If you're among the 40 million Americans coping with student debt, you may be in luck. A handful of young lending firms want to refinance your loans at significantly lower interest rates than traditional banks offer.
The caveat? You still need to be in strong fiscal standing (and the credibility of an elite degree doesn't hurt.)
Startups like CommonBond, SoFi (also called Social Finance), and Earnest are recognizing the potential in more (traditionally risky) clients, while still bringing in steady revenues. Take Elena Lucas, for example.
In 2014, the 27-year-old was deep in loan debt, even as she was earning an annual salary of $85,000 at a wind power company. Lucas had attended Loyola University in Chicago, and then went on to pursue a Masters in International Economics from U.C. San Diego. Her student loans had totaled $120,000.
Then, in August of last year, Lucas was approved for a refinanced loan with SoFi, a San Francisco-based company that issues personal loans to younger professionals. Her loan was approved at an interest rate of 6.75 percent (that's one percent point lower than what she had initially received from SallieMae).
Lucas, it's worth noting, is a unique borrower. She's currently participating in SoFi's free six-month entrepreneurship program. In addition to personalized guidance, she has the opportunity to network with prominent angel investors in Silicon Valley, with the option to defer her loans in the meantime. Her one-year-old company, an alternative energy provider called UtilityAPI, has five employees and has raised over $1 million in funding.
In the U.S. alone, student loan debt currently weighs in at $1.3 trillion. If you're one of the many looking to qualify as a client with these lending firms, here are five things you should know about the student loan refinancing market:
1. It's a tech-driven business model.
Lending firms that target young professionals can often charge lower interest rates because they use data-driven web platforms, which allow them to evaluate and take on more potential clients with different risk factors. It also helps that these firms are bolstered by millions of dollars in venture capital. Collectively, SoFi, Earnest, and CommonBond have all reeled in over $740 million from investors like Andreessen Horowitz and Tribeca Ventures.
"We look at risk differently," says Aimee Young, SoFi's chief marketing officer. A loan approval can be based on many factors beyond just the FICO score, which is a calculation of both positive and negative information in a client's credit report.
2. You'll need to make a decent salary.
To qualify, you generally need to have already graduated, be currently employed, and make a sizeable salary, but things like employment history and savings accounts are also considered. SoFi borrowers tend to make somewhere north of $60,000 annually, and their credit score must be above 700.
Other companies don't specify a minimum credit score, such as New York City-based CommonBond, where the average client still rates around 770. He or she, it should be noted, is no average Joe. Approved borrowers typically make an annual salary of $100,000 or more, and can receive fixed rates of between three and six percent on loans on the order of $100,000.
Skeptics point out that such lending firms, while targeting a traditionally underserved demographic, are still failing to help the clients who need their services the most: Young professionals with patchy credit, who are making under $60,000 annually, aren't too likely to qualify for refinancing at present.
3. Why the lending market is ripe for disruption.
David Klein founded CommonBond in 2011 after he was unable to secure student loans for graduate school at payable interest rates. "At the time, the only options were to go through the federal government, which charges the same loan rates to everybody, or through private banks, which charge a higher rate than what appears necessary," he said. Klein had personally called every bank that offered student loans, only to be blown away by the associated costs.
Earnest, another San Francisco-based lending firm, has a similar founding narrative. After graduating from Princeton and working for years as a quantified options trader on Wall Street, Louis Beryl was inspired to start the company after being rejected from every bank he applied to for student loans. Beryl's mother, who works as a CEO for a nonprofit organization, ended up co-signing with him at interest rates well above ten percent. "How is there so much information asymmetry between me as the borrower, who feels like the lowest risk person imaginable, and the lender, who thinks I'm at such a high risk that I can't even get approved?" Beryl asked.
Enter Earnest: Like SoFi and CommonBond, the company harnesses software to determine client risk based on factors beyond credit, such as income, cash flow, and retirement savings. Rates typically range from 3.5 to 7 percent (fixed), with variable rates starting as low as 1.9 percent. At large, "We believe that the vast majority of Americans are financially responsible," Beryl explains-- millennials included.
4. Business is expanding.
Customers who qualify for student loan refinancing (also called "refis") are typically young and agile. The average client is thirty-something and well-educated.
Klein notes that CommonBond only refinances from 200 graduate schools (including 85 select medical schools and 75 select law schools,) although he adds that it plans to expand its services to every school in the U.S. by the end of this year -- including some undergraduate programs. Earnest doesn't specify any group of schools that a borrower must have attended, whereas SoFi caters to a total of 2,200 nationwide.
5. The market outlook is decent.
All three firms are growing at a rapid clip. SoFi and CommonBond, which both launched in 2011, have issued $3 billion and more than $100 million in loans respectively to date. Earnest, while just two-years-old, projects doing $1 billion worth of loans by June 2016. What's more, it claims to be cash flow positive.
Analysts argue that such firms will likely have to expand to lower credit clients in the long term. "The strategy of cherry picking high credit quality borrowers is a good one but a short term one," says Craig Focardi, a principal with financial reserach firm CEB TowerGroup. "Any startup or traditional bank or credit union can do the same thing, and these brorowers tend to be more savvy and need the least help."
Still, if their rapid growth is any indication, companies like these might just be poised to disrupt the financial industry-- or, at least, an elite sliver of it.