Student loan refinancing is the process by which a borrower can obtain a lower interest rate on their student loans, usually by taking out a new student loan that pays off the old one. If this new loan comes with a lower interest rate and better repayment terms, the borrower may save substantially, both on a monthly basis and in total.

During the past few years, up-and-coming private student loan refinancing companies have been offering various options to student borrowers. These programs are relatively new, and they tend to be restricted to people with good income and excellent credit, so we don’t know much about them. But as more and more borrowers turn to these programs in the absence of federal student loan refinancing options, I’ve been trying to find out more information about them.

Last week, I wrote a review of “SoFi” student loan refinancing based on a borrower’s experience and my analysis of their loan contract.

This week, I’m taking a look at “Earnest” student loan refinancing. Like SoFi, Earnest offers student loan borrowers with various refinancing options. However, Earnest seems to focus more on its technology-based application process and customer-service-oriented approach.

I recently had the opportunity to talk with a borrower (we’ll call her “Amanda”) who refinanced her student loans through Earnest. Like “Aaron” (who refinanced his loans through SoFi), Amanda graciously answered my barrage of detailed questions about her experience, and also provided me with a copy of her Earnest loan contract so I could write this article. Here’s what I found. 

Background

Amanda relied heavily on both federal and private student loans to fund an accelerated Bachelor of Science degree in Nursing (“BSN”) at a private university. She has been managing her federal student loans, and since she works at a nonprofit medical institution, she has those loans on track for the Public Service Loan Forgiveness program. However, Amanda was still left with over $33,000.00 in private/state-based student loans serviced by ACS. These loans had an 8.29% interest rate and a combined monthly payment of $386.

Amanda found that these private loans were “onerous.” Given her 15-20 year repayment term, she realized she would pay tens of thousands of dollars in interest before the loans would be paid in full – and she’d be in her 50’s. Amanda found this “unacceptable.”

So Amanda started looking into refinancing programs. Like Aaron, she was thorough in her research, and she actually initially considered SoFi and even started their application process. However, Amanda found SoFi’s website to be “wonky,” and she had difficulty interfacing with it and uploading the documents that SoFi required (if you remember, Aaron also had a less-than-stellar initial application experience with SoFi). Amanda put the “pause” button on her SoFi application, and turned to Earnest.

The Initial Earnest Application Process

Amanda was immediately intrigued by Earnest’s “awesome” website. She does a lot of web-based investing and thought that Earnest’s interface was intuitive and user-friendly. There was no need to upload any documents, as Earnest could directly link to her key financial and credit institutions.

Earnest allowed Amanda to do a “soft” credit check to get an initial estimate of what her interest rate and repayment options would be. Earnest also provided Amanda with a sliding scale so she could see how different interest rates and repayment terms would impact her monthly payment amount.

Most intriguing is that Earnest seems to take a “holistic” approach to refinancing. You’re not just a number to them, and not just some formulaic combination of a credit score and employment income. Earnest also considers other less-traditional factors such as work history and educational background, and it even allowed Amanda to submit a narrative written statement explaining her reasons for wanting to refinance, and what her ultimate goals were.

The Earnest Application Processing Period

Amanda found the entire Earnest application process to be quick and painless. It took her 30 minutes to complete and submit the refinancing application in May 2015. In June, she was approved, and Earnest sent her the loan contract and other disclosure documents to review and sign. Once submitted, Amanda’s private loans were paid off in 10 days. (Note: like Aaron, Amanda wisely excluded her federal student loans from the refinancing so she could maintain their eligibility for federal repayment and forgiveness programs).

Amanda ended up with a refinanced student loan of approximately $33,000.00 with a 4.79% interest rate – essentially cutting her rate in half. Amanda shortened her repayment term to 8 years, which increased her monthly payment to $450, but this will allow her to repay her loans much sooner, and she’ll save many thousands of dollars in the process. I estimate that when she was repaying her loans under their original terms, approximately 60% of her monthly payments were going to interest. On her refinanced Earnest loan, only 29% of her payments are going to interest. This is a huge difference.

