Come January, the gloves come off.
Navient Corp. has been ramping up origination of refinance student loans even as rising interest rates reduce the potential savings for borrowers. Earnest, the online lender it acquired late in 2017, originated $903 million of refinance loans in the third quarter, bringing year-to-date originations $2 billion. But so far, the servicing giant’s ability to expand has been limited because of a non-compete agreement with the largest private student-lender, SLM Corp., better known as Sallie Mae.
Under the terms of their split in 2014, Navient is unable to refinance either private student loans made by Sallie Mae or any federally guaranteed student loans held by Sallie Mae.
The non-compete clause expires in January, and Navient CEO Jack Remondi doesn’t plan to waste any time. On a third quarter conference call Wednesday, Remondi made it clear that he sees plenty of potential to refinance loans made or held by Sallie Mae.
“We’re focused on the Sallie Mae opportunity that will be available in January,” he said in response to question about competing for refinance lending.
Sallie Mae, for its part, has repeatedly downplayed the threat from all refinance lenders, not just Navient. Senior executives have pointed out that interest margins for refinance loans are thin and eroding as lenders are forced to increase rates as their own borrowing costs rise. On Monday, CEO Raymond Quinlon told analysts on the company’s own third quarter earnings call that the volume of loans refinanced away from Sallie Mae had plateaued.
Quinlon also said Sallie Mae has plans to test ways to offset competition from refinance lenders next year, by offering its own borrowers either lower interest rates or lender loan terms. “We will continue to build our capability to engage in this type of fighting,” he said, adding “we do think it is on its face a margin destroyer. So, our enthusiasm for this type of business is relatively low.”
Navient has steadily increased rates on its refinance loans this year, and plans to continue raising them, but this has yet to affect demand, Remondi said. “Demand is principally a function of higher rates on PLUS and Grad PLUS program loans, and to a lesser extent, on some private student loans,” he said on the conference call. As interest rates rise, “the savings is smaller, but it’s still significant, so demand remains very robust.”
The $903 million the company originated in the third quarter was a 44% increase over the second quarter. Navient expects refinance originations for the full year to reach $2.9 billion.
While Navient has no qualms about cherry picking Sallie Mae’s existing borrowers with refinance loans, Remondi would not discuss any plans to start offering student loans to borrowers still in school. Navient is unable to do so before January, and the terms of its split from Sallie Mae prevent it from even disclosing its plans before then, he said.
In addition to making refinance loans, Navient also purchases portfolios of both federally guaranteed and private student loans. But this activity has slowed in recent quarters. Remondi said that there are simply fewer of these loans available for purchase. Most of the large bank portfolios of Federal Family Education Loan Program loans have been sold, so the biggest opportunity is purchasing FFELP loans from non-profits and state student loan agencies.
“We’re not going to see a repeat of [loan portfolio sales] we saw in prior years,” he said.
Navient acquired $164 million of FFELP Loans in the third quarter; available capacity under Navient's FFELP secured facilities is $2.6 billion; available capacity under its private education loan secured facilities is $108 million.
