Wharton FinTech Podcast
00:12:56 · Matt Palese, Vaibhav
[00:12:56] S1: Yeah, the way I would think about this is our goal here is to really form a complete picture of the borrower as fast as we possibly can to give them the best possible price in the least amount of time. Right? That's the North Star. That's the objective. When you think about FICO in particular, which is heavily used across the lending space for a lot of different reasons, that is one critical input into helping us form that picture. But we also look at things like career trajectory, what your real free cash flow is after things like taxes and other debt obligations. You know, what your savings behavior is, whether you have other sources of income that we should be taking into consideration. So the better we understand someone as an individual using the right data, the more accurately we can assess their risk, the more competitive the rates we can offer to our borrowers, and the higher chances and the higher the likelihood of them actually saving over the long term. [00:13:53] S0: I was having a conversation with, I don't know if you know Christian Widham, who's the CEO of Bloom Credit, and he was talking about the need and the importance of alternative data sources just beyond the traditional credit score. Curious to hear if that's something that you heavily incorporate in your underwriting model and how you think about that.
00:13:53 · Vaibhav, Matt Palese
[00:13:53] S0: I was having a conversation with, I don't know if you know Christian Widham, who's the CEO of Bloom Credit, and he was talking about the need and the importance of alternative data sources just beyond the traditional credit score. Curious to hear if that's something that you heavily incorporate in your underwriting model and how you think about that. [00:14:14] S1: Yeah, I actually listened to the episode. I think traditional data sources, in the way I think about them, is largely credit reporting data in particular. That gives you a pretty clear picture of what has happened in the past and where does that currently put you on the scale of your ability to kind of pay back. The other things that we look at is sort of affordability measures. What is the income? How does that translate to your disposable income after real things like taxes and debt obligations? We look at your savings behavior, as I mentioned, to understand how disciplined you are in saving and also your career, right? Because we want to look at where you're going. And I think when you start to add up all these pieces together, that helps to form the picture between using traditional data, again, which is mostly gleaned from the credit bureaus, but also other affordability measures. And both of those things are taken into consideration to ultimately form a decision on the overall risk, which allows us to make sure that we are being as competitive possible on the pricing side.
00:15:23 · Vaibhav
[00:15:23] S0: Now, zooming out for a moment and thinking about the industry as a whole, from my vantage point, I can see that FinTech lending has faced headwinds in the last few years, like rising rates, defaults. I'm sure we're going to talk about that in a few minutes. Perhaps stricter regulations. Would be interesting to hear, where do you see opportunity in student lending today that perhaps other might be missing, that you might be working towards as a next step in Earnest's journey?
00:15:52 · Matt Palese
[00:15:52] S1: Yeah, I think generally every industry experiences headwinds, and lending is no different here. I do think like during periods of economic uncertainty, you have to be prudent as a lender. But I actually think FinTechs are positioned better than anyone to respond and adjust, given our technology infrastructure and data capabilities. I think in terms of what others are missing, I think it's the massive gap between perception and reality in the student loan space right now. If you look at rates on federal student loans over the last two or three years, they are at historic highs. The options for broad federal loan forgiveness are off the table, at least for right now. And because of that, professionals or those with professional degrees are really reevaluating their finances. We're actually seeing that major shift right now where about 40% of the loans that are refinancing with Earnest are actually federal loans. But the reality is there's a lot of confusion out there. And as I mentioned earlier, there's only about 10% of borrowers who we think could benefit from refinancing actually do it. And on the federal side, only a small fraction of public loan forgiveness applications are actually approved. And so we put all that together and you look at, we have historically high rates, we have no path in sight, at least for right now, related to broad based forgiveness, and a lot of missed opportunity to save money. Those are some pretty big things that I think is important to make sure that we are communicating. And so, you know, where that opportunity for Earnest as a company is to really take the lead in cutting through that confusion, really just with honesty and transparency. And the way borrowers can think about that is, because there's a lot going on here, and because we sort of emphasize and are intentional around how we think about, again, we can sort of connect them within ninety seconds to really evaluate whether refinancing actually aligns with their current situation, or if just staying with the government makes more sense for them, which in a lot of cases actually does, but you should understand the options and trade offs so you can have an informed decision to make.
00:18:04 · Vaibhav
[00:18:04] S0: We're going to circle back on the rising default rates and regulations in a bit. I want to shift gears and talk about the persona of, let's say, one of your borrowers. I'm curious, how does carrying student debt and perhaps massive amount of student debt actually shape someone's ability to build wealth over the next, whatever, ten, twenty, thirty years from all different perspectives, home ownership, retirement planning, perhaps having entrepreneurial desires, so on and so forth.
00:18:36 · Matt Palese
[00:18:36] S1: Yeah, it's a great question. I mean, I would say it's important to remember that student loans in general are an investment, right? Borrowers who graduate end up realizing significantly higher earnings over their lifetime compared to someone with just a high school diploma, as an example. So while it is debt, it's also an investment that leads to much better outcomes for the students overall. And so I think that's important to just remember as we think about this. You know, with all of that said, the burden it creates, to your point, especially for the people who are just out of school, is very real. And we conducted a few surveys and we have some data points that show that. One example of that is one in four borrowers that we surveyed said that their debt delayed a major life milestone, and in addition to about sixty percent, that finances have caused tension in their relationships. And when you're carrying that monthly burden, it does have an impact on your ability to buy a home and your ability to potentially start a business if that's what you want to do, or if you want to start saving for retirement because you want to get a head start on that. When that cash flow is tied up, that sort of prohibits your ability to do that. And so if you are eligible and it ends up being the right move for your situation, I think the long term benefit of taking action now and potentially refinancing if it's right for you is quite sizable.