Lending Startup Earnest Gets Into the Student Loan Refinance Game

With student loan debt weighing down $1.3 trillion and technology and big data are reshaping finance, it’s no wonder startups like Sofi and CommonBond have tried to apply advances in fintech to one of the biggest crises of our time – and realize a steady profit in the process.

Today, Seriousa personal lender known for its innovative algorithm that uses between 80,000 and 100,000 data points to lend to people with little or no credit history, joins them.

The San Francisco-based company, which provides personal loans to young people whose credit scores belie their actual creditworthiness, announces the launch of a student loan refinance product that will offer overwhelmed graduates the opportunity to refinance their undergraduate loans. and graduate, federal and private – at rates as low as 1.92% and capping at 7.5% for terms ranging from five years to 20 years.

Student loan debt is my generation’s home loan. It’s almost a universal problem for my age demographic. I’m still paying off almost $100,000 in college debt myselfsays Louis Beryl, 34, co-founder and CEO of Earnest, adding that customers have been asking for a student loan refinance product since the company launched last May.

By the end of 2014, Earnest, which is in about 20 states covering 70% of the US population, had processed $8 million in personal loans and expects this product to make hundreds of millions of loans this year. . Exploration and development of this product will be funded by a $17M Series A investment, also announced today, by a consumer-focused venture capital firm Maveronwhose portfolio includes Everlane, General Assembly and Zulily.

The financial services industry is poised to be disrupted by innovative technologies and market approaches, which is why we believe Earnest is one of the winners,” says Dan Levitan, Maveron Co-Founder and Board Member Board of Directors of Earnest.

Earnest’s competitors like Reached, Pave and, now, SoFi and Common Bond focus their credit decisions primarily on alma mater, education, employment, and credit score. Earnest differentiates itself by leaving the credit score out of the decision and instead asking the borrower to provide their full financial history, including bank and credit card details like deposits, withdrawals and payments, and all savings, including retirement accounts. It examines whether the applicant is making minimum, full or intermediate payments on their credit cards and even checks their


“The data-driven nature of all of our products allows us to really reduce the cost of processing these loans while still making better decisions, which translates directly into better rates for borrowers,” says Beryl.

Earnest’s Big Data approach will also allow it to offer candidates a “check your rate” function which will give them a quote in less than two minutes, after the candidate has entered their employer, level of education, school, job title, income and savings. (The company also makes a smooth credit application which will not affect the applicant’s score.)

The refinance product will feature a high level of flexibility, allowing borrowers to repay their loans almost as they wish. Borrowers can switch between fixed and variable rates. (The closest product offered by a competitor is the Common Bond hybrid loan, but the rate is fixed for the first five years and then variable for five seconds). “People tend to worry about this decision, so we give customers the opportunity to change,” says Beryl.

They can swap between, say, a 15-year loan and a five-year loan with a more attractive interest rate – an attractive feature, for example, for poor resident doctors who can expect higher paychecks generous in the future. (Meanwhile, bankers who decide to go the nonprofit route might do the opposite.)

Borrowers can choose to pay twice a month instead of once a month to better match their payment cycle and save a few hundred dollars over the life of the loan.

And they can customize the length of their loan up to the month. If a borrower has a monthly payment of, say, $475 and rounds it up to $500, they’ll pay it off 13 months early. Earnest will allow him to opt for a 14-year loan and reward that commitment with a lower interest rate, saving the borrower between $3,100 and $3,600. The borrower can even subscribe to a loan over 13 years and 11 months.

Those who establish an on-time payment history with the company can even skip one payment per year.

In addition, the company offers the typical advantages of a federal loan: protection against unemployment, deferrals of enrollment in higher education for up to three years.

Beryl says Earnest’s other point of differentiation is that the company will also service the loan, while SoFi and Common Bond use third-party services. “The problem with that is that it’s kind of the same less than ideal practice that happens in the mortgage industry,” says Beryl. “You go to your bank and get a mortgage and immediately send all your money every month, but all your customer service and all your bills and anytime you have questions, that’s not the company you’re dealing with. originally processed.”

Beryl says being the point of contact for “very high quality borrowers means a lot.” Earnest’s core demographic is between the ages of 22 and 35, and his average income exceeds $100,000.

Like SoFi and Common Bond, the company does not charge any setup or prepayment fees. SoFi’s lowest variable interest rates match Earnest at 1.92%, while Common Bond is at 2.66%. Earnest’s highest variable interest rate is 5.75%, while SoFi’s is 4.92% and Common Bond’s is 5.66%. The lowest fixed rates at SoFi and Earnest are 3.5% and at Common Bond 3.89%. Earnest’s highest fixed rate is 7.5%, while SoFi’s is 6.99% and Common Bond’s is 7.24%.

While Earnest’s borrowers appear to be the future 1%, it remains to be seen whether the company’s gamble pays off or not. The company is too young to have much experience with defaults, so it’s too early to judge how well its algorithm identified creditworthy people among the so-called “light cases” – young people whose cases traditional lenders have too few data points for traditional lenders. Additionally, society may stumble in trying to strike the right balance between lending standards that are loose enough to capture as much of this demographic as possible, yet stringent enough to keep defaults low.

If his model succeeds, the implications could go far beyond SoFi and Common Bond’s ability to attract desirable borrowers. As more and more creditworthy student borrowers refinance with these venture capital-backed startups, the federal government could end up with a student loan portfolio with a much higher default rate.

Update, January 27, 2015 at 12:50 p.m. EST: This story originally reported an incorrect amount for Earnest’s Series A funding round. Earnest raised $17 million.

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