Investors applaud student loan actions ahead of President Trump

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As President Donald Trump moves into the White House, the future of many political issues, including student debt, remains uncertain. But investors seem to be betting President Trump and the Republican Congress will be good for companies involved in the $ 1.3 trillion student loan business.

Sallie Mae SLM,
+ 0.56%,
the leader in private student loan origination, saw its stock price increase by more than 50% between the election and the end of last week. Other companies involved in the industry, including Navient NAVI,
+ 1.21%
and Nelnet NNI,
+ 0.83%,
two publicly traded companies that manage government student loans, also saw increases of around 18% and 26% respectively during this period. Discover DFS,
+ 1.21%,
which also offers private student loans, saw its share rise by around 8%. While various factors likely contributed to the growth of stocks, experts say investors’ perception that the new administration will make more room for private companies in student loans may have played a role.

The Department of Education is the largest student lender in the country, accounting for around 90% of the market. But large-scale changes or even smaller adjustments to the system, which might be considered in a new administration, could shift that balance.

Until 2010, private banks served as intermediaries for government guaranteed student loans. The Republican Party has indicated its interest in returning to a student loan market similar to this system – the 2016 GOP party platform called on the government to pull out of the student loan business. And although little is known about the higher education policy preferences of Education Secretary candidate Betsy DeVos, she clearly supports the introduction of more private options into the public school system. K-12.

While the growing privatization of the student loan industry could be a boon to companies involved in the market, consumer advocates have warned borrowers may be worse off. Federal government loans generally have more generous repayment terms than private loans and offer an option to borrowers with little or bad credit history. And supporters of the Obama administration’s 2010 decision to restrict the role of banks in the government’s student loan program argue that the old system allowed financial institutions to earn a profit while the government carried all the risk of the loans.

“Many in the financial industry will go out of their way to go back to the good old days of charging big fees without having a lot of skin in the game, but if we are concerned about borrowers then what we really need to ask ourselves is this. ‘is:’ Will this lead to lower prices and defaults for borrowers? ‘ Said Rohit Chopra, former student loan ombudsperson at the Consumer Financial Protection Bureau and senior member of the Consumer Federation of America, an association of consumer-focused nonprofit associations.

It may still be too early to say whether investors’ bets on further privatization of the student loan market will pay off, but Trump’s election against Hillary Clinton has removed some of the possible risks for student loan companies, said Moshe Orenbuch, Managing Director. at Credit Suisse, which tracks student lenders. On the one hand, it seems less likely now that lawmakers will implement some sort of national free college program – a major goal of the Clinton campaign – that would likely have reduced the role of student lenders.

Orenbuch said it also seems less likely that Republicans will increase federal government loan limits than if Democrats had remained in power. Currently, undergraduates dependent on their parents can borrow up to $ 31,000 government for university and when they reach that ceiling, students can turn to private lenders. If this limit were raised, it would mean fewer opportunities for these companies.

“When considering a public investment in higher education or a private investment in higher education, Democrats generally prefer more public than private and Republicans prefer more private than public,” said Joe DePaulo, director. general of College Ave Student Loans, a private lender. “I think that’s the number one reason you’ve seen these stocks jump.”

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It’s also possible that Republicans in Congress are even reducing the government’s role in graduate student loans. Currently, graduate students can borrow up to the cost of their degree; leading Republicans have indicated they will target this reform program.

Making major changes to the mix of private and public student loan options would require significant action on the part of Congress, which, given the typical deadlock, could be difficult to achieve. But there are opportunities for less dramatic changes that could also be a boon to student loan companies and their investors.

The Department of Education is in the process of awarding a new contract for the management of its student loan portfolio. Currently, several companies hold this contract, but under the new system, touted by the Obama administration, only one company will clearly come out on top. Navient and Nelnet are both vying for the new contract, but it’s unclear whether a Trump administration will continue this process, said Michael Tarkan, senior analyst at Compass Point Research and Trading.

“It would be business as usual for these companies if they didn’t award it,” Tarkan said. “If they award it, then one of those entities is going to win and the other is not. So you have a pretty binary outcome if they go ahead with the contract. “

It is also possible that the new administration will change its position in favor of private companies involved in the student loan market, which could be a boon for companies. “Sentiment is generally positive, I think, mainly due to perceived lower regulatory risk across the industry,” Tarkan said.

The Obama administration has applied relatively aggressive security to student loan companies. Earlier this week, the Consumer Financial Protection Bureau filed a lawsuit against Navient for claiming the company had mistreated borrowers. But the future of the lawsuit and similar actions remains uncertain as some Republicans have said they would like to reduce or even eliminate the CFPB.

Despite indications that the new administration and a Republican convention 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 see higher education as a top priority for the administration right now. There are other things they will cover first.

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