Yahoo Finance 3 Upcoming Changes in Private Student Lending
With the change in administrations to President Donald Trump, the discussion of reinjecting private dollars back into the higher education system has reemerged.
Under the Obama administration, the Department of Education become the sole originator of federal student loans. The move ended the guaranteed student loan program, which existed from the 1960s to 2010, in which the government backed private lenders to make student loans.
But turning to private lenders in the student loan space has long been a mainstay of the Republican Party, experts say.
"We're likely to see more discussion on where private dollars can help fix the problems in higher education. I would be very surprised if that does not take center stage in the next six to nine months," says Carlo Salerno, an educational economist based in California.
In fact, the day after Trump was elected to office, the stock price for Sallie Mae Corp., a large student loan lender, shot up nearly double from $7.10 per share on Election Day to $12.47 on Feb. 15.
[Read tips for planning to take on your child's college debt.]
Sallie Mae's spokesman Rick Castellano told U.S. News via email that the company has a longstanding policy not to comment on its stock price. "We expect to continue responsible participation in a student loan marketplace that will continue to feature both federal and private student loans," he said.
Salerno says, historically, private lenders pick up gaps left behind by federal student loan programs.
"So if you're Sallie Mae, the market is probably a good sign if we think that policy changes are coming where there are gaps to be filled," the educational economist says.
For prospective private student loan borrowers, here are a few expectations that experts say consumers may see in the next year or two as a result of changes at the federal level.
[See three student loan reforms to expect under Trump.]
1. More lenders entering the private student loan market: "The Trump administration has talked about pushing for more privatization in the market and making it easier to lend," says Nate Matherson, co-founder and CEO of LendEDU, an online marketplace for student loans and student loan refinancing.
Matherson says easing of lending restrictions will lead to more lenders entering the marketplace over the next two years.
"That's good for consumers," he says about borrowers interested in private higher education loans. "More competition between lenders ultimately means lower rates for borrowers for those individuals who don't have private student loans."
Experts say large commercial banks that left the private student lending market after the 2008 financial crises may also return.
2. Interest rate hikes for both variable and fixed-rate private loans: The Federal Reserve is signaling that it's on course to raise the short-term interest rate this year.
Unlike federal student loans, interest rates for private education loans are linked to LIBOR, a benchmark many financial institutions use for setting rates on short-term loans.
"LIBOR is closely related to the Federal Reserve rate. The Federal Reserve has been pretty vocal about raising interest rates, and I think those rates will definitely be pushed on to the consumer," Matherson says.
Lending experts say they expect to see a 1 percent rise in interest rates for private student loans over the next two years. Those increases, they say, will affect both variable and fixed-term rates on private education loans.
[Learn several student loan refinance options for 2017.]
3. A growing number of start-ups offering income-shared agreements: Under an income-shared agreement or ISA, students use funds from an investor to pay for college and in turn agree to make payments based on a percentage of their income for a set period of time after they graduate.
"We'll probably see more interest in income-share agreements. I wouldn't be surprised if we saw more pilots or more growth and at least more focus and attention there," Salerno, the economist, says.
Casey Jennings, chief operating officer at nonprofit 13th Avenue Funding, which works with low-income students, says clarification of the legislation will make it much easier for financial and educational institutions to enter this space.
On Feb. 1, Sen. Todd Young, R-Ind, and Sen. Marco Rubio, R-Fla, introduced a bill to create legal framework for ISAs. The legislature includes the lawfulness of these contracts as well as the structure for terms and conditions for these types of agreements.
"From an investor standpoint, a pool of ISAs is much less risky than a pool of debt to the same group of students. With a pool of debt you never get any upside, where as with a pool of ISAs the upside is the students who outperform make up for the students who underperform," Jennings says.
Jennings says it will probably take government backing to make ISAs available to low-income students.
"In the absence of a government guarantee, it's only going to be students from the upper middle class who get funding because the risk of funding poor students is way too high," he says. "ISAs work better for students who need the risk transfer mechanism, which are students from low income."
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
More From US News & World Report
