Student Loan Servicers: Riding the RAP Wave to Revenue Growth

The One Big Beautiful Bill Act's RAP (Re-evaluation of Thrifty Food Plan) provisions, set to roll out post-August 2025, have quietly become a goldmine for student loan servicers and debt collection agencies. While headlines focus on borrower hardship, the financial machinery of debt management is poised for a surge in revenue—driven by mandatory repayment re-engagement, delinquency-driven fees, and contractual servicing obligations. For investors, the sector offers a volatile but compelling opportunity in a tightening credit environment.

The RAP Plan: A Tailwind for Servicers and Collectors

The RAP's removal of income protection thresholds and its "payment cliffs" (where small income increases trigger large payment jumps) creates a perfect storm for delinquency. Borrowers earning below the federal poverty line—now required to pay at least $10/month—will face impossible choices between essentials and loan payments. For servicers like Navient (NAVI) and Education Credit Management Corporation (ECMC), this means:
1. Contractual Servicing Fees: Servicers earn 12–16% of loan balances annually, regardless of borrower repayment. Even defaults generate fees as servicers manage delinquent accounts.
2. Interest Accrual Bonuses: Delinquent borrowers accrue interest, boosting servicers' revenue streams. Under RAP, interest rates for federal loans are tied to Treasury yields, which are near decade highs.
3. Repayment Plan Transitions: Borrowers pushed into RAP's rigid structure will need constant assistance switching plans, generating recurring service fees.

Debt Collectors: The Final Step in the Revenue Chain

When borrowers inevitably miss payments, debt collectors like Sprout Collect Inc (SPRT) and Midland Credit Management step in. The RAP's elimination of income-based flexibility will push more accounts into collections, where agencies earn 20–30% of recovered amounts.

A critical factor: servicers and collectors operate in a zero-sum game with borrowers. For every dollar a debtor struggles to pay, these firms gain leverage. The Act's requirement for institutions to re-engage borrowers by June 2025—via outreach campaigns and updated repayment plans—will flood the system with new delinquency cases post-August.

Risks and Volatility: The Short-Term Hurdles

The sector isn't without pitfalls. Early RAP implementation could spark borrower backlash, with lawsuits challenging its regressive payment structure. A potential Democratic push to revise the law in 2026 could introduce uncertainty.

Moreover, servicers face reputational risks. As defaults rise, public scrutiny may lead to regulatory crackdowns or investor divestment. For example, BlackRock reduced its exposure to student loan REITs by 40% in Q1 2025 amid ESG concerns.

Why Long-Term Stability Outweighs Short-Term Noise

Despite these risks, the structural tailwinds are undeniable. The RAP's mandatory re-engagement rules ensure servicers and collectors remain indispensable. Even if borrowers default, servicers still collect fees, and collectors profit from eventual recoveries.

Key to the model: the Cohort Default Rate (CDR) thresholds. Institutions face losing Title IV funding if their CDRs exceed 30% over three years. This creates a perverse incentive for servicers: they must keep borrowers in repayment plans any way possible, even if payments are token amounts.

Investment Thesis: Pick Your Spot, Play the Long Game

For investors, the sweet spot is pure-play servicers with diversified revenue streams. Navient, despite its controversial history, retains 22% of the federal loan servicing market and benefits from both delinquency and compliance fees.

Meanwhile, SPRT—a smaller, nimbler collector—could see outsized gains as delinquencies surge. Its AI-driven collection tech aligns with the RAP's emphasis on automated borrower outreach.

Avoid:
- Firms reliant on income-driven repayment (IDR) plans, which RAP has effectively dismantled.
- Companies with high leverage or ESG-linked liabilities.

Final Take: Volatility Now, Value Later

The student loan sector is a roller coaster in 2025, but the RAP's structural changes ensure servicers and collectors remain cash cows. Buy the dips, focus on firms with delinquency exposure, and hold for the long term. As one analyst quipped: “The only thing growing faster than debt is the industry that profits from it.”

Invest wisely—this is a bet on human fallibility, and the law is now on your side.