The investment opportunities presented by the immense private student loan industry have been getting a lot of attention since the election of President Donald Trump. Many investors took careful note of the Republican platform which included plans to get the federal government out of the student loan business. This opened up the arena to privately held companies to help fill the void.
In many ways, the private student loan market operates much differently than the traditional stock market and might be even riskier. Investing in student loans isn’t necessarily the first place you’d think to look for investment opportunities, but it does present some interesting options for those comfortable with this risk.
What Types of Student Loans Are Open to Investments?
First and foremost, not all types of student loans are open for investment opportunities. The $1.45 trillion student loan market is made up of public and private student loans. Publicly funded student loans come from the accounts of the U.S. Treasury and are therefore not open for public investment. As some analysts have pointed out, taxes are technically the only method of investing directly in federal student loans, and the rate of return on taxes leaves much to be desired.
On the flip side, there are privately funded student loans. While there are no specific stock listings for these privately held loans per se, they are held by publicly traded companies such as Wells Fargo, Discover, and SunTrust Bank. These companies are all listed on the Nasdaq stock exchange.
In the months leading up to the election of the current administration, there was an expectation that President Trump would be very good for the private student loan companies and servicers. As reported on The Student Loan Report, some of the leading private student loan companies saw stock prices soar.
Although most federal student loan servicers operate as nonprofits, there are a handful of private companies, like Navient and Nelnet, which are contracted to service federal student loans. These companies, all listed on the stock market, are open for investment. The majority of the student loan holdings are private, but each holds a contract with the federal government for publicly held student loans.
Unconventional Ways of Investing in Student Loans
We now live in a world where crowdfunding and P2P investment opportunities are everywhere. The student loan market is no different. Companies like Sofi are shaking up what it looks like for both students and investors alike.
Sofi (short for Social Finance) has funded over $25 billion in student loans, with over 437,000 members around the country. Sofi funds student loans through investments from alumni at participating colleges. It's an interesting and exciting approach that is shaking up the conventional understanding of educational financing.
For anyone wishing to invest through Sofi, they must first be alumni at one of 78 participating colleges. According to Sofi, “Alumni earn a compelling double bottom line return, students receive a lower loan rate than their private or federal options, and both sides benefit from the connections formed.” At the moment, for the general public, other investment opportunities with Sofi are restricted to accredited investors.
Is the Student Loan Market Risky?
There is no such thing as a risk-free investment. Anyone seeking new investment opportunities, especially in alternative markets like student loans, needs to have a full understanding of the associated risk.
According to Investor Junkie, student loans might be even riskier than other investment options thanks in part to two main issues: lack of collateral and risk of default. Students, although well-meaning, are often extremely uneducated when it comes to debt. They are also relatively inexperienced in efficiently managing money, which all leads to increased risk.
Most federal student loans come with little to no qualifiers. Students do not need to prove financial stability, provide collateral, and often do not even require a cosigner. In 2016, the default rate for student loans was over 11 percent. That is a dangerous number, especially considering the relatively low-interest rates of most federal student loans. Plus, in the event of default, student loans are not tied to collateral, which is the standard with almost all other types of loans.
The increased interest in the student loan market will likely continue to unfold throughout the coming years. After all, it could represent a tremendous opportunity with it currently sitting at $1.45 trillion. While student loan stocks have experienced growth recently, it does not mean there is no associated risk. In fact, some experts peg student loan investments as one of the more risky options.