Morningstar DBRS Confirms the Credit Ratings of Nelnet, Inc. at BBB (low) With Stable Trends

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Nelnet, Inc. (Nelnet or the Company), including its Long-Term Issuer Rating and Long-Term Senior Debt, both at BBB (low). Nelnet's Intrinsic Assessment (IA) was maintained at BBB (low), while its Support Assessment is SA3, meaning timely systemic support is not expected, resulting in the final credit rating being positioned in line with the IA. The trend on all credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings consider Nelnet's sound franchise in education-related business services and its expanding lending and banking franchise, resilient earnings generation, limited credit-risk exposure, suitable liquidity management, and solid capitalization. The credit ratings also reflect the Company's confined earnings growth trajectory due to the ongoing runoff of its Federal Family Education Loan Program (FFELP) portfolio, as well as its primary reliance on secured funding sources.

Morningstar DBRS views the Company as well positioned in the current regulatory environment. The recently enacted One Big Beautiful Bill Act, which limits education financing from the federal government, presents an opportunity for the Company and its subsidiary, Nelnet Bank (the Bank), to fill the vacuum and expand their loan book. Additionally, the uncertainty surrounding the potential of increased FFELP portfolio paydowns from programs and initiatives previously offered by the federal government or the Department of Education (ED) has been essentially eliminated. Indeed, the Company has indicated that, since August 2024, prepayments have returned to more normal levels relative to the high prepayments that had begun in 2021.

The Stable trends reflect Morningstar DBRS' expectation that Nelnet will continue to generate solid earnings while maintaining good balance sheet fundamentals and credit risk discipline. The key downside risks to Morningstar DBRS' expectations are a notable weakening in the labor markets and/or a slower macroeconomic growth, both or either of which could pressure the Company's operating results.

CREDIT RATING DRIVERS
Sustained growth in earnings generation through a diversified revenue mix and the expanding contribution from Nelnet Bank while maintaining a similar risk profile would result in an upgrade of the credit ratings. Conversely, a sustained deterioration in the Company's earnings power and material weakening in its credit risk or capitalization metrics would result in a downgrade of the credit ratings.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Good/Moderate
Nelnet has a sound franchise underpinned by its leading position and long-tenured presence in the education-related services market. The Company has substantial scale in student loan servicing not only as the largest servicer for the ED but also as a loan servicing provider of private education and consumer loans for 39 third-party customers along with backup servicing arrangements for 14 additional entities. In addition, the Company is a leading provider of school management and payment solutions in the K-12 and higher education market, serving approximately half of the private faith-based K-12 schools and nearly one-fifth of colleges and universities in the U.S. The Company's franchise is also benefiting from the Bank's expanding origination platform of private education loan products and consumer loans as well as from its growing deposit-gathering capabilities.

Earnings Building Block Assessment: Moderate
The Company has demonstrated solid earnings generation despite the revenue pressures associated with the run-off of its sizeable FFELP portfolio. Nelnet has made significant strides in gradually diversifying its revenue streams by expanding its fee-based businesses as well as by organically growing its loan book through the Bank. After excluding derivative market value adjustments, Nelnet generated core net income of $176.4 million in 2024, up from $121.6 million in 2023, mostly driven by the increase in non-spread income, partially offset by higher provision for credit losses and a modest increase in operating expenses. In Q1 2025, core net income was $87.4 million, up from $67.4 million in Q1 2024, mostly as a result of higher revenue and flat operating expenses. Of note, the redemption of the Company's certain membership interests of ALLO Holdings LLC in June 2025, which resulted in a pre-tax gain of $175 million, should meaningfully boost earnings for 2025.

Risk Building Block (BB) Assessment: Good
Nelnet's credit risk exposure remains limited. Specifically, the FFELP student loan portfolio comprised a high 88% of the total $10.0 billion loan portfolio (including the Bank's) at March 31, 2025, and carries a federal government guarantee of at least 97% of principal and accrued interest at default. Looking forward, the Company's credit risk exposure should incrementally increase over time as its organic private education and consumer loan portfolio grows while the FFELP portfolio runs off. That said, the Company has indicated a measured approach to its credit risk exposure. Meanwhile, the Bank-originated private education loan portfolio of $489.5 million is focused on higher credit quality borrowers with 92% of this portfolio associated with borrowers with FICO scores (at origination) of 705 or higher (44% with FICO above 794 and 48% with FICO between 705 and 794). Overall, the 30+ day delinquency rate (as a percent of loans in repayment) was 1.5% compared with 1.8% at YE2024, but higher year-over-year (YOY) given the seasoning of the portfolio. Looking at just the non-bank private education loans, the 30+ day delinquency rate was 2.6%, lower than in YE2024, but slightly higher YOY. While credit risk is limited, the Company is subject to greater operational risk given its sizeable servicing operations, but such risks are lessened because of its expertise and longevity in providing these services.

Funding and Liquidity Building Block Assessment: Moderate
Nelnet's funding profile is mostly reliant on secured forms of funding, but the Bank's growing deposit base is gradually contributing to the diversification of its funding composition. Nelnet has demonstrated a flexible approach in utilizing its funding sources to support its operations, including portfolio purchases or bolt-on acquisitions. As of March 31, 2025, the Company had $8.7 billion of total debt outstanding, of which approximately 90% was term asset-backed debt while most of the remainder were draws from warehouse facilities. Meanwhile, the Bank's deposits of $1.3 billion grew from $802.1 million and $675.8 million in the comparable periods in 2024 and 2023, respectively. As of March 31, 2025, Nelnet had ample available liquidity of nearly $1.3 billion, comprising cash ($175.6 million), unencumbered available for sale asset-backed securities (ABS; $164.6 million), unencumbered loans ($327.7 million), unencumbered repurchased ABS issued by the Company ($97.4 million), and from its unsecured line of credit, of which the entire maximum capacity of $495.0 million was readily available. Additionally, Nelnet had unused borrowing capacity in its warehouse facilities of $309.3 million, subject to eligible collateral.

Capitalization Building Block Assessment: Moderate
Nelnet's capitalization is supported by its consistent capital-generation ability, prudent and flexible capital management, and strong capitalization metrics. Over the past year, the tangible common equity-to-tangible assets ratio increased to 22.6% at March 31, 2025, from 20.1% at the same time a year ago reflecting higher equity levels and a decline in total assets. The Company's capital position provides a solid cushion to absorb losses under stressed conditions. The capital payout (including dividends and share repurchases) was 67% in 2024 and 75% in 2023.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024), https://dbrs.morningstar.com/research/443208. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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