loans, transferring its U.S. Department of Education-owned student loan accounts to Maximus. Navient's transfer of its servicing portfolio comes following the Pennsylvania Higher Education Assistance Agency's and Granite State's decision to end their relationship with the government servicing federal student loans earlier this year.

Last year the government provided student loan relief for students with federal loans in the early stages of the coronavirus pandemic, a measure that has been extended into January 2022. While this had an effect on these loan servicers, the biggest reason companies are exiting the business now is likely due to the federal government's increasing scrutiny.

Image source: Getty Images.

Increased scrutiny from the Feds regarding student loans

The Biden administration has made it clear that it is cracking down on companies that it sees as taking advantage of consumers. One aspect of this is increasing scrutiny on student loan lenders and servicers.

In an effort to protect student borrowers, the federal government is looking to add performance and accountability metrics -- and it has made this central to renewing servicing contracts with private companies. Some believe these added metrics are why Navient and others are exiting the federal loan servicing business altogether.

Navient services federal loans for 5.6 million customer accounts under its education department servicing contract, but these servicing fees only make up 6% of the company's total revenue. Not only that, but servicing revenue has been on the decline for the lender for a few years now. In 2016, it brought in $289 million servicing federal educational loans, but by 2020 this has dropped 28% to $208 million.

Navient is already under scrutiny from the government, dealing with lawsuits from the Consumer Financial Protection Bureau and different state attorneys in recent years. The main accusation has been that the lender hasn't made relief options available to borrowers and instead steered borrowers to more expensive repayment programs. Given broader uncertainty about increased regulations on federal student loans, Navient has made a business decision to drop servicing federal loans altogether while focusing on loan origination and private loan servicing.

Where will Navient go from here?

Last year with student enrollments down, Navient worked to expand its revenue from other sources. The lender was able to pivot and earned fees on contracts related to the coronavirus pandemic, including providing unemployment benefits, contract tracing, and vaccine administration. As a result of these efforts, other income was $480 million in the first half of this year, up from $85 million in the first half of 2020.

While Navient has been creative in generating revenue amid the pandemic, my primary concern is about what it will do to drive long-term growth. One thing that has helped keep its stock price higher is its massive stock repurchase programs, which have reduced its shares outstanding by 56% since 2014. However, since the end of 2014, it has seen its total revenue decrease at a 7.1% compounded annual rate while its net income has declined at a 2.8% annual rate.

Uncertainty about the future of higher education makes it hard to forecast the business, with much debate about the student loan debt burden and what the federal government may do in response. While Navient looks like a deep value stock with a price-to-earnings ratio of 3.8 and a solid dividend yield of 3.3%, it's hard for me to be optimistic about the company unless there is clear direction on how the business will grow from here.

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Courtney Carlsen has no position in any of 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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