Sallie Mae Stock Experiences a Trump Bump

Published 8:42 am Thursday, March 9, 2017

By Drew Cloud, The Student Loan Report

Student loans were not a major component of Trump’s campaign rhetoric. Trump made brief mention of his plan to implement more provisions for borrowers, including a loan forgiveness program made available after 15 years on consistent, on-time payment, and capping income-based repayment at 12.5% of earnings for most borrowers. Despite his minimal discussion of the prevailing issue of student loan debt, student loan providers, like Sallie Mae, have experienced increased interest from investors, based on a steadily rising stock price since the election results rolled in.

Sallie Mae is the largest provider of private student loans in the country – an already booming business based on the rising cost of college education at both state and public institutions. However, in recent weeks the company has seen a nearly 37% increase in stock price as investors have high hopes for even greater growth in the industry. Given the upcoming shift in the political administration not only with President-elect Trump’s narrative but the backing of a Republican-led Congress, investors may be on to something.

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How Trump Benefits Private Student Loan Providers

Although the majority of Trump’s comments specifically point to changes needed for student loan borrowers, his broader plans for the economy as a whole have widespread implications for student loan servicers. First, his far-reaching recommendation to cut the corporate tax rate to 15%, down from its current 35%, paves the way for higher profitability for large companies throughout the country. Private student loan providers and servicers are part of that mix.

In addition to cutting the corporate tax rate, Trump and his team envision a business landscape with fewer regulatory oversights. While he’s made mention of a few specific instances where this may benefit big business, analysts believe the Consumer Financial Protection Bureau falls directly in his line of sight. The CFPB, a U.S. government agency established through the Obama administration, works to protect consumers from fraudulent, unfair practices by banks, lenders, and other financial institutions including student loan providers. With a sharp overhaul of the reach of the CFPB, student loan servicers may have an even greater chance to reap profitable benefits, making Sallie Mae and the like strong investments for the long-term.

A Reduction in Spending

The case for rising investments returns for Sallie Mae and other private student loan providers and servicers is strong based on lowered corporate tax rates and lessened government oversight; however, the added corporate benefit in the student loan industry comes on the wings of traditional Republican narratives. The vast majority of previous Republican-led administrations focus on cutting government spending in support of an overall smaller government. The idea is that with less government intervention, businesses have the ability to create additional jobs, invest in growth for new products and services, and keep more of their revenue as profits. It is reminiscent of the classis laissez-faire policy that was prominent in the early twentieth century. In theory, that money is trickled down to the average worker in the form of new employment opportunities, increased wages, and ultimately, more money to spend with other businesses.

This trickle down economic plan starts with a reduction in spending on government programs, not the least of which would be federal student loans. If student loan funding is reduced from federal sources, student borrowers have no choice but to turn to private lenders, like Sallie Mae, to finance their education. When combined with the other tentative changes a Trump administration could bring to the student loan industry, reducing access to federal funding creates a much greater demand for private student loan companies than ever before.

The Cost Savings Continue

Trump and his team have been quite vocal about the need for lifting the cap placed on short-term interest rates as well, which ultimately benefits private companies even more. The Federal Reserve has maintained historically low interest rates for nearly a decade in an attempt to boost economic activity spawned by big banks. When borrowing is kept at an affordable level, consumers have the ability to use lending products like loans and mortgages to further their financial footprint. In Trump’s eyes, keeping a lid on interest rates has had the opposite effect since banks have been wary of lending to the masses based on, you guessed it, profitability.

Trump’s plan to spur the economy also includes an increase in interest rates which would, in turn, encourage banks and financial institutions to lend more freely. With a higher cost of borrowing comes a higher potential for profitability, as the increased cost charged to financial institutions for borrowing from the federal government is ultimately passed down to consumers in the form of interest rates on loans. Higher interest rates directly impact lenders like Sallie Mae, arguably more so than the increase in demand from student loan borrowers.

Other student loan providers have experienced similar results to Sallie Mae in the weeks after the election, including Nelnet which experienced a 25% boost to its stock price in the same time period, and Navient which saw a 30% increase post-election. Although investors are making clear moves toward big business profitability, only time will tell whether the Trump bump seen clearly in Sallie Mae’s stock price will be a long-term profit maker for some investors. Overall, the factors at the foundation of a Trump administration point to big business growth for at least the next four years.