Dive Brief:

• Discover Financial Services’ bank subsidiary has agreed to sell its private student loan portfolio to global investment firms Carlyle and KKR for up to $10.8 billion, Discover said Wednesday.
• The portfolio will be sold at a premium to its principal balance, which is about $10.1 billion, the card network company said in a news release. The investment firms said the portfolio is being purchased by “one or more strategic partnerships comprised of funds and accounts managed by Carlyle and KKR’s respective credit businesses,” according to a Carlyle news release.
• Firstmark Services, a division of student loan servicer Nelnet, will handle servicing of the portfolio upon the sale, which is expected to be completed through multiple closings by the end of the year, Discover said.

Dive Insight:

The student loan sale is the latest loose end Discover seeks to tie up since Capital One announced its intent to purchase the Riverwoods, Illinois-based card company in February. 

The student loan business has been a source of regulatory woes for Discover in recent years: The Consumer Financial Protection Bureau issued a consent order in 2015 alleging the company misstated minimum amounts due on billing statements for student loans, misstated tax information required for certain tax benefits and engaged in illegal debt collection. In 2020, Discover signed another consent order with the CFPB and agreed to pay $35 million after violating the prior order.

Then, in 2022, Discover conducted an internal investigation of its student loan servicing practices and “related compliance matters.” The company warned it could be subject to reviews, investigations or other regulatory actions connected to its student loan servicing. In January, Discover CFO John Greene said the company set aside $80 million for a “customer remediation” reserve, related to the student loan issues.

Discover had been searching for a buyer of its student loan portfolio since last November. In January, the company announced Nelnet would take over servicing of the loan portfolio as it continued to look for a purchaser.

The following month, Capital One said it would acquire Discover for $35.3 billion, pending regulatory approvals. The McLean, Virginia-based bank is bracing for a “significant” undertaking in tackling Discover’s various compliance issues. Earlier this month, Discover said it’s settling class action lawsuit claims related to a card misclassification issue disclosed last year, for $1.2 billion.

The proposed merger, which would create the largest credit card issuer in the U.S. and the sixth-largest bank in terms of assets, requires approval from the Federal Reserve and the Office of the Comptroller of the Currency. The two agencies will hold a public meeting related to the merger on Friday. 

In a step that appears intended to placate critics and smooth the path toward regulatory approval of the merger, Capital One on Wednesday announced a five-year, $265 billion community benefits plan, which includes $35 billion to support affordable housing for low- and moderate-income communities and individuals, $600 million in capital to nonprofit community development financial institutions and some $15 billion for small businesses and businesses in low- and moderate-income communities.

The plan, which the bank said it developed in conjunction with a coalition of community groups, shows that the combined company “will create an opportunity to provide more lending, investment, and services to underserved communities than the institutions would undertake on a stand-alone basis,” Capital One said in a news release. The bank has also pledged to grow Discover’s customer care center in Chicago’s South Side and meet the card company’s goal of employing about 1,000 people there.

The student loan portfolio purchase is the latest move by private equity firms to expand their presence in an arena banks are looking to exit. In January, Carlyle bought a $415 million private student loan portfolio that reportedly came from Truist, and invested in Monogram, a platform that works with financial institutions to help them offer student loans. 

Other private credit firms that had expressed interest in Discover’s student loan portfolio included Ares, Blackstone, Brookfield, Fortress and Oaktree, the Financial Times reported last month, citing unnamed sources.

“This transaction demonstrates the value that scaled private lenders can bring to key areas of the economy as the priorities of traditional lenders continue to evolve,” RJ Madden, a managing director at KKR, said in Carlyle’s news release.