Publicly traded student loan players like Navient and Wells Fargo may have gotten hit by lawsuits from the Consumer Financial Protection Bureau, but that hasn’t kept their stocks in the industry from gaining ever since President Donald Trump won the election.
With many investors betting there will be a friendlier regulatory environment for the student loan market under Trump, shares have been increasing, particularly last week after Betsy DeVos, President Trump’s controversial nominee for Education Secretary, was confirmed. DeVos, who has ties to the for-profit higher education market, wouldn’t commit during senate confirmation hearings on keeping Obama’s gainful employment rule on the books. This law attaches federal financial aid to schools that graduate students with degrees that actually lead to good paying jobs. SLM Corp., the student loan lender, shares have been gaining all year while Navient’s stock is up over the last six months, although it did take a hit in recent weeks after the CFPB lodged a lawsuit against it over student loan servicing practices. Meanwhile, shares of Wells Fargo, who issues loans for students, are also up this year.
At the same time that investors are remaining upbeat about the student loan market, there are a handful of bears that have been making money betting these stocks are going to implode. According to a report in the New York Times that profiled FlowPoint, the investment firm has seen its returns increase fivefold by shorting some student loan-related stocks. FlowPoint is part of a group of investors that think the student loan market is in a bubble that will eventually burst. The reason: defaults on the student loans and federal lawsuits lodged against student loan servicing companies’ over alleged abusive practices. Even JPMorgan Chase CEO Jamie Dimon raised a red flag about the market, saying that defaults among student loan borrowers will become a big problem.
Despite the writing on the wall, shorting higher education stocks isn’t as easy as it seems. For one thing, the New York Times pointed out that a lot of the stocks have been trading higher on the optimism about President Trump. What’s more, the student loan market has protections from defaults because many are backed by the government. And lenders are able to garnish wages and use other debt collecting tools. Student loan debt is one of the few that can’t be discharged by bankruptcy. Adding to the challenges, there’s a lack of trading tools to make it easy for student loan bears. Unlike the mortgage market, there aren’t any credit default swaps that pay the holder if certain pieces of student loan-backed securities go south. Unfortunately, time will only tell what happens to the student loan market; for now, the market can only move forward.
Author: Donna Fuscaldo
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