The Trump Era Is Already Giving a Boost to Sagging Student Lenders

Student debt was far from a signature issue in the general election campaign, but the result still reverberated among lenders and for-profit educators. Investors in the nation's largest student loan companies and proprietary colleges bet that President-Elect Donald Trump, combined with Republican control of Congress, will lead to a reduced federal role in education lending, as well as an easing of enforcement efforts and new rules.

Shares in Navient Corp., the largest student loan servicer in the U.S., with more than 12 million debtors, surged more than 20 percent on Wednesday afternoon. SLM Corp., better known as Sallie Mae, was up more than 19 percent; no company in America originates more student loans without government backing than Sallie Mae. Both companies' shares hit 52-week highs.

Investors also rewarded Career Education Corp., Bridgepoint Education Inc., American Public Education, Inc., and DeVry Education Group Inc. with higher share prices after punishing the companies over the last few years in anticipation of decreased enrollment, higher costs, stringent new federal rules, and heightened government scrutiny. Career Education shares hit levels last seen in 2012.

"Chances are good that the tone in general will be one of deregulation and rolling back some of the stuff put in place over the last eight years," said Trace Urdan, an analyst at Credit Suisse Group AG. Jeffrey Silber, an analyst at BMO Capital Markets, said that for-profit colleges "could be the big winner—or at least less of a loser" under a Republican-led White House and Congress.

Navient and Sallie Mae faced the prospect of higher costs and fewer opportunities to increase revenues under Hillary Clinton, with analysts forecasting that a Democratic administration would continue policies put in place by President Obama and his appointees. In 2010, for instance, the Obama administration and the Democratic-controlled Congress ended the bank-based federal student loan program, immediately cutting off billions of dollars in annual revenues for lenders. More recently, the Consumer Financial Protection Bureau and the Department of Education have been preparing new rules that would govern the business of collecting borrowers' monthly payments. The CFPB and a group of state attorneys general also have been preparing a possible lawsuit against Navient for allegedly mistreating borrowers in violation of federal consumer protection laws, a charge Navient repeatedly has denied.

A Trump administration and a Republican-controlled Congress means that the nascent federal consumer bureau, created in 2010 as part of the post-financial crisis law known as Dodd-Frank, will be under pressure to lessen its oversight of the for-profit-college and student-loan sectors, said analysts Isaac Boltansky and Alison Ashburn of Washington-based Compass Point Research & Trading LLC. "The CFPB will become far less impactful," they said. In recent years the agency sued Corinthian Colleges Inc. and ITT Educational Services Inc. in federal court for allegedly defrauding student debtors. Both companies are now out of business.

For-profit colleges, meanwhile, have been preparing for new federal rules that threaten to cut off their access to the federal student loan program, the lifeblood for most colleges in the U.S., if their graduates fail to land jobs that enable them to repay their student debt, as well as put the colleges on the hook for the cost of canceled loans if the Education Department determines that they have defrauded students.

Trump didn't devote much time to student loans during his presidential campaign. In a speech delivered last month in Columbus, Ohio, he promised that borrowers wouldn't have to spend more than 12.5 percent of their annual income on student loan payments and that any debt remaining after 15 years would be forgiven. Trump did not elaborate on the details of his proposal. His 2016 book, Great Again: How to Fix Our Crippled America, includes a passage ridiculing  the Education Department as a "disaster" and threatening to abolish it. "If we don't eliminate it completely," Trump wrote, "we certainly need to cut its power and reach."

Urdan, the analyst at Credit Suisse, warned that a government-wide group that Obama established dedicated to investigating dodgy for-profit colleges will probably cease its work. The interagency group helped the Federal Trade Commission sue DeVry in federal court earlier this year for allegedly misleading prospective students with false claims about its graduates' success at landing jobs. Recent rules finalized by the Obama administration to govern colleges "will probably become a lot friendlier to institutions," Urdan said. "You can take that to the bank."

Compass Point reckons that Trump's student loan plan, though scant on details, would increase the private sector's role in originating new student loans. As it stands, the Education Department is responsible for more than 90 percent of all new lending. This means that companies such as Navient, Sallie Mae, Discover Financial Services Inc., and Nelnet Inc. would benefit, which helps explain Wednesday's rally on Wall Street. Discover shares were up more than 5 percent by 1:57 p.m. in New York, while Nelnet climbed nearly 6 percent. Navient's bonds rose as well. Its notes paying 5.5 percent coupons and maturing in 2019 rose 52 cents on the dollar, to $1.0346.

"Time will tell if this is truly a good bet," Rohit Chopra, formerly the top student loan official at the consumer bureau and an adviser to Education Secretary John B. King Jr., said on Twitter about the surge in student loan companies' share prices.