Discover Financial Services (NYSE:DFS) announced this morning that its subsidiary, Discover Bank, would sell its private student loan portfolio. The buyer consists of at least one strategic partnership managed by Carlyle (NASDAQ:CG) and KKR (NYSE:KKR).
Discover’s portfolio of student loans had a principal balance of about $10.1 billion as of June 30 while the selling price is estimated to be up to $10.8 billion.
“Discover, which had been weighing a sale of the portfolio since November, is one of a handful of lenders that have exited the space in recent years,” said Reuters.
The deal comes after Capital One (NYSE:COF) announced in February that it would acquire the company for $35.3 billion in an all-stock deal. If successful, Capital One would become the sixth-largest U.S. bank based on assets.
Discover Is Selling Its Student Loan Portfolio. What Does That Mean for SoFi Stock?
During the first quarter, student loans accounted for 17.21% of SoFi’s (NASDAQ:SOFI) origination volume. The dollar volume tallied in at $751.68 million, growing by 43% year-over-year (YOY). Personal loans made up the majority of total origination volume, tallying in at 75%.
Financial institutions selling their loans to another party isn’t a rare event. They often do this in order to collect a profit, providing them with capital to originate more loans.
Still, several large student loan providers have exited the market in recent years. According to EMarketer, that’s because student loans make up a small portion of origination volume although they increase reporting and regulatory requirements.
“In recent years, the US government stopped backing private student loans, increasing risks for FIs offering these loans,” added EMarketer. In 2022, President Joe Biden’s administration said that student loan holders could default on their loans by declaring bankruptcy.
Discover’s student loan sale doesn’t exactly mean that it believes the student loan market will perform poorly. However, it adds to the growing trend of student loan providers drifting out of the market.
As for SoFi, its student loan origination growth is quite encouraging. And with interest rates set to drop later this year, students may be more inclined to take on a loan.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
