While there might have been fears of a massive selloff following the election, the market seems to have largely taken it in stride. In fact, there have actually been many big winners, including the student loan firm SLM, more well-known as Sallie Mae. SLM stock experienced a jump of 15 percent to reach $8.18 following the election.
Driving gains in the stock is an expectation in the market that a Republican Congress and president working together could result in reduced regulation. Overall, the student loan industry experienced a number of challenges during the current administration. Many within the industry are hopeful that circumstances could be turned around dramatically during the new incoming administration.
The changes that occurred during the last few years include the end of a program that allowed private lenders and banks to make government-backed student loans. Banks were able to earn interest payments and fees while the government shouldered the cost of any loans that went into default. Under a new law, however, only the government was allowed to make those loans, which were issued directly to borrowers.
Three years later, interest rates on new federal student loans were slashed by the government to levels that were approximately half of the interest rates offered on private loans by banks. Meanwhile, loan repayment plans were made more and more generous to student borrowers. As a result, borrowers were less inclined to take out loans from Sallie Mae. As a direct result, the stock for student loan companies became increasingly unattractive for investors, many of whom wanted nothing to do with stocks associated with student debt.
Had the election gone the other way, things could have become even worse for the student loan industry. While running for president, Hilary Clinton advocated free tuition, which likely would have resulted in less demand for new student loans. Under a Clinton administration, the Consumer Financial Protection Bureau could have become even stronger. The agency has been documenting complaints from consumers regarding poor customer service and misbehavior on behalf of companies responsible for servicing student loan debt. Among those companies is Navient Corp., the largest loan servicer in the country. Last year, Navient was informed by the CFPB that enough evidence had been gathered indicating that Navient was in violation of consumer protection laws and at risk for being sued. Navient has continued to maintain its innocence.
The Republicans have called for the CFPB to be abolished completely. Even if the agency is not ended under the new administration, Trump has made assurances that as much financial regulation as possible would be dismantled. At the very least, a new director for the agency could be named by Trump in 2018, possibly even sooner, following a recent court decision.
There is certainly a lot on the line for the student loan industry following the election, including the potential to take back a massive portion of the student lending business with the government being far less involved. Given that nearly $88 billion was disbursed by the federal government in student loans during the last academic year, there is a lot at stake. Data show that private lenders originated only a small fraction of that amount.
Prior to the election, SLM Corporation released its third-quarter financial results for 2016, which showed significant growth in portfolio size, originations, and net interest income. During the third quarter, the corporation’s private education originations showed an increase of 7 percent to reach $1.8 billion, while Sallie Mae’s private education loan portfolio increased by 27 percent to reach $13.7 billion. During the same time, net interest income increased by 27 percent to reach $223 million. Overall, SLM earned $0.12 per diluted share during the third quarter, representing a 33 percent increase during the same time last year.
Recently, the research analysts at Barclays PLC reissued SLM Corp’s “buy” rating. Currently, Sallie Mae has a $12 price objective for its stock. The target price from Barclay’s indicates a possible upside of almost 24 percent from the previous close for the company.
According to the analysts at Barclay’s, there is now a reinforced view regarding the long-term growth prospects for SLM’s stock. Prior to the election, the company represented the potential for robust growth; however, there were legislative risks. Following the election, those risks are considered off the table. Rather, Barclay’s believes the legislative landscape has become more supportive of the private student lending industry, meaning SLM could benefit from the potential for a reduction in federal student lending, lower corporate taxes, and possibly even a revival of the FFELP program.