Discover Financial Services is best-known for its credit cards but the Chicago-area company sees opportunity if the federal government, as widely expected, curtails its student loan lending under a Trump administration.
Only about 6 percent of student loans are private. If the federal government were to phase out its student loan programs, private lenders might be the only ones able to fill a gap that can mean the difference between living on campus or at home, or even attending college.
Investors see opportunity too.
Since the election, stocks of some student loan issuers and servicers have outperformed the Standard & Poor's 500. Shares of Sallie Mae, a private student loan originator, are up 65 percent. Navient and Nelnet, which service student loans, are up 17 percent and 29 percent, respectively. Discover's stock is up more than 20 percent since the election.
"To the extent that there was a greater role for private lending, I think we would be very well-positioned," David Nelms, Discover's chairman and CEO, said during a call Tuesday to discuss the Riverwoods-based company's fourth-quarter earnings.
"It wouldn't take much in the way of federal backing off to have a dramatic increase on the private origination side," said Nelms, who added he wouldn't expect any changes in 2017 "but maybe in subsequent years."
Discover's student loan business is already on the upswing. It set a record with $1.4 billion in new loans last year, a 9 percent increase. It credited more sales and marketing, as well as a redesign of the loan application that improved the customer experience.
William Blair & Co. analyst Bob Napoli predicts private student loans could account for 12 percent of all student lending in the next few years. "There could be substantial growth potential in the student lending business as we believe the Trump administration is likely to reduce government involvement in the student lending business," Napoli wrote in a report on Wednesday.
Worries about the private student loans persist, however.
This month the federal Consumer Financial Protection Bureau released a report showing that student loan debt is a problem even for older consumers heading into retirement, as they help finance their own educations and those of their children.
In 2015, nearly 870,000 borrowers age 65 and older owed federal student loans, the report said. But unlike federal loans, private student loan companies routinely require a co-signer or co-borrower, a process that also puts, say, a parent on the hook along with the primary borrower, according to the report.
Both Illinois and the federal government are going after allegedly abusive student loan practices they say trap consumers and make it difficult for them to move past their school years.
Illinois Attorney General Lisa Madigan this month filed a lawsuit in Cook County Circuit Court, alleging student loan servicer Navient and its subsidiaries failed to properly help struggling borrowers. The Consumer Financial Protection Bureau filed a similar complaint against Navient.
Navient, based in Wilmington, Del., said the allegations in the lawsuits are unfounded. "We will vigorously defend against these false allegations and continue to help our customers achieve financial success," the company said.
Illinois' suit also alleged that loan originator Sallie Mae Bank put students into expensive subprime loans it knew were going to fail, violating the Illinois Consumer Fraud Act. Madigan's suit asks the court to provide restitution to borrowers, and to rescind or change contracts or loan agreements between Navient and Illinois consumers.
"One of the reasons I brought the Navient lawsuit is to reform the private student loan industry by establishing enforceable standards for servicers that will better protect borrowers and provide consistent repayment options," Madigan said in a statement. "We believe the federal direct loan program is vital and its benefits, including income-driven repayment plans, should continue."
Sen. Richard Durbin, D-Ill., has supported a bill that would make private student loans dischargeable in bankruptcy court.
"This issue is a top priority for Sen. Durbin and he will be watching it very closely," spokeswoman Emily Hampsten said.