from Hacker News

Earnest, Fueled by Growth in Student Loans, Raises $275M

by jrkelly on 11/17/15, 8:23 PM with 12 comments

  • by zaroth on 11/17/15, 10:41 PM

    Their key differentiation? "Earnest says its approach is particularly data-intensive, which it says allows it to tailor rates to individual circumstances. It asks its customers for digital links to their bank, credit card and retirement and investment accounts, and information on all their loans. “They are willing to share their data for a better consumer finance experience,” Mr. Beryl said."

    Apparently they found recent grads with very large student debt load but commensurately high future earning potential had inaccurately low credit scores. Bypassing the credit agencies and doing their own scoring let them offer more competitive rates to that segment in particular, whose big loans probably carry a lucrative underwriting fee, not to mention bigger savings for every basis point you can shave off.

    Interestingly they are underwriting as well as servicing ("Earnest will never pass you off to a Third-Party Servicer") which I see as a huge selling point. I wonder how hard it was to get the Federal approval for that?

  • by bradleyjg on 11/17/15, 11:15 PM

    Graduate loan rates not too long ago were 6.8% for Stafford and 8.5% for Grad PLUS, regardless of the underlying interest rate environment. But starting in the September 2014 school year the law was changed to charge a fixed margin over the 10 year rate -- 3.6% for graduate Stafford loans and 4.6% for graduate PLUS loans. I don't know what rate Earnest is borrowing at, but AA rated 10 year corporates are yielding just about 3%. That leaves somewhere between 60 and 160 basis points to make their profit. Even if their underwriting is near perfect, there are still servicing costs.

    Certainly that's enough of a spread to make money, but it doesn't seem like some huge opportunity. FWIW I scratch my head for the same reason about mortgages given the narrow spreads, but there companies don't actually plan on holding the loans on their books (most end up on some set of government books in recent years). So that's more of a services volume business than it is an underwriting one.

    Edit: I just re-read this and I made a mistake. The 3.6 and 4.6 are above the 10 year treasury which is around 2.3. So the spread between the AA rate and the loan is 290 to 390 bps not 60 to 160. A considerably better situation.

  • by mbesto on 11/18/15, 12:04 AM

    > In this round, $75 million is equity investment, and $200 million is debt funding.

    Before people read the headline and think "OMG another big one", this line is important. They are raising $75MM for the company and $200MM for the actual financing of the loans.

    For anyone not familiar with SoFi (the main competitor), this model makes a ton of sense. Student loan terms do not take into consideration your future earnings based on what school you attend. Which means someone who goes to Harvard could have the same student loan structure as someone who goes to Foo State College. This is simple arbitrage.