Student Loan Defaults Set To Rise, Analysts Say It's 'A Sizeable Shock' With Ripple Effects: 5 Stocks to Watch

The U.S. student loan market stands at a crucial juncture, where the prevailing post-COVID-19 calmness could either solidify as the new norm or be hit by a storm that could disrupt this debt category.

Millions of American students are anxiously awaiting the upcoming ruling by the Supreme Court on the Biden Administration’s ambitious plan to alleviate student debt. The plan aims to cancel up to $20,000 of student loans for Pell Grant recipients and up to $10,000 for other low-income borrowers.

The scale of debt forgiveness being pursued by the Biden administration is unprecedented, and with an estimated public cost of $400 billion, it would rank among the most expensive executive actions in U.S. history.

A decision from the Supreme Court is expected to be announced later this month or in early July.

Student Loan Delinquencies Set To Return To Pre-COVID-19 Levels

Regardless of the ruling’s outcome, the early-June deal to raise the U.S. debt ceiling mandates the resumption of federal student loan repayments by the end of August.

The restart of federal student loan repayments is projected to lead to an increase in delinquency rates, posing significant challenges to this market and potentially causing ripples in other debt categories, according to a Bank of America research note.

Bank of America noted that the share of student loan balances categorized as seriously delinquent fell from 11.1% in the fourth quarter of 2019 to 0.7% in the first quarter of 2023.

If loan payments were to resume in full, Bank America thinks it’s fair to assume that student loan delinquencies will return to pre-pandemic levels. This might lead to a $167 billion increase in substantially delinquent student debt.

“This would be a sizeable shock, and it would probably have knock-on effects to other categories of debt as well,” economist Ethan Harris and his team said in the note.

Chart: Outstanding U.S. Student Loans Totaled $1.8 Trillion At The Start of 2023

5 Stocks To Watch In The Student Loan Market

SoFi Technologies, Inc. SOFI: SoFi is a fintech company that provides a variety of financial goods and services, including student loan refinancing. Since the agreement on the debt ceiling deal, SoFi shares have risen 22%.
Navient Corp NAVI: Navient is a student loan servicer that manages and collects payments on student loans on behalf of various lenders and investors. NAVI has gained 19% month-to-date.
Discover Financial Services DFS: Although Discover is well recognized for its credit card services, it also offers private student loans to help students pay for their higher education. DFS stock price has surged 12.4% since the start of June.
Nelnet, Inc. NNI – Nelnet is a diversified education services company that offers student loan services, as well as other educational products and services. Nelnet shares have risen 6% thus far in June.
SLM Corp SLM: Commonly known as Sallie Mae, is a provider of student loans and other financial services for higher education. Its stock price is up 5.6% so far this month.