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Why SoFi Is Suing to End the Student Loan Payment Pause

an online personal finance company called Sophie It first made a name for itself by fundraising from Stanford University alumni to make cheaper student loans available to MBA students at the university. It then held a mixer for single borrowers with special degrees. Social finance, do you understand?

But last month, the now-public company that generated more than $1 billion in revenue from private student loans and other services did something shocking. Appealed Ministry of Education to be terminated agency suspension It refused to pay federal student loans and forced tens of millions of debtors who weren’t SoFi customers—teachers, military personnel, and the sick who were forced out of school—to pay off their debts sooner.

How did a stellar company not far from its founding in 2011 act in such a mean-looking way?

The answer lies in the highly imperfect way to help most people get higher education in America, not just future MBAs. But it’s also an object lesson in the red-blooded capitalist behavior you should expect from any profit-seeking entity, no matter how it’s dressed up.

SoFi exists because of the quirks of the federal student loan program. The government charges different interest rates for different loan types, but there is no difference between these loan types. Graduate students all pay the same amount regardless of the subject they study, the school they attend, or their future income.

This fact creates an opportunity for companies like SoFi that want to target students in the schools that have the best repayment history and generate the highest income. Arguably, SoFi is a competitor to the US government, luring borrowers with high balances and income to make debt affordable.

In its early days, SoFi proved itself to the world as an anti-bank. It was effective and attractive.one of his founders Mike Cagneya former derivatives banker at scandal-plagued Wells Fargo who ran a hedge fund as a side business.

Soon, as chief executive, Mr. Cagney brought corporate disgrace — romantic relationships with subordinates, left evidence of his misdeeds on the manifesto of a private jet — and revealed himself. was eventually replaced by former Goldman Sachs Managing Director Anthony Noto. bought a bank For SoFi, which has previously run commercials with the tagline “”Do not bank.Sophie

Mr. Cagney’s “kilbanksThe campaign was worth running for at least two reasons. First, banks can take out loans using money from depositors. This can be more profitable than using capital from other sources.

And product diversification makes sense for a company like SoFi that wants to grow. If you do the right thing for young borrowers who get rich quickly, they may stay for life given a desirable array of financial services.

Today, Bank SoFi can connect you with your checking account, and the company offers all kinds of trendy toys. cipher and option tradingNamed after the football stadium where the Los Angeles Rams and Chargers play. And it was published through one of his SPACs that I read a lot of years ago.

But then SoFi ran into a pandemic problem (and a political one) that even the best professor of game theory at Stanford University couldn’t foresee.

Not long after the world shut down in 2020, legislation allowed federal student loan borrowers to stop making payments without financial penalties.

The suspension had an expiration date, but the Biden administration extended it several times and is still in effect. That caused big problems for SoFi. After all, if a borrower doesn’t have to pay interest on a federal loan, why would he refinance to SoFi to take out a low-interest loan that must begin repaying immediately?

They probably won’t — and they haven’t. Between 2020 and 2022, new his SoFi student loan originations fell by 54%.

This was not a complete disaster. SoFi also offers personal loans, allowing him, for example, to pay off his credit card debt with one low-interest loan. Nevertheless, investors have not been impressed. SoFi shares on Friday closed about 76% below their all-time highs set in 2021.

So it all sued by itself. And the reaction from competitors has been entirely predictable and fairly aggressive for government agencies. It’s an attempt to make a profit while exposing many people to serious risk of economic harm.”

Borrower advocates were frustrated by SoFi’s move. “There are companies in our private sector that are reaching for the broken edges of America’s education and student loan system,” Cody Hornanian said. Student Debt Crisis Center“I see the SoFi lawsuit as another sign of profiteering.”

That’s how to take a heated policy. Consider legal issues, too. “If a government fails to do something good for its citizens and make money, that should not be the basis for lawsuits. Student Borrower Protection Center“Corporations have no right to make a profit.”

However, companies have obligations to their shareholders. And if you believe investors come first, SoFi’s lawsuit makes sense.

SoFi declined to comment, citing the need to remain silent ahead of its quarterly earnings report on May 1. But last month, he was quick to explain his support for President Biden’s effort to write off up to $20,000 in student loan debt. It would also be fine to resume payments immediately, but only for those whose incomes are too high to qualify for Biden’s cancellation plan.

The company doesn’t believe for a second that the Biden administration will lift the payment moratorium this summer. say you’re going toWith the presidential election heating up, why is that?

The lawsuit could force the government to reopen the repayment mechanism, which may not be terrible. Given the low unemployment rate and the existence of income-driven repayment schemes for those struggling, few will be doomed by restoring the status quo of February 2020. It will encourage more SoFi loan applications.

It might work that way. But Natalia Abrams, president and founder of the Student Debt Crisis Center, had another question. Why would SoFi alienate potential customers by filing this lawsuit?

There are several possible answers. For one, it’s possible that the majority (probably the majority) of federal student loan borrowers don’t have credit scores like the 773 average that SoFi’s current student loan borrowers maintain. In other words, as the company noted in the bizarre commercial that aired during the 2016 Super Bowl, none of that vast majority of people are “great” enough to qualify.

On the other hand, even the smartest may not be wondering how potential lenders treat people who aren’t their customers. would probably search for “best student loan rates” instead of “SoFi reviews”. And if you search for reviews on Google, will news of your company’s lawsuit show up at the top of the search results?

At the moment, it doesn’t. SoFi is counting on this — and the fact that many think the suspension of student loans shouldn’t have lasted this long.

SoFi is probably right about prospects. So why are you suing the federal government? It had considerable advantages and very few disadvantages. And since it’s a bank, let’s repeat the words for emphasis. Bank — I’m going to go to the bank, no matter what.

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