Wharton FinTech Podcast
00:28:56 · Matt Palese, Vaibhav
[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. [00:30:11] S0: Yeah. And I think the flip side of the discussion is also that we do expect default rates to rise. We briefly spoke about this before, and that 2026 is going to hit record levels of default. In your view, how is that changing the borrower's stress level right now? And is that having a knock on effect on the refinancing behavior?
00:30:32 · Matt Palese
[00:30:32] S1: Yeah. So I think, you know, what we're actually seeing in the data is that past due balances that are ninety plus days delinquent is actually normalizing closer to pre pandemic levels, right around ten percent. To your point, we did see a massive spike when credit bureau reporting first resumed, but based on the last quarterly refresh of data, things are stabilizing now, and we're in a much better position overall and more consistent with, again, what we saw pre pandemic. You know, with all of that said, that doesn't mean that there isn't sort of real borrower stress out there. It just gives you the kind of the right context in terms of where we are. I think what those numbers really tell us is that the multi year payment pause created what I refer to as a budget illusion, if you will. And so what I mean by that is millions of people didn't have to make student loan payments for years, right? Which made it feel like they had more disposable income than they actually did. And so when payments turned back on, it was really a massive shock to the system because households suddenly had to find room for a bill that they didn't have to worry about for many years or they didn't budget for for many years. And so, you know, when it comes down to how kind of the environment that we're currently in today intersects with refinancing, I think you have to look at the reality of the people we serve, the customers we serve. I think refinancing requires you to have a stable income and a strong credit profile. But even for borrowers who meet that criteria and look great on paper today, often or sometimes encounter changing circumstances that may impact their ability to pay in the future, right? And we're always thinking about that. We're always contemplating sort of what that might look like. And more importantly, we're always thinking through how we can assist those borrowers through those periods. That's why those hardship protections really matter so much.
00:32:46 · Matt Palese, Vaibhav
And so, you know, to put that in perspective, at Earnest, we have things like skip a payment or temporarily interest only or temporary rate reduction programs for those that, if they hit a snag or experience a financial hardship, we can offer those types of programs to minimize and help with that transition for them, whatever it may be, whether it's dealing with an unexpected medical bill, whether it's dealing with a job transition. We have kind of real structural options to help them get back on track. I think these are the types of things that aren't talked about often with customers that I think is extremely important, especially as you think about the decision whether refinancing is right for you, is to often make sure that things change, right, all the time and the economic environment is very uncertain and it's very difficult to predict the future. But the one thing that we want to make sure is known is that if you do encounter an unfortunate circumstance that requires some assistance along the way to help you get back on your feet, we have options, we have programs to help you. [00:34:01] S0: My overall assessment is that there's a lot that's changing for the borrowers, regulations and otherwise, and a lot of change yet to come. I can only imagine that means there are more opportunities for Earnest to innovate, to the extent you can share if there's anything that you're building or anything that you're excited about that's yet to come for Earnest.
00:34:20 · Matt Palese
[00:34:20] S1: Yeah, no, absolutely. I love this question and I'm excited about a lot of different things. The one thing I would say here is when you look back on Earnest's history, we spent over a decade building, I would say, something that is incredibly hard to build in this industry. It's a brand that borrowers actually trust. It's a product that consistently delivers. We have a phenomenal team that really cares about customer outcomes. And so for me, the foundation is there. And really the way I think about the next twelve to twenty four months is building on top of that, right? And so on the product side, what that means is the expansion into personal loans. That is still very much in the early stages, but we have a ton of runway ahead of us. We're serving people who are navigating high interest debt or who might be sort of contemplating a major financial milestone. And the exact same approach that made us successful in student lending also applies to personal loans. And so, you know, we're also in a unique moment where, you know, there's just millions of borrowers that are actively reevaluating their options, and they're doing that without a clear picture or a full picture. And so, as I mentioned earlier, our focus is to simply keep building features that really solve each customer's pain point, which could be unique and different, and making sure that we can be flexible in that way. And so, you know, one of the things that we've just done recently was launched a new feature called the job offer refinancing. And so what it does is allow graduate borrowers to refinance using a signed job offer letter before they even graduate. And so the benefit there is that they can lock in a better and hopefully a lower rate much earlier without losing their grace period. And so ultimately what that means is that you can start saving sooner, right? Because that interest during your grace period continues to accrue, but if you can accrue less interest and you have a job offer lined up, then Earnest will take that into consideration and allow you to refinance earlier versus making you wait until you actually graduate and go into repayment. And so, you know, at the end of the day, we just want the company to show up for the people when it matters. I think that means giving them clear, honest answers and again, real human support.
00:36:44 · Matt Palese, Vaibhav
That's what we're going to keep building towards. [00:36:48] S0: The job offer feature is quite interesting. I can see how that can give someone almost like six months to an year of headway in terms of the savings they can make. And finally, a word of advice from you. What would you say Wharton or other graduate students, many of whom are in their early careers or still paying loans, actually should do right now? Is there any one thing that matters from a financial planning or a wealth management perspective?
00:37:16 · Matt Palese
[00:37:16] S1: Yeah, I think that goes back to where, you know, why do we think people choose not to refinance today? Or why do we think that 10% is so low? You know, part of the problem being just inertia and inaction. I think the advice I would give is to develop a plan, right? The sooner you act, the quicker you can actually start to realize the full return on your investment, which in this case is your education. And so acting fast and quick is the most important thing. I think second, be strategic about your choices. Not every loan is created equal, so it doesn't have to be an all or nothing decision. Sometimes it only makes sense to refinance a portion of your loans while leaving the rest alone, right? That sometimes can complicate the decision. But if the objective is to get out of debt faster or reduce your monthly payment, And as a borrower, you have multiple loans that were taken out over multiple academic years. Those loans likely have different interest rates, right? And so it may not necessarily make sense to refinance all of those loans, but some of those loans, it might make more sense. And so just be strategic when you do act, because I do think there's options that are out there where you don't have to kind of make this an all or nothing decision. I think the last thing I'll say is be thoughtful about what you do with your savings, right? And so if the objective is to pay less over the life of your loan, and so therefore you have more excess cash flow, you know, think about how you should start allocating that free cash flow that you've freed up effectively into a potential brokerage account or a savings account that can compound over time and ultimately build into much more meaningful wealth. I think the thing that I'm incredibly thankful for in my own life is growing up is really being disciplined very early on about spending less than I make, thinking long term and really valuing the benefits of compounding. So it didn't feel like I was making a lot of progress over the years when I was just taking the $100 or $200 or $300 whatever it may be, and stashing it in a brokerage or savings account. But you fast forward ten, twenty, thirty years later, you really start to see the value of compounding.