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Navient (NAVI) Fails to Win Federal Debt Collection Contract

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Last Friday, Navient Corporation (NAVI - Free Report) failed to win a government contract to collect on defaulted federal student loans, according to a Bloomberg report.

Navient has been providing asset recovery services on defaulted education loans to the Department of Education (ED) since 1997. However, this contract expired in Feb 2015 and its subsidiary – Pioneer Credit Recovery – received no new account placements under the contract.

Navient, which has generated substantial revenues from the ED debt collection contract, had been striving hard to win it. Citing estimates by the U.S. Department of Education, the report noted that the awardees of the contract, which may extend as long as 10 years, would earn around $417.1 million in revenues.

Pioneer has been subject to investigation by authorities, including The Consumer Financial Protection Bureau and the ED, over misleading borrowers. Investigations have found that employees of Pioneer provided inaccurate representations to borrowers about the benefits associated with the loan rehabilitation program at “unacceptably high rates”.

Navient’s shares have gained 45.8% year to date, outpacing 20.3% growth for the Zacks categorized Consumer Loan industry. The company has gained considerably since Election Day over the possibility of new government contracts and reduced government participation in the student loan business and more private lenders involvement under Trump’s administration. However, the stock is down more than 3%, closing at $16.70 on Monday.
 



We foresee limited upside for the stock in the near term given the several challenges faced by the company, including escalating costs and regulatory issues. Further, the company faces revenue pressure, as following the 2010 reform, Navient’s interest income on its Federal Family Education Loan Program (FFELP) portfolio and associated fee-based revenue are expected to gradually decrease as existing FFELP loans are paid down, refinanced or repaid, following default by guarantors.

Nevertheless, Navient  should benefit from the ongoing economic recovery, and its previous acquisitions of asset recovery and business process outsourcing firms.

Currently, Navient carries a Zacks Rank #3 (Hold).

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