Why SoFi Is Suing to End the Student Loan Payment Pause

SoFi, an online personal finance firm, first gained fame by securing money from Stanford graduates to help M.B.A. student at the university get lower-cost loans. It held mixers later for single borrowers who had fancy degrees. Social Finance, get it?

Last month, SoFi, a now-public company with more than $1 billion in revenue generated from private student loan offerings and other offerings did something shocking. It sued the Department of Education, forcing it to resume federal student loan repayments and to force tens of thousands of debtors, who aren't SoFi customers – teachers, soldiers and sick people forced to drop out of school – to pay their debts sooner.

Why would an incredibly bright and shiny company, not too far from its start-up days in 2011, act so savagely?

The answer is in the very imperfect way that we pay for higher education, not only in America but also in other countries. It's also a lesson in how to expect any company that is looking for profit, no matter what it looks like, to behave.

SoFi was created because of an anomaly in the federal student loans program. The government may charge different interest rates based on the type of loan, but there are no differences within the types of loans. Graduate students pay the same amount, regardless of the course they study, the school that they attend, or what they may earn in the future.

This fact opens the door for companies like SoFi to target students who come from schools with high incomes and the best repayment records. So, make no mistake about it: SoFi competes with the U.S. Government by attracting borrowers with high debt balances who also have the income to pay off the debt.

SoFi began its existence as an antibank. This was both effective and charming. It was hilarious because one of the founders, Mike Cagney is a former derivatives manager at scandal-plagued Wells Fargo, who ran a Hedge Fund as a side gig.

As chief executive, Cagney quickly brought shame to the company -- romantic relationships between subordinates and evidence of his wrongdoings in private jet manifests. He also showed himself out. Anthony Noto (a former Goldman Sachs managing Director) was eventually appointed to replace him. He acquired a bank in the name of SoFi. The company had run advertisements with the tagline, "Don't Bank." SoFi."

At least two good reasons made it worthwhile to kill off Mr. Cagney’s "Kill Banks". When you're a bank, you can use the money that depositors have deposited to make loans. This can be a more profitable option than using capital from another source.

Diversification of products is also a sensible move for a growing company such as SoFi. If you treat young, soon to be wealthy borrowers well, they may stay with you for life, if you offer a suite of desirable financial services.

SoFi, the bank, can now provide you with a checking or savings account. The company also offers a variety of other trendy products, such as crypto trading and options trading. Its name is on the stadium where Los Angeles Rams and Chargers compete. It went public via one of the SPACs you've read about in the past.

Even the best Stanford professor of game theory could not have predicted that SoFi would run into a pandemic and political problem.

After the end of the world in 2020, a new law made it possible to stop paying federal student loans without incurring any financial penalties.

The pause was supposed to expire, but it has been extended several times by the Biden administration. It is still in effect. This has caused a major problem for SoFi. Why would borrowers refinance their loans with SoFi if they don't need to pay any interest on federal loans?

They haven't and probably won't. Between 2020 and 2022, the dollar value of new SoFi student loan originations fell by 54 percent.

This wasn't an absolute disaster. SoFi offers personal loans, such as a loan to pay off credit card debts with one single loan and at a lower interest rate. These originations dwarf those for student loans. Investors aren't impressed. SoFi's shares closed Friday at a price 76 percent below the high of 2021.

It sued itself. The response of its competitor was predictable, but also aggressive. The Department of Education told reporters that "This lawsuit is a money-making scheme by a multi-billion dollar company, while forcing 45 million borrowers to repay their loans -- putting them at risk of serious financial harm."

SoFi's decision was deemed offensive by advocates for borrowers. Cody Hounanian is the executive director of Student Debt Crisis Center. He said that private companies have sucked money from the broken edges of American education and student loans. "I see SoFi's lawsuit as yet another example of profiteering."

This is the hot policy view. Also, consider the legal issue. Persis Yu is the deputy executive director at the Student Borrower Protection Center. She said that when the government does good for citizens, but you cannot make money, this should not be a basis for suing. "Corporations don't have the right to profit."

But companies do have a responsibility to their shareholders. If you think that investors are first, SoFi’s lawsuit makes sense.

SoFi declined to comment, citing a need to remain silent before its quarterly earnings report on May 1. Last month, SoFi was quick to say that it supported President Biden's effort to cancel student loans up to $20,000. The company also supported the initial 2020 pause. The company is also fine with a payment restart immediately for those who earn too much to qualify for the cancellation plan of Mr. Biden.

What it didn't say is what observers infer: The company does not believe that the Biden Administration will lift the payment suspension this summer as they have said. Why would they do this, as the presidential elections are heating up?

Suing the government could force it to restart the repayment machine, which is not necessarily a bad thing. The low unemployment rate, and the income-driven repayment plan for those who are struggling would mean that few people will be affected by the status quo of February 2020. This status quo will encourage more SoFi loan requests.

This could be the case. Natalia Abrams of the Student Debt Crisis Center had another question. Why would SoFi alienate its potential customers by filing a lawsuit?

You have a few options. The first is that it's likely that most federal student loan borrowers -- or even the vast majority of them -- don't have scores as high as the average 773 that SoFi student loan customers maintain. The company said that none of those in the majority were "great" enough for them to qualify in an odd Super Bowl commercial.

Even great people might not care how their prospective lender treats those who aren't customers. You would search "best student loan rates" if you were looking for a loan, or to refinance an existing loan, and not "SoFi Reviews." If you searched on Google for reviews, the news about the lawsuit against the company wouldn't be near the top.

For the time being, it doesn't. SoFi is banking on this, and the fact many people do not think that the student loan repayment pause should have been this long.

SoFi probably has it right when it comes to its potential customers. Why did SoFi sue the federal Government? There was some upside, but very little downside. Because banks, let's say it again to emphasize, will bank no matter what.