As President Donald Trump moves into the White House, much remains uncertain about the future of many policy issues, including student debt. But investors appear to be betting that President Trump and Republican Congress will be good for the companies involved in the $1.3 trillion student loan business.
Sallie Mae SLM, +2.68% the leader in private student loan origination, saw its stock price grow more than 50% between the election and the end of last week. Other companies involved in the industry, including Navient NAVI, +1.92% and NelnetNNI, -0.14% two publicly traded firms that service student loans originated by the government, also saw increases of about 18% and 26% respectively during that period. Discover DFS, +1.28% which also offers private student loans, saw its stock rise about 8%. Though a variety of factors likely contributed to the growth in the stocks, experts say investors’ perception that the new administration will make more room for private companies in student lending likely played a role.
The Department of Education is the nation’s largest student lender, accounting for roughly 90% of the market. But large scale changes or even smaller tweaks to the system, which may be on the table in a new administration, could shift that balance.
Until 2010, private banks served as middlemen for student loans guaranteed by the government. The Republican Party has indicated an interest in returning to a student loan market that’s similar to that system — the 2016 GOP Party platform called for the government to get out of the student loan business. And though little is known about the higher education policy preferences of Secretary of Education nominee Betsy DeVos, she has a clear record of support for introducing more private options into the K-12 public school system.
While growing privatization of the student loan business could be a boon for companies involved in the market, consumer advocates have warned that borrowers may be worse off. The loans offered by the federal government typically feature more generous repayment terms than private loans and provide an option for borrowers with little or poor credit history. And supporters of the Obama administration’s 2010 move to curtail the role of banks in the government’s student loan program argue that the old system allowed financial institutions to collect a profit while the government bore all of the risk for the loans.
“Many in the financial sector will push hard to revert back to the good old days when they collected big fees without having much skin in the game, but if we’re concerned about borrowers, then what we really need to ask ourselves is, ‘Will this lead to lower prices and lower defaults for borrowers?’” said Rohit Chopra, the former student loan ombudsman at the Consumer Financial Protection Bureau and a senior fellow at the Consumer Federation of America, an association of consumer-focused nonprofits.
It may still be too early to tell whether investors’ bets on increased privatization in the student loan market will pay off, but the election of Trump over Hillary Clinton removed some of the possible risks to student loan companies, said Moshe Orenbuch, a managing director at Credit Suisse, who follows student lenders. For one, it seems less likely now that lawmakers will implement some kind of national free college program — a major focus of Clinton’s campaign — which likely would have curtailed the role of student lenders.
Orenbuch said it also appears less likely that Republicans will raise the lending limits on the federal government than if Democrats had stayed in power. Right now, undergraduate students dependent on their parents can borrow up to $31,000 from the government for college and when they hit that ceiling, students may turn to private lenders. If that limit were raised, that would mean less opportunity for these companies.
“When you’re considering public investment into higher education or private investment in higher education, typically speaking, Democrats prefer more public than private and Republicans prefer more private than public,” said Joe DePaulo, the chief executive officer of College Ave Student Loans, a private lender. “I think that’s the number one reason why you saw those stocks jump.”
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There’s also a chance that congressional Republicans may even curtail the role of the government in lending to graduate students. Right now, graduate students can borrow up to the cost of their degree; leading Republicans have indicated they would target that program for reform.
Making major changes to the mix of private and public student loan options would require significant moves by Congress, which given the typical gridlock, may be difficult to achieve. But there are possibilities for less dramatic changes that could also be a boon to student loan companies and their investors.
The Department of Education is in the midst of awarding a new contract for servicing its student loan portfolio. Right now, multiple companies hold this contract, but under the new system, touted by the Obama administration, only one company will come out a clear winner. Both Navient and Nelnet are in the running for the new contract, but it’s unclear if a Trump administration will continue that process, said Michael Tarkan, a senior analyst at Compass Point Research and Trading.
“It would be business as usual for those companies if they don’t award it,” Tarkan said. “If they do award it, then one of those entities is going to win and one is not. So you have a pretty binary outcome if they do move ahead with the contract.”
It’s also possible that the new administration will shift its posture toward private companies involved in the student loan market, which could be a boon for the firms. “The sentiment is generally positive I think primarily due to a lower perceived regulatory risk across the entire sector,” Tarkan said.
The Obama administration has applied relatively aggressive security to student loan companies. Earlier this week, the Consumer Financial Protection Bureau filed a major suit against Navient over claims the company mistreated borrowers. But the future of the suit and similar actions remain unclear as some Republicans have said they would like to curtail or even eliminate the CFPB.
Despite indications that the new administration and a Republican congress will be a boon to student loan companies, investors will have to wait and see if their bets actually pay off. “In terms of what ultimately happens, I think it’s too early to tell,” Tarkan said. “I don’t view higher education as a top priority right now for the administration. There’s other stuff that they’re going to tackle first.”