SLM: Lower Federal Student Loan Supply Will Boost Private Lending Demand

Key Takeaways

• Federal student loan policy changes are set to expand the private loan market, favorably positioning SLM for long-term origination and revenue growth.
  
• Operational efficiencies, strong asset quality, and innovative funding strategies enhance profitability and reduce risk amid evolving education finance demand.
  
• Intensifying competition, regulatory risks, credit quality pressures, funding challenges, and demographic shifts threaten SLM's market share, loan growth, and earnings stability.

Catalysts

Through its subsidiaries, originates and services private education loans to students and their families to finance the cost of their education in the United States.

• The recently enacted federal student loan reforms, which cap borrowing under Parent PLUS and eliminate Grad PLUS, are expected to shift $4.5–$5 billion in annual loan volume from the federal to the private market, directly expanding SLM's addressable market; this is poised to drive higher revenue growth beginning in 2027 as the impact phases in.
  
• SLM is well positioned to capture this incremental private loan opportunity due to its dominant share, deep school relationships, disciplined underwriting, and leading digital origination platform, supporting long-term growth in loan originations and sustaining or improving net interest income.
  
• The company's exploration of new alternative funding partnerships, while maintaining the economics of loan sales, could enhance funding efficiency and scalability; this should enable SLM to support higher origination growth without outsized capital deployment, bolstering net margins and earnings stability.
  
• Strong credit performance and effective loan modification programs, along with stable or improving asset quality, are limiting net charge-offs and supporting consistent earnings, alleviating investor concerns about future losses related to macro headwinds or policy changes.
  
• Ongoing operational improvements (automation, advanced underwriting, digital self-service) contribute to lower expense ratios and higher profitability, allowing incremental revenue growth from secular demand for higher education and upskilling to more fully translate into stronger EPS growth over time.

SLM Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SLM's revenue will grow by 17.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 35.2% today to 47.0% in 3 years time.
• Analysts expect earnings to reach $918.9 million (and earnings per share of $4.13) by about September 2028, up from $425.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, down from 14.6x today. This future PE is greater than the current PE for the US Consumer Finance industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 1.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.15%, as per the Simply Wall St company report.

SLM Future Earnings Per Share Growth

Risks

• SLM's projected incremental growth opportunity from the federal student loan reforms may attract increased competition from established financial institutions and new fintech entrants, risking SLM's market share and pricing power, which could limit long-term revenue and net interest income growth.
  
• Persistent or rising delinquency and net charge-off rates-illustrated by the recent uptick tied to disaster forbearance-and reliance on success of loan modification programs signal elevated credit risk, which could compress net margins and increase earnings volatility, especially if macroeconomic or borrower repayment conditions worsen.
  
• SLM's ability to fund expected loan volume growth from policy changes hinges on alternative partnerships and capital markets access; heightened funding costs, tighter capital requirements, or lower-than-expected economics from private credit deals could erode net interest margin and dampen earnings growth.
  
• Regulatory and political uncertainty remains significant: additional reforms promoting debt forgiveness or stricter borrower protections, or future policy reversals may directly diminish SLM's private loan demand and impair revenue streams.
  
• Secular trends such as declining college-age demographics and the gradual growth of alternative education pathways (e.g., online certifications, bootcamps) threaten to shrink the addressable market for traditional student loans and consequently SLM's long-term loan origination volumes and revenues.

Valuation

• The analysts have a consensus price target of $39.0 for SLM based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $44.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $918.9 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 9.2%.
• Given the current share price of $29.82, the analyst price target of $39.0 is 23.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.