What student lenders think about Warren, Sanders reform plans

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With Democratic presidential hopefuls Elizabeth Warren and Bernie Sanders proposing broad overhauls of how Americans pay for college, investors have started to wrestle with the implications for private-sector education lenders.

At an industry conference in New York this week, industry executives spoke about how the Democratic candidates’ plans could affect their businesses. They were generally dismissive of the threat, though their optimism seemed to stem largely from a belief that the sweeping proposals are unlikely to become law in their current form.

Sens. Warren and Sanders want to cover all tuition and fees at U.S. public universities, and they also have plans to cancel hundreds of billions of dollars in existing student debt. Sanders, from Vermont, would go further than his colleague from Massachusetts by canceling all outstanding loans regardless of the borrowers’ income level.

Both candidates touted their student debt plans at the Democratic presidential debate in Houston on Thursday evening. "We are going to cancel all student debt in this country," Sanders vowed.

Private student loans make up an estimated 8% of total U.S. education debt, with federal loans accounting for the lion’s share of the $1.6 trillion market. Sallie Mae and Discover Financial Services are among the largest private student lenders in the country, along with Wells Fargo and Citizens Financial Group.

Back in May, a Sallie Mae executive said at an industry conference that free college could “really hurt” the Newark, Del.-based company’s business model, though he also suggested that the final version of such a plan would likely have strings attached that would ensure that many borrowers still turn to private student lenders.

On Wednesday, Sallie Mae CEO Raymond Quinlan expanded on the argument that free college, if it gets enacted, would likely come with some big caveats. He pointed to the company’s experience in New York state, which has launched a scholarship program to make public colleges tuition-free.

The New York program does not cover the cost of room, board, books or computers. And it is only open to students who have lived in the Empire State for at least 12 months, who come from families with annual incomes of $125,000 or less, and who agree to live in New York for a specified number of years after graduation.

“Those people deserve to go to college. They’re young, they’re ambitious, they come from economically challenged households. They are not our customers,” Quinlan said. “Our customers come from stable middle-income households.”

If a national version of the New York program were implemented, Sallie Mae would not expect any impact on its business, he added.

Two days earlier, Discover CEO Roger Hochschild was asked about student lending under a scenario in which Democrats win the White House and control of Congress. “We don’t see any risks in that business where we sit right now,” he replied.

Hochschild questioned how the U.S. government would finance the purchase of existing student loans that borrowers have with private-sector lenders such as Discover. Warren wants to pay for her plans with a 2% tax on families with more than $50 million in wealth. Sanders wants to impose a tax on financial transactions.

“The appetite in the general public for paying back someone’s $200,000 of law school debt may not be entirely there,” Hochschild said at the conference.

If private student debt were canceled by the U.S. government, there would be implications for the pricing and availability of such loans in the future, according Mark Kantrowitz, an expert on higher education finance who is the publisher of Savingforcollege.com.

He noted that the purchasers of bonds tied to private student loans would lose out on expected interest payments if the loans were paid off early. “The capital markets would probably be a little bit antsy with funding new loans,” he said.

Kantrowitz argued that the far-reaching proposals by Democratic presidential candidates are unlikely to be enacted. But he said that their prominence on the campaign trail could improve the chances that smaller reforms will become law.

He pointed to the idea of allowing student loans to be discharged in bankruptcy — a longstanding proposal by Sen. Dick Durbin, D-Ill. — as an example of the kind of bill that might look more feasible in comparison to the proposals by Warren and Sanders.

If investors are misjudging the impact that a change in the White House would have on student lenders, it would not be the first time.

In the month after President Trump’s election, shares in Sallie Mae rose by approximately 59%. But they have since given back nearly half of those gains.

“I think one of the things we’ve seen, even from this administration, is that regulatory policy doesn’t change that much,” Hochschild said.

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