The online personal finance company called SoFi first made a name for itself by rounding up money from Stanford alumni to help the university’s MBA students get cheaper student loans. Later it included mixers for single borrowers with fancy degrees. Social finance, understood?
But last month, the now publicly traded company, with more than $1 billion in revenue from private student loans and other offerings, did something shocking: It sued the Department of Education to end the agency’s pause on payments. of federal student loans and forcing tens of millions of debtors who aren’t SoFi customers — teachers, soldiers, sick people forced to drop out — to pay off their debts more quickly.
Why would a smart, shiny company not far from its 2011 startup days behave in a way that seems so downright mean?
The answer lies in the very imperfect way we help most people – not just prospective MBAs – pay for higher education in America. But it is also a graphic lesson in the red-blooded capitalist behavior we should expect from any profit-seeking entity, however it dresses.
SoFi exists because of a quirk in the federal student loan program. Although the government charges different interest rates depending on the type of loan, there is no differentiation within those loan types. Graduate students all pay the same regardless of the subject they study, the school they attend, or what they might earn later.
That fact creates an opening for companies, such as SoFi, to target students from schools that produce the highest earners with the best payment history. So make no mistake: SoFi is a competitor of the US government and lures away the borrowers with high balances and incomes to make the debt affordable.
In the early years, SoFi presented itself to the world as an anti-bank. This was effective and charming. It was hilarious, too, since one of the founders, Mike Cagney, is a former derivatives banker at scandal-ridden Wells Fargo who ran a hedge fund as a sideline.
Pretty soon, Mr. Cagney as general manager disgraced the company – romantic relationships with subordinates, leaving evidence of his misdeeds on private jet manifests – and showed himself. His eventual replacement, Anthony Noto, a former general manager of Goldman Sachs, subsequently acquired a bank for SoFi, which had previously aired commercials with the slogan “Don’t Bank.” SoFi.”
It was worth getting Mr. Cagney’s “Kill Banks” campaign out of the way for at least two reasons. Firstly, as a bank you can use money from depositors to provide loans. This can be more profitable than using capital from other sources.
Product diversification is also wise for a company like SoFi that wants to grow. If you do well with young, soon to be wealthy borrowers, they may be able to stay for life if you have a desirable range of financial services.
These days, SoFi the bank can give you a checking account and the company offers all sorts of trendy trinkets such as crypto and options trading. It put its name on the football stadium where the Los Angeles Rams and Chargers play. And it went public through one of those SPACs you read a lot about a few years ago.
But then SoFi hit a pandemic problem—and a political one—that not even the best Stanford professor of game theory could have foreseen.
Not long after the world went into lockdown in 2020, legislation made it possible for federal student loan borrowers to stop paying without any financial penalty.
The break had an expiration date, but the Biden administration has extended it several times and is still in effect. That has created a major problem for SoFi. After all, if borrowers don’t have to make interest payments on their federal loans, why would they refinance with SoFi for a lower interest rate on a loan they would have to pay off immediately?
They probably wouldn’t – and they didn’t. The dollar value of new SoFi student loans fell 54 percent between 2020 and 2022.
This was not a total disaster. SoFi also offers personal loans — for example, to pay off credit card debt with a single loan at a lower rate — and those origins now dwarf those for student loans. Still, investors are not impressed. SoFi’s stock closed about 76 percent lower on Friday from its all-time high in 2021.
So sued it, all alone. And his competitor’s reaction was both completely predictable and quite aggressive for a government agency. “This lawsuit is an attempt by a billion-dollar company to make money while pushing 45 million borrowers back into repayment — putting many at serious risk of financial loss,” said the statement handed to reporters by the Department of Education.
Borrower advocates found SoFi’s move repugnant. “We have private sector companies that have plunged into the broken edges of the U.S. education and student loan system,” said Cody Hounanian, executive director of the Student Debt Crisis Center. “I see SoFi’s lawsuit as another symptom of profiteering.”
That’s the white-hot policy. Also consider the legal question. “If the government is doing something good for the citizens and you can’t make money, that shouldn’t be the basis for a lawsuit,” said Persis Yu, deputy executive director and counsel for the Student Borrower Protection Center. “Companies have no right to be profitable.”
However, companies do have a duty to shareholders. And if you believe that investors come first, SoFi’s lawsuit starts to make sense.
SoFi declined to comment, citing a need to remain quiet ahead of its May 1 quarterly report. But last month it was quick to explain that it supported President Biden’s efforts to forgive up to $20,000 in student loans. It also ratified the initial pause for 2020. The company would also be fine with an immediate payment restart, just for those whose incomes are too high to qualify for Mr Biden’s cancellation plan.
Here’s what it didn’t say, but what outside observers suspect: The company doesn’t believe for a second that the Biden administration will lift the payment freeze this summer, as it has said it intends to do. Why should it, just as the presidential election is heating up?
A lawsuit could force the government to restart the repayment machinery, which may not be a bad thing. Given the low unemployment rate and the existence of means-tested repayment plans for those in need, few people would be ruined by restoring the February 2020 status quo. And that status quo would prime the pump for more SoFi loan applications.
That’s how it could go. But Natalia Abrams, the president and founder of the Student Debt Crisis Center, had another question: Why would SoFi alienate potential customers by filing this lawsuit?
There are a few possible answers. One is the likelihood that the majority — perhaps the vast majority — of federal student loan borrowers do not have credit scores comparable to the average of 773 that SoFi’s current student loan borrowers maintain. In other words, none of the people in that majority are “big” enough to qualify, as the company put it in a strange commercial that ran during the 2016 Super Bowl.
Meanwhile, even great people might not wonder how their potential lender treats people who aren’t customers. If you were looking for a student loan or planning to refinance one, you would probably search for “best student loan interest rates” and not “SoFi ratings.” And if you looked up reviews on Google, would news of the company’s lawsuit show up somewhere near the top of the results?
Not at this moment. SoFi is counting on this — and the fact that many people feel the student loan payment pause shouldn’t have lasted this long.
SoFi is probably right about its potential customers. So why did it sue the federal government? Because there was quite a bit of advantage and very little disadvantage. And because banks — let’s repeat the word for emphasis, Bank – go banking no matter what.
