Rohit Chopra, the former student loan ombudsman at the Consumer Financial Protection Bureau and a senior fellow at the Consumer Federation of America, argues that private lenders may not see the windfall they are expecting after President-elect Donald Trump takes office. –Danielle Douglas-Gabriel
It’s no surprise that some industries are gearing up for big paydays with the election of Donald Trump. Among the biggest winners after Election Day were private prisons, which Trump showered with praise during the campaign. The same goes for the fossil-fuel industry, given Trump’s well-known skepticism of climate change.
But investors also see fortunes in their future in another market: the student loan industry.
After Election Day, a slew of student loan outfits scored big gains before 2016 came to a close. Nelnet, which collects payments from 5 million borrowers, climbed 39 percent. Discover, the credit card company that has bet big on student loans, rose 29 percent.
But the biggest haul belongs to Sallie Mae, whose investors saw their stock surge 64 percent — just one month after Election Day.
Investors are betting that a President Trump will make the student loan industry super-rich again. But given the incoming president’s consistent rhetoric about the squeeze of student debt on young people across the country, this bet could go badly.
Like the subprime mortgage industry, Sallie Mae and the student loan industry were booming a decade ago, aggressively pushing loans and packaging them up into securities. But the music stopped soon after Sallie Mae and other lenders were implicated in a kickback scandal, although they stayed afloat thanks to federal bailout programs.
In 2010, Congress halted the student loan gravy train, cutting subsidies to Wall Street and Sallie Mae for offering federally guaranteed student loans. Sallie Mae now focuses on private student loans, mostly marketed to students who borrow heavily, where the company controls roughly half the market.
Just a few weeks after Election Day, at a JPMorgan investor conference, the chief executive of Sallie Mae laid out his plans to triple its business that relies one of its time-tested strategies: lobbying.
The federal government will lend close to $100 billion in student loans this year. Sallie Mae wants to see the government halt lending on the most profitable loan programs, forcing those borrowers to go to private lenders, where most of them would face higher interest rates and fewer protections.
If the student loan lobby can convince Trump to agree to siphon off $20 billion in Department of Education loans to private lenders, Sallie Mae believes it could triple its lending.
The chief executive, whose personal stock holdings have jumped millions of dollars in value since Election Day, acknowledged that “we are in close contact with all the relevant politicians.”
The Republican platform mostly steered clear of how we need to restructure our badly broken student loan system. But Trump sang from a different song sheet.
In the campaign, Trump actually proposed shortening the number of years borrowers would have to pay their loans from 20 years to 15 years before getting the rest forgiven. He criticized colleges that “spend more on private-equity fund managers than on tuition programs.” And he echoes Massachusetts Democratic Sen. Elizabeth Warren’s concern about the federal government profiting off student loans.
Trump hasn’t exactly championed eliminating a borrower’s choice to choose lower-rate federal student loans. If anything, he’s tapped into the economic anxiety that so many Americans with student debt face, where borrowers worry that they won’t be able to save up for that first down payment on a home or start a family.
And student debt stress isn’t confined to your prototypical college graduate. According to exit polls, Trump won big among voters that served in the military. But Sallie Mae’s spinoff Navient was caught cheating tens of thousands of military families on their student loans, paying close to $100 million to settle the overcharging scandal. According to a Justice Department complaint, the company engaged in conduct that was “intentional, willful, and taken in blatant disregard of the rights of servicemembers.”
Although it’s unlikely that Trump will be a cheerleader for free college or any other major expansion of the federal government’s role, Americans of all ages and political affiliations want to see real progress on student debt.
As with so many issues, none of us can predict exactly what’s on Trump’s student loan to-do list. Perhaps he’ll unleash tweets at colleges with large endowments that are jacking up tuition. Maybe he’ll renegotiate the cushy contracts the government has with student loan companies responsible for collecting payments from borrowers.
He may even act immediately by demanding reimbursement for taxpayers who were overcharged by Sallie Mae for more than $22 million in subsidies, according to a 2009 investigation by the Department of Education’s inspector general, a substantial sum that has gone mysteriously uncollected for more than seven years.
With a student loan borrower defaulting every 28 seconds, slipshod loan servicing is one of the biggest problems. If he’s smart, he’ll support the Consumer Financial Protection Bureau’s work to stop this avalanche of defaults.
I’m crossing my fingers that a sweetheart deal for Sallie Mae and the student loan industry that soaks Americans with more debt won’t be high on Trump’s list. But if it somehow makes the cut, he’ll be asking for a fight with a lot of current — and future — student loan borrowers across the country.