The online personal finance company SoFi first made a name for itself by raising funds from Stanford alumni to help the university’s MBA students get cheaper student loans. It later held mixers for individual borrowers with failed deals. Social finance, got it?
But last month, the now-public company with over $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 federal student loan payments and coerce tens of millions of borrowers who aren’t SoFi’s customers – teachers, soldiers, sick people who have had to drop out – to pay off their debts faster.
Why would a bright, shiny company not far from its 2011 start-up days act in a way that seems downright mean?
The answer lies in the highly imperfect way in which we help most people—not just prospective MBAs—pay for higher education in America. But it’s also a lesson in red-blooded capitalist behavior that we should expect from any for-profit corporation, no matter how it disguises itself.
SoFi exists because of a quirk in the federal student loan program. While the state charges different interest rates depending on the type of loan, there is no differentiation within these types of loan. Graduates all pay the same no matter what subject they study, what school they attend or what they later earn.
That fact creates an opportunity for companies like SoFi that want to target students from schools that produce the highest earners with the best repayment histories. So make no mistake: SoFi is a US government competitor, luring borrowers with large balances and incomes to make debt affordable.
In the early years, SoFi presented itself to the world as an anti-bank. That was effective and charming. It was also hilarious since one of its founders, Mike Cagney, was a former derivatives banker at scandal-plagued Wells Fargo who ran a hedge fund as a side hustle.
Pretty quickly, as chief executive, Mr. Cagney brought shame on the company — romantic relationships with subordinates, leaving evidence of his misdeeds on private jet lists — and showed himself. His eventual successor, Anthony Noto, a former Goldman Sachs executive, then acquired a bank for SoFi, which previously ran commercials with the slogan “Don’t Bank. SoFi.”
Killing Mr. Cagney’s “Kill Banks” campaign was worth stalling for at least two reasons. First, if you’re a bank, you can use money from depositors to make loans. This can be more profitable than using capital from other sources.
Product diversification also makes sense for a company like SoFi looking to grow. If you get young, soon-to-be-rich borrowers right, they may stay for life if you have a desirable suite of financial services.
Today, SoFi, the bank, can connect you to a checking account, and the company offers all sorts of trendy gizmos, like crypto and options trading. It gave its name to 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 ran into a pandemic problem — and a political one — that even the top Stanford game theory professor couldn’t have foreseen.
Not long after the world shut down in 2020, legislation allowed federal student loan borrowers to stop making payments without financial penalty.
The pause had an expiration date, but the Biden administration extended it several times, and it’s still in effect. This created a big problem for SoFi. After all, if borrowers don’t have to make interest payments on their federal loans, why would they refinance with SoFi at a lower interest rate on a loan they would have to pay back immediately?
They probably wouldn’t – and haven’t. The dollar value of new SoFi student loan originations fell 54 percent between 2020 and 2022.
It wasn’t a total disaster. SoFi also offers personal loans — for example, to pay off credit card debt with a single loan at a lower interest rate — and those loans now dwarf those for student loans. Still, investors are unimpressed. SoFi’s stock closed Friday about 76 percent lower than the all-time high it set in 2021.
So it complained all by itself. And the competitor’s response was both entirely predictable and quite aggressive for a government agency. “This lawsuit is an attempt by a multibillion-dollar company to make money while forcing 45 million borrowers to repay — putting many at serious risk of financial harm,” said the statement, which the Department of Education gave reporters.
Borrower advocates found SoFi’s move galling. “We have private sector companies that have sucked themselves to the broken edges of America’s education and student loan system,” said Cody Hounanian, executive director of the Student Debt Crisis Center. “I see SoFi’s suit as another symptom of profiteering.”
This is hot politics. Also consider the legal issue. “If the government is doing something good for the citizens and you can’t make money, that shouldn’t be the basis for legal standing,” said Persis Yu, deputy general manager and chief attorney of the Student Borrower Protection Center. “Companies have no right to profit.”
However, companies have a duty to shareholders. And if you think investors come first, SoFi’s lawsuit starts to make sense.
SoFi declined to comment, citing the need to remain quiet ahead of its May 1 earnings report. But last month it was quick to declare that it supports President Biden’s effort to forgive up to $20,000 in student loan debt. It also endorsed the initial pause in 2020. The company would also agree to an immediate restart of payments only for those whose incomes are too high to qualify for Mr. Biden’s cancellation plan.
Here’s what wasn’t said, but what outside observers suspect: The company doesn’t believe for a second that the Biden administration will lift the payments freeze this summer as it announced. Why should it while a presidential election is heating up?
A lawsuit could force the government to restart the payback machine, which might not be a bad thing. Given the low unemployment rate and the existence of income-based payback plans for people who are struggling, few people would be ruined by restoring the February 2020 status quo. And this status quo would boost the pump for more SoFi loan applications.
It could work like this. 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 a credit score equal to the average of 773 that SoFi’s current student-loan borrowers have. In other words, none of the people in that majority are “great” enough to qualify, as the company put it in a weird commercial it ran during the 2016 Super Bowl.
Meanwhile, even great people may not wonder how their potential lender treats people who aren’t their customers. If you’re looking for a student loan or looking to refinance one, you’re probably looking for “best student loan rates” rather than “SoFi ratings.” And if you searched Google for reviews, would the news about the company’s lawsuit even appear anywhere near the top of the results?
At the moment it doesn’t. SoFi is counting on that — and the fact that many people don’t think the student loan payment pause should have lasted that long.
SoFi is probably right about its potential customers. Why did she sue the federal government? Because there were quite a few advantages and very few disadvantages. And because banks — repeat the word for emphasis, bank — will bank no matter what.