Discover Sells Student Loans to Carlyle, KKR for $10.8B

Discover Financial Services (NYSE: DFS) announced the sale of a substantial portion of its student loan portfolio to private equity giants Carlyle Group (NASDAQ: CG) and KKR & Co. (NYSE: KKR) on July 17, 2024. The transaction value is estimated to reach up to $10.8 billion, with the final sum exceeding Discover’s principal balance of nearly $10.1 billion.

This divestiture signifies Discover’s strategic shift from the student loan market, a space witnessing increasing political scrutiny and regulatory uncertainty. Discover has been contemplating this move since November 2023, and it aligns with a broader trend of lenders exiting the student loan sector.

The specific details of the portfolio being sold were not disclosed. However, it was confirmed that the loans would be sold at a premium, indicating a profitable outcome for Discover. This transaction is expected to positively impact Discover’s risk profile by reducing its exposure to the student loan market.

Furthermore, the sale coincides with Discover’s potential acquisition by Capital One Financial Corp. (NYSE: COF). Divesting the student loan portfolio will likely streamline the regulatory approval process for the anticipated merger.

The acquisition is undertaken by a consortium of funds and accounts managed by Carlyle and KKR’s credit businesses. The specific allocation between the two private equity firms was not revealed. This partnership suggests their confidence in the potential returns associated with the student loan portfolio.

Industry analysts offered mixed reactions to the news. Some commended Discover’s strategic decision to mitigate risk and potentially expedite the Capital One merger. Others expressed concerns regarding the potential long-term impact on student loan affordability, particularly if the new ownership prioritizes aggressive debt collection practices.

In conclusion, Discover’s divestiture of its student loan portfolio to Carlyle and KKR marks a significant development in the US student loan landscape. This transaction reduces Discover’s exposure to the market while potentially generating a profit. However, the long-term implications for student loan borrowers under the new ownership remain to be seen.