1.26.2017 Why Trump Administration Could Benefit Private Student Lending

President Trump has already taken a number of actions during his first two weeks in office that will impact different sectors of the U.S. economy. One area where he hasn’t taken action yet is the $1.4 trillion student loan market — but anticipation of such action in the near future is causing excitement among private student lenders.

Since the election, shares of Sallie Mae, the largest private student lender, have soared by more than 50 percent. In a recent Wall Street Journal article, Sallie Mae’s CEO put it this way: “Political risk has now been removed. We can now deal with the facts as opposed to a nightmare.”

Sitting on the Sidelines

Under the Obama administration, the federal government took on origination of all federally backed student loans, pushing private lenders to the sidelines. The goal was to lower lending costs for the government, which would then allocate the savings to student grants and offsets to Obamacare costs.

Of course, the increased regulatory scrutiny on private lenders that arose with the formation of the Consumer Financial Protection Bureau (CFPB) also played a big role in the exodus of private lenders from the student loan market. Bank of America, Citigroup, J.P. Morgan Chase and U.S. Bank have all left the market since 2009.

In fact, the federal government’s share of outstanding student loan debt has increased since 2008 from about 88 percent to nearly 93 percent. Private student loans now account for less than 8 percent of outstanding student loan balances.

A drawback of the federal government dominating the student loan market is that taxpayers are ultimately liable for defaults. Making matters worse, the government made most of these loans without even checking borrowers’ credit scores.

Return of Private Lenders

One plank of the Republican Party platform was a return of private lenders “in order to bring down college costs and give students access to a multitude of financing options,” the platform stated. “The federal government should not be in the business of originating student loans,” according to the platform.

Less government regulation in student lending could lead to several possible outcomes, including more private student loans from the likes of Sallie Mae, Wells Fargo and Discover Financial Services, the three largest private student lenders. It could also entice more private lenders into the market. Or, it could lead to the federal government selling loans to private lenders or encouraging the emergence of a bond market for student loans.

Before the election, there was “a zero percent chance” of this happening, the CEO of a private student loan lender was quoted as saying in The Wall Street Journal article. “But now something like this has a possibility,” he said.

According to the CEO of Sallie Mae, if 20 percent of the federal student loan market (including certain loans to grad students and undergrad students’ parents) moved to the private market, private lenders would see a huge increase in student loan volume.

Benefitting from a Trump Administration

It remains to be seen, of course, exactly what the Trump administration will do in terms of relaxing regulations on private student lenders. And even if regulations are pared way back, the banks that bailed on private student lending might not rush back in right away.

Some like J.P. Morgan have already moved on from this market in search of other loan products than can help them attract younger customers. But one thing seems certain: You can add private student lending to the list of industries that will likely benefit from a Trump administration.

We’re interested in hearing from you. What do you think about the possible rejuvenation of the private student loan industry? Send me an email at steven@lendtrade.com.