The Loan Repayment Period

Amanda has been thrilled with Earnest’s loan servicing so far. Unlike other lenders – including SoFi – Earnest boasts that all of its loan servicing is conducted in-house. It does not contract out its loan servicing operations to any third-party companies. Compared to her former servicer (ACS), Amanda finds the Earnest customer service staff to be much easier to communicate with, and much more responsive. Phone calls aren’t even necessary – Amanda says you can just send Earnest an email, and they usually respond within eight hours.

Amanda’s only complaint thus far was that when she had to change her address, Earnest required that she upload documentation to verify her new address (such as a utility bill or an apartment lease). She found this to be “overkill,” but still found the overall process to be relatively easy.

The Earnest Loan Contract

As with SoFi, I couldn’t wait to get my hands on the Earnest loan contract. Amanda’s application and repayment experience seemed stellar, but what would the terms and conditions show?

I was surprised to see that the Earnest contract is essentially identical to the SoFi contract. I didn’t have time to do a complete word-for-word comparison, but the two contracts are too remarkably similar for it to be a coincidence. I’ll let more corporate-minded folks speculate as to why this may be the case, but I did find this to be rather peculiar.

The Good

• Like SoFi, Earnest does an excellent job of warning borrowers about the dangers of refinancing federal student loans by providing a detailed disclosure of the benefits a borrower might lose.
• There is no pre-payment penalty.
• There was no origination fee – the refinanced loan was thus “free” for Amanda, just like SoFi was for Aaron.
• The contract provides for 36 months of deferments, as well as hardship-based forbearance. Like SoFi, an Earnest forbearance can only be requested in 3-month increments, although there is no hard cap in the total amount of forbearance Earnest can grant.
• The Earnest contract (like SoFi’s) provides for modified repayment terms at the request of the borrower, including graduated plans and even income-driven plans – these options are usually not available to private student loan borrowers.
• There are also discharge options in the loan contract for death and disability.

The Bad

• Just like SoFi, the Earnest contract provides that default can occur after being only 30 days past due on a payment.
• Earnest can also publicly disclose a default to relevant “investors.”
• There are no default resolution options built into the Earnest contract.
• The Earnest loan contract also specifically states that the loan is an “educational loan” for bankruptcy purposes, making it very difficult to discharge in bankruptcy.
• The Earnest contract also has a mandatory arbitration clause for any disputes, just like SoFi. These arbitration clauses are usually not good news for consumers, but like SoFi, a borrower can request a waiver of the clause within 60 days of the loan’s disbursement.

The Unknown

• Like Aaron, Amanda has not yet encountered a financial hardship or other circumstance that has put her in the position of having to request any of the relief outlined in the Earnest loan contract (such as deferments, forbearance, or modified repayment plans). As with SoFi, Earnest has complete “discretion” in deciding whether to grant any such relief, and we don’t know how merciful Earnest would be.
• Amanda hasn’t missed a payment, so we don’t know how aggressively Earnest enforces its strict default clauses.

Conclusion

Amanda has been thrilled with her Earnest experience thus far, and she would recommend Earnest to other borrowers looking to refinance their student loans. Compared to Aaron, Amanda’s application experience with Earnest seemed better than SoFi’s, and her customer service experience has been excellent so far. Amanda’s refinanced loan has undoubtedly already saved her a significant amount of money.

I was particularly impressed with Earnest’s website and interface, its pre-application transparency that allowed Amanda to research and understand her options, and the fact that Earnest does not contract out its loan servicing operations to a third party. Almost every student loan lender – federal and private – contracts out servicing operations to an outside company. Thus even if you have an easy application experience, you could have a terrible loan servicing experience if that company is difficult to work with. Amanda has only been dealing with Earnest from the beginning, and she’s been happy. I think this is noteworthy.

However, while both SoFi and Earnest seem to have a lot to offer, I think it’s still too soon for me to endorse either company just yet. I still don’t know enough about how either company truly handles borrowers in distress or default, and I feel that I must have that important piece of information to make a firmer conclusion. Bad things happen to people, and often a consumer lender’s true colors are revealed when someone is struggling and requesting relief.

As I said in my SoFi article, I think we’ll just have to see how these new programs play out over time.

If you have student loan refinancing experiences that you want to share, please get in touch, I’d love to hear about it.