Nothing says "congratulations on your graduation" like an email from your student loan servicer reminding you that your first payments will soon be due.
That five- or six-figure bill is the financial hangover that thousands of newly minted graduates are waking up to this month as they reenter the workforce, diplomas in hand. "Game of Loans: interest is coming," one Wayne State University senior wrote in protest on her graduation cap. "I got 99 problems and student loans are all of them," another tweeted.
But if graduates are quick to vent their anger and anxiety (#StudentDebtStress has been trending on Twitter), they are not necessarily eager to engage in a deeper conversation with a financial advisor or their peers. Enter Earnest cofounder and CEO Louis Beryl: He wants millennials to harness their frustration, and take action.
"Really high-quality, high-potential young people are just being dramatically overcharged and mispriced by the credit system," Beryl says. "You’ve heard all of these things—you need to go get a J.Crew card, and pay it off—that’s crazy! All the workarounds—the system isn’t built right."
Earnest is an attempt to correct those flaws, and in the process save young borrowers thousands of dollars. Beryl and his growing team launched the company last year with a personal loan product designed to cover major life events like relocation or marriage, and introduced a student loan refinancing product in January. Unlike traditional loan providers, which evaluate borrowers’ credit histories through the lens of the FICO system, and unlike startups such as LendUp, which mine Facebook and social media to assess borrowers’ risk of default, Earnest approves applicants based on a comprehensive snapshot of their career history and their finances.
"It’s all about the causal factors that affect your ability to repay—so your income, your cash flows," Beryl says. "We have you connect your bank account, your active credit cards, your home loan, your student loans. We also give people the opportunity to connect their asset accounts." The end result: "It dramatically reduces fraud. It dramatically reduces our costs. And it allows us to pass on those savings to customers."
That message is resonating: Earnest is on track to hit a lending run rate of $1 billion by the end of the year. According to the company, the average customer paying off a bachelor's degree will save $11,143 with Earnest; savings are even higher for graduate-level degree-holders like MBAs ($14,740) and lawyers ($30,715).
One of the customers who participated in the company's student loan refinancing pilot, Beryl says, was a librarian with a master’s degree in English literature. "This person makes a librarian’s salary but pays all bills on time and saves a huge amount of money each month." In Earnest’s world, that borrower can refinance and save thousands of dollars, based on those good habits.
Play out those potential savings across the 40 million Americans who owe student loans, to the tune of over $1.2 trillion, and the impact could be transformational. Studies show that student loans are acting as an economic headwind, slowing growth by curtailing millennials’ ability to buy housing, cars, and other major items. For the 8 million borrowers in default, the situation is even more dire. Policymakers, concerned about those effects, are finally responding to the 28,000 formal complaints logged against student loan servicers over the last two years.
"Student loan servicers often make more money when they spend as little time as possible on a student’s account," Richard Cordray, director of the Consumer Financial Protection Bureau, said earlier this month, as he invited public comment on the rules that govern the industry. President Obama has requested a report recommending changes to the current system by Aug. 1.
Earnest is not alone in seeing an opportunity to profit from the existing system’s shortcomings. Startups CommonBond and SoFi, for example, also offer refinancing at lower rates. But Beryl is confident that Earnest’s flexible model, which allows borrowers to adjust their payment schedule with just a few clicks, will win over his millennial peers. Earnest also allows borrowers to set terms according to their preferred monthly outlay, and benefit from the lower interest rate associated with finishing payments in 7.8 years versus 10, or 14.1 years versus 15. The average Earnest loan term: 8.4 years, a metric that would be nonsensical for other loan servicers with standard 5-, 10-, or 15-year terms to analyze. Between 6-10% of Earnest's customers have already refinanced with someone like a CommonBond—and yet are choosing to fill out the refinancing paperwork for a second time, in order to take advantage of those benefits.
"We’re not trying to get into a price war with the other guys," Beryl says. "But we are trying to win on customer service and design and better software."
Not to mention Bloody Marys. When Earnest noticed that many prospective customers were dropping off at the point where they needed to track down their original student loan documentation (no small task), the company decided to launch a $200 brunch reimbursement program. The idea was simple: Finish the administrative tasks associated with refinancing, and then treat your friends to pancakes. The "click through" on that word-of-mouth marketing has been strong, with Earnest's organic site traffic hovering north of 90%. "We’re trying to build a company that will be awesome for the next 100 years," says Beryl—one side of bacon at a time.