Dive Brief:

• Card issuer Discover Financial Services said Wednesday it’s considering selling its $10.4 billion private student loan portfolio as it pursues “strategic alternatives” for that business unit.
• On Wednesday, the boards of both Discover and its bank subsidiary authorized management to “explore the sale of the Discover Student Loans portfolio, and pursue the transfer of servicing of such loans to a third-party provider,” the company said in a filing with the Securities and Exchange Commission.
• Additionally, Riverwoods, Illinois-based Discover will stop accepting new applications for student loans Feb. 1, 2024, the company said in a Wednesday news release. The company said current student loan customers or their loans or payments won’t be affected.

Dive Insight:

During Discover’s third-quarter earnings call in October, interim CEO John Owen said the company’s board was in the process of evaluating all of its businesses as part of an annual strategic planning effort. That followed a September report from Bloomberg that Discover was exploring a sale of its student loan business. 

When reviewing the company’s business units, Discover’s board prioritizes “providing exceptional customer service and allocating resources to optimize returns,” Owen said in Wednesday’s release.

“During a recent review, the Board determined that exploring the sale and transfer of servicing of Discover’s student loans is aligned with those priorities, better enabling Discover to focus on our core banking products, capitalize on our growth opportunities and deliver long-term shareholder value,” he said in the release.

As of the end of September, Discover had about $10.4 billion in outstanding student loans, according to the company’s most recent quarterly filing. The business unit, along with other products Discover offers such as credit cards and home loans, “require significant investments in consumer portfolio risk management, marketing, customer service and related technology,” the company said in its most recent annual filing. 

Discover has counted Sallie Mae and Citizens Bank among its competitors in the private student loan market, and the company noted in the filing there are “several challenges” to managing and growing its student loan business going forward.

Among those: regulatory scrutiny. In 2015, the Consumer Financial Protection Bureau issued a consent order alleging Discover 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 the company violated the prior order.

Additionally, in July 2022, the company said it was conducting an internal investigation of its student loan servicing practices and “related compliance matters.” In November of that year, Discover said it had concluded that investigation but the company continued to communicate with regulators, and Discover could continue to be subject to reviews, investigations or other actions connected to its student loan servicing.

Discover has encountered more regulatory attention this year. The company reached a consent agreement with the Federal Deposit Insurance Corporation in September in connection with a consumer compliance probe at Discover Bank. 

And Discover disclosed a card pricing error in July that affected merchants and merchant acquirers. Discover has shared with regulators the findings of an internal investigation into the pricing error, CFO John Greene said in September. 

Discover said Wednesday there’s no deadline or set timeline for the student loan portfolio sale process to be completed. The company doesn’t intend to share developments “unless and until the Board approves a specific transaction or determines that further disclosure is appropriate,” the release said. 

Discover is “committed to a path forward that enables a seamless transition for our customers,” Owen said in the release. The company is also searching for a new CEO, after Roger Hochschild resigned abruptly in August.

Student loans make up about 8.5% of Discover’s total loans, Goldman Sachs Analyst Ryan Nash wrote in a Nov. 10 note to investor clients. In a recent meeting between company executives and Nash, executives noted regulatory issues related to the student loan business, and “stated that servicing has been a challenge and it has more effective and efficient customer acquisition tools across other products,” Nash wrote.