As banks retreat from student lending, a private equity giant steps in

Michelle Gustafson/Bloomberg

The private equity firm Carlyle is stepping into the private student loan market as banks continue their retreat from the sector. 

Carlyle said Wednesday that it's buying a $415 million student loan portfolio from Truist Financial, and it's separately investing in a private student lender called Monogram. 

Banks have long been retreating from private student lending, citing the difficulty of making profits in a relatively small business line that's heavily regulated. One major bank that stuck around, Discover Financial Services, said recently that it will exit the sector and sell its $10 billion loan portfolio. Discover's student loan business has repeatedly run into regulatory troubles.

Despite banks' pullback, students still have "strong demand for loans," as they face rising tuition costs, and because federal student loans don't always cover their expenses, said Akhil Bansal, who heads Carlyle's Credit Strategic Solutions division.

"This gap is continuing to expand, and we believe private markets have a tremendous opportunity to step in and fill this gap as banks leave the ecosystem," Bansal said in an email.

At the same time, Carlyle's investment in Monogram is aimed at helping traditional financial institutions get into the student lending business. Monogram works with banks and credit unions to help them offer student loans. Carlyle did not disclose the size of its investment in the company.

Student lending gives banks another "touch point" to connect with both potential customers and existing ones at a critical time in their lives, said Monogram CEO Seth Gelber. Monogram provides the compliance and customer-service expertise, he said, while its partner banks offer loans that have a solid track record of being repaid and are often co-signed to provide additional security.

"We can work with them," Gelber said of Monogram's partnerships with banks. "They don't need to stand up a whole new compliance team. They don't need to stand up an origination system and an origination team and a school sales force."

In addition to expanding its partnerships with financial institutions, Monogram is weighing originating loans on its own — and benefiting from Carlyle's expertise in the securitization of those loans.

Gelber declined to say how many bank and credit union partners Monogram has. But the nonbank lender is currently managing some $7 billion of private student loans, which is a bit smaller than Discover's current portfolio.

Monogram, through its predecessor Cognition Financial, has more than 30 years of experience in the sector and has managed more than $30 billion of private student loans.

With Discover's upcoming exit from the student loan market, only a few major banks will still offer private student loans. Banks such as JPMorgan Chase and U.S. Bancorp left the market more than a decade ago, and Wells Fargo announced that it would leave in 2020.

PNC Financial Services Group in Pittsburgh still offers private student loans, as does Providence, Rhode Island-based Citizens Financial Group. Sallie Mae, which has a bank, specializes in private student loans, and the fintech SoFi Technologies, which obtained a bank charter in 2022, also offers the product.

Truist's shift away from student lending is part of a broader restructuring at the Charlotte, North Carolina-based bank, which has struggled in the wake of the 2019 merger that created it. Truist has also pulled back on indirect auto lending as part of its effort to refocus on core businesses.

In July, Truist said it had sold $5 billion of student loans. A company spokesperson did not respond Wednesday to a request for comment about the Carlyle announcement.