[bradleyjg]

Graduate loan rates not too long ago were 6.8% for Stafford and 8.5% for Grad PLUS, regardless of the underlying interest rate environment. But starting in the September 2014 school year the law was changed to charge a fixed margin over the 10 year rate -- 3.6% for graduate Stafford loans and 4.6% for graduate PLUS loans. I don't know what rate Earnest is borrowing at, but AA rated 10 year corporates are yielding just about 3%. That leaves somewhere between 60 and 160 basis points to make their profit. Even if their underwriting is near perfect, there are still servicing costs.

Certainly that's enough of a spread to make money, but it doesn't seem like some huge opportunity. FWIW I scratch my head for the same reason about mortgages given the narrow spreads, but there companies don't actually plan on holding the loans on their books (most end up on some set of government books in recent years). So that's more of a services volume business than it is an underwriting one.

Edit: I just re-read this and I made a mistake. The 3.6 and 4.6 are above the 10 year treasury which is around 2.3. So the spread between the AA rate and the loan is 290 to 390 bps not 60 to 160. A considerably better situation.