The largest student loan servicer in the U.S. announced on Wednesday that it plans to acquire student and personal loan company Earnest for $155 million in cash.
Founded in 2013 and joining the rush of student loan refinancing products in 2015, Earnest has refinanced nearly $2 billion worth of student loans, claiming to have saved its customers more than $500 million in the process. The company expects to refinance $1 billion in student loans in 2017 alone.
In an announcement on the company’s website, Earnest founder and CEO, Louis Beryl, explained his reasoning for the acquisition in three words: growth, expertise, and mission. By joining a larger company in the industry, Earnest gets access to a larger platform and systems to expand its reach.
For Navient, the acquisition is an opportunity to move into the student loan refinancing industry. The servicer doesn’t originate loans on its own.
But it still has other issues to consider. It’s been a target by regulators for some of its practices. For example, the Consumer Financial Protection Bureau (CFPB) sued Navient in January, alleging that it failed to provide accurate information, process payments, and respond to customer complaints.
More recently, the Pennsylvania attorney general sued Navient deceived student loan borrowers by approving subprime loans to college students attending universities with a low graduation rate and high default risk.
Regarding both suits, the student loan servicer regards the allegations as unfounded.
What this means for current and future Earnest customers
According to Beryl, Earnest will continue to operate as a separate entity from Navient. The CEO expects that future customers won’t see much of a difference either, other than that fact that the company will be able to reach more prospective customers through the acquisition.
That said, it might also be a sign of Earnest’s struggles to have a sustainable business model. The company’s investors have put roughly $320 million into the company, which was valued at $375 million just two years ago — that’s more than twice the sale price in the acquisition.
“Big valuations and high stakes deals are attention-grabbing, but rather than get distracted by the numbers, at the end of the day what matters is that we continue executing on our mission to democratize access to high-quality financial services,” said Beryl in a statement.
Understand your options
Earnest offers some of the lowest interest rates on the market, with both student loans and personal loans. It will likely continue to do so after the acquisition. If, however, you’re not sure how you feel about Navient as a student loan servicer, check out other student loan refinancing companies to see if you can get just as good or better interest rates.