Thank you to everyone who participated in Earnest’s Reddit AMA a couple weeks back. I loved getting the opportunity to field questions about our industry, Earnest’s products, student loan advice and more. In case you weren’t able to join us, we’ve summarized some of our favorite questions and answers from the conversation below, broken into a few of the most prominent themes: general finance, the rise of fintech and student loans. To read the conversation in its entirety, you can check it out on Reddit here!
General Finance + The Fintech Landscape
How do credit scores work? And why are they so important in lending these days?
There are lots of different Credit Scores (FICO, Vantage, etc.) and they were originally designed to provide an overview or snapshot of your finances and how “creditworthy” you were — i.e., how risky would it be to give you a loan. However, these systems were designed decades ago and grew out of local stores that became bigger stores like Sears and Macy’s. At Earnest, we believe the current credit scoring system is broken, because it doesn’t paint a complete picture of your financial picture, leaving out things like income, savings, and your 401k that definitely speak to your financial responsibility and ability to pay back loans and other debt. This is a big part of why we built Earnest, to build better underwriting, and why we use 80,000 – 100,000 data points per client to offer our clients better rates through better underwriting.
Why has it taken this long for banks to start innovating in ways that benefit consumers and not themselves?
I agree it is taking too long — that is another big reason we started Earnest. I can’t really say why most banks aren’t innovating faster, but what I can say is that there lots of startups in addition to Earnest looking to disrupt large incumbent financial institutions.
In the JPMorgan annual letter to shareholders, their CEO warned that companies like Earnest were “coming” for them. Do you think the bigger banks have the ability to move quickly and innovate in the face of this perceived threat?
In terms of traditional banks using innovative technology, more and more of the biggest names in banking are investing time and resources in online banking and hiring people to up their tech game. (Check out this recent Quartz article highlighting just one example of this trend). That said, I believe it’s largely too little, too late — even with better technology. These financial institutions are mired in traditional practices that are based on making money off of customers, particularly those in the bottom income brackets who have to battle late fees, overdrafts, transfer fees, etc. Unless traditional banks can shift their focus to genuinely be about forging lifetime relationships on trust, all the apps in the world aren’t going to solve the core issues.
Student Loans + Refinancing
I am graduating next month with my BS in public health and I am terrified that I won’t be able to afford my loan repayments. What are the benefits of student loan refinancing and is that something I should consider in the future?
Refinancing can be a great way to lower your payments and ultimately pay less overall (on average, we save our refinancing clients $12.5k). That said, you not only have to be approved by the provider, but you also want to make sure refinancing is right for your particular situation. One thing to keep in mind: every day you don’t refinance is another day toward higher interest payments!
Here are a few resources I like that can help you figure this out: MagnifyMoney has a thorough, easy-to-use comparison chart of student loan refinancing providers and Student Loan Hero put together a solid rundown. Also, Gradible has a free student debt evaluation which lets you input all of your loan information and then spells out some options that will likely work for you.
Finally, there are articles published every day that can help you or at least provide some encouragement as you repay your loans — a recent one that I loved was this piece from the New York Times, “Student Loan Facts They Wish They’d Known,” containing first-person experiences and advice.
Could you give some suggestions to recent grads and the newly employed who are trying to maximize future financial stability (e.g. put money in a mutual fund, keep it in the bank, etc.)? How would you suggest balancing savings and investing with repaying student loan debt?
I think both are important and if you have other high rate debt paid off you’re in a good spot. My quick answer is get your student loan rates as low as possible, get on a payment plan and a budget that works, and aggressively save for your future. Here are a few general guidelines to consider:
Pay off any credit card debt (or high rate debt) you have by starting with whatever has the highest interest rate. Even if your student loans are in deferment and you’re not currently making any payments, you should refinance them into a lower rate right away if you can, because that will reduce the amount of interest you’re incurring and have to pay back later. Maximize things like employer matches for your 401k and mixing your investments over time through accounts like Roth and traditional IRAs. IRAs are one of my secret favorite things in life — who doesn’t love your money growing tax-free! Make sure you prioritize your rainy-day fund, too. Unexpected things happen to all of us at some point in life.
We always love hearing your questions and thoughts, whether on Reddit or elsewhere. Feel free to reach out to me on Twitter (@louis_beryl or @meetearnest). Hope to hear from you soon — and keep the questions coming!