Wharton FinTech Podcast
00:20:39 · Matt Palese
[00:20:39] S1: Yeah, I think, you know, for some, I think it's all circumstantial. For some borrowers, it's really about just creating some breathing room, right? Given where they are, and that may mean a lower monthly payment, so they aren't choosing between only paying down debt versus trying to pay down debt and build an emergency fund, for example. I think for others, it's about speed, right? They want to get out of debt faster, they want to pay less overall, and they're willing to pay a little more to do that, just to put it behind them. And then I think for an increasing number of people, it's about a specific milestone, right, that's on the horizon. So, you know, maybe their goal is to buy a home. Maybe it's to start a family. And this is sort of in the background impacting their ability to achieve those milestones. I think what's pretty interesting here is that the goals, and this kind of ties back to what I mentioned earlier, I think the goals here aren't always about the numbers. The reality is that causes a lot of stress, right? And getting rid of it gives people peace of mind. And so, you know, there's your financial health that's on paper, but then it's how you actually feel when you have to make these decisions about your career or your relationships. And I think both of those things matter as to numbers and how you feel. And so, we talked about this a little bit at the beginning, or a couple questions prior to this, and that's really the reason why flexibility at Earnest is so central to everything that we do. Think to give you a little bit of an example about that flexibility is like today we offer about 180 different configurations or repayment term options, you know, because we realize that a borrower who wants to pay off their loans in like seven years and four months may have a much different goal than someone who needs maximum breathing room for payment relief right now that may want to choose a term that's fourteen years and four months because that exact payment fits their current situation much better and can enable them to achieve the milestone that they have on the horizon. So like, you know, I think our job here is just to meet them where they are and to build around where they are actually trying to go and what they're trying to accomplish.
00:23:26 · Vaibhav
[00:23:26] S0: Yeah. If someone does refinance with you, do they typically refinance once and are just done with that relationship once the loan is repaid? Or do you see refinancings occurring in let's say tranches over the years, perhaps a second refinancing after a couple of years after things have improved for a borrower. I'm just curious how you think about the lifetime value of your customers and is there potential for any kind of cross selling there? Or is that not essentially aligned with the mission?
00:23:57 · Matt Palese
[00:23:57] S1: Yeah, I would say this. We have customers that come back numerous times to refinance over and over again because their situation has changed or rates today are lower than where they were and they could benefit even more. And I think that's one of the benefits and a strong value proposition for customers is that there's no fees. It's free to do. It's very quick, simple, and convenient. And you can do it as many times as you want. So there's no prohibition on how many times you can actually do it. I think that's an extremely important component here. This is not a set and forget strategy, if you will, for customers. It's an evolution that as market conditions change and rates change, there could be continued value and opportunities to save over time. But I think to your point, when I think about the refinancing product from a business perspective, it is highly transactional, right? And I think we've always known that. But the way I look at that is, we're helping someone handle student debt, and that process is really just the beginning of a relationship, not the end of one. And if you think about kind of where we've been over the last decade, it's been north of 400,000 barbers that we helped get control of their student loan debt. And I think what we've really learned throughout that process is that their financial needs don't stop once their student loan debt is sorted out. They're navigating other life milestones, unexpected expenses often come up, and many times the same borrowers are dealing with variable rate credit card debt. And I think to put that one in perspective a little more, there's about 1,200,000,000,000 of U. S. Household debt that's currently sitting in credit cards alone. And the average interest rate on that credit card debt is hovering around 21%. Because that debt is also typically variable, that financial burden can shift on people pretty fast. And so that's exactly the reason why we expanded into personal loans, right? We saw a massive opportunity to take the same approach that worked for us in student lending and give people a much more predictable fixed rate option to help them also pay down that credit card debt.
00:26:04 · Vaibhav
[00:26:04] S0: I also want to circle back to the regulations we were discussing earlier. We all read about the termination of SAVE, but for the benefit of our listeners, could you walk us through what's happening with SAVE right now? Why is this moment important? And how does this affect the borrowers? And perhaps how does this change the calculus for someone who's looking for refinancing?
00:26:26 · Matt Palese
[00:26:26] S1: Yeah, great question. Lot to unpack here. To take a step back, the official end of SAVE, to your point, I think, is creating a lot of new questions and frankly is a real transition period for millions of borrowers who I think sort of built their financial plans around that program. That timeline is obviously a lot more clear now, July 1 is when borrowers will have ninety days to move off of this A program and enroll in a different federal plan. And for a lot of people, that switch will likely mean adjusting to a different monthly payment or a longer repayment timeline. And from my perspective, I think that transition is just another evolution that I think really changes the math for people considering refinancing in particular. And while many borrowers understandably stayed sort of in the federal system over the last several years to see how things will sort of settle and shake out, that landscape is changing. When you couple that with where federal interest rates are, in particular over the last three academic years, especially for graduate students in particular, they're up around 8%. So running the numbers now, given the clarity, makes a lot of sense. And so for, you know, again, certain borrower segments, whether you have a graduate or a professional degree who might not likely qualify or is more unlikely to qualify for federal subsidies anyway, seeing if a private lender like Earnest can offer a lower fixed rate is a much more practical step to take today than it was a few years ago. I think the other thing I'll say, and for the benefit of your listeners, is the role Earnest. And so what that might mean and what that might look like for borrowers is staying in the federal system, right? And sticking with federal loans. That could absolutely be the right move, but for others, this is a good moment to see if refinancing can give them some more predictability and a more cost effective path forward. And so we're just here to help them map that out.
00:28:46 · Vaibhav, Matt Palese
[00:28:46] S0: Yeah. And backtracking a little bit, for those who may not be familiar with what SAVE exactly is, could you just very briefly explain what the SAVE program is about as well? [00:28:56] S1: Yeah, so SAVE is a federal program that effectively allows borrowers the ability to increase their monthly cash flow by minimizing the amount of money they need to make towards their federal student loans. In a lot of cases, it's nothing or zero. And then over a certain period of time, that loan becomes eligible for a potential forgiveness scenario. And so those are sort of the high level kind of components that are being factored into the SAVE program. So the flexibility and the convenience that it provided to customers is quite substantial. And so back to my earlier point where the removal and the change of this program and how customers need to start thinking about the transition is extremely important. Because again, there's a couple of decisions that are gonna change the dynamics from potentially paying close to nothing to having to pay something. I think again, given the dynamic and the shift, given where we are, thinking about that in advance and figuring out if there's an alternative option for you to navigate to help ease that transition is incredibly important.