Student loan debt is one of the leading causes of modern American stress, especially among Millennials, who are putting off life milestones like marriage, having children or buying a house because they are overwhelmed by their portion of the $1.5 trillion student loan debt.
As record debt levels keep growing, it’s not surprising that lenders smell a market for what they euphemistically call solutions.
Social Finance Inc., known commercially as SoFi, is among the high-profile entrants in the student-debt refinancing market. It focuses on graduates of top-ranked colleges and universities with high earning potential, offering refinancing plans that consolidate student debt at lower interest rates.
Target customers often have student loans from private lenders like banks and credit unions. These lenders charge significantly higher interest rates than federal loans that are most commonly used to finance higher education costs.
SoFi is one a relatively small group of nonbank, online lenders that cater to high earning, not-yet-rich student borrowers, a group called “Henrys” in lending parlance.
SoFi was launched in 2011 as a sort of peer-to-peer lender that raised capital from Stanford University alumni to make loans to a small group of that university’s business school students. Since then it has expanded rapidly and diversified. It now offers mortgages and personal loans as well as its mainstay student loan refinancing options.
How Does SoFi Work?
SoFi grew from a core student-loan refinancing business to a diversified financial company. Like other lenders that refinance student loans, it attracts customers with lower interest rates and the ability to consolidate multiple loans into a single debt. Much of the money it lends has come from private investment funds.
As it has expanded its business to include mortgages, personal loans, brokerage and financial advice services and deposit accounts, it continued to focus on customers with solid credit. Would-be loan consolidators and borrowers can prequalify and receive a loan rate online or with a cellphone app in two minutes. If they are satisfied with the terms, they can proceed with a formal application.
SoFi offers homeowners the option of using equity to pay off student loans through its Student Loan Payoff ReFi program that is backed by federally controlled mortgage behemoth Fannie Mae. When mortgage rates are lower than interest on student loans, the program is a way to cut monthly payments, and it allows borrowers to take additional cash out for other uses.
Borrowing against a home to pay a student loan debt comes with risks. If the borrower is unable to keep up with higher mortgage payments, the lender can foreclose on the real estate.
Cash out mortgage refinancing holds an allure for parents or other relatives that have a large amount of home equity and cosigned student loans. In many cases, they can shave several percentage points off interest from the debt by converting a student loan into a mortgage payment.
Though many of SoFi’s 600,000 members are student loan refinancers, customers can access personal loans that can be used for many purposes, including credit card debt consolidation, home improvements and paying medical bills.
SoFi also offers deposit accounts to customers through a branch called SoFi Money. The no-fee accounts pay 2.25% APY interest and offer debit cards.
What Makes SoFi Different from Other Lenders?
SoFi offers fringe benefits to borrowers that include free access to financial planners, career counselors and membership events. It sponsors mingle and meet cocktail parties that allow SoFi’s borrowers to invite friends. The mostly young borrowers are able to network and find dates. SoFi gets to expand its audience and potentially increase business.
SoFi is among a small group of lenders that consolidates both federal and private student loans. It also has special refinancing products for medical and dental students.
Though SoFi has grown rapidly during the past several years, it ran afoul of the Federal Trade Commission for making false claims about how much its borrowers can save through refinancing. SoFi settled with the FTC in October 2018, agreeing to back off its money-saving claims.
What Are the Requirements to Qualify?
Applicants must be graduates of a four-year accredited college or university or have a two-year associate’s degree to qualify for SoFi refinancing. SoFi uses what it says is a proprietary underwriting model to evaluate applicants. The model considers free cash flow, credit score (a minimum 650 is required), as well as strong financial history and professional credentials.
What Are SoFi’s Repayment Terms and Loan Fees?
SoFi doesn’t charge loan origination fees nor does it impose prepayment penalties on those who want to pay off their loans more quickly than planned. It bases its interest payments on the term of the loan and its underwriting evaluation.
It offers both variable and fixed rate loans. A five-year fixed rate loan in early 2019 carried interest rates ranging from 3.899% to 6.324%. For a borrower who started with a $10,000 loan, total payments would range from $11,023 to $11,690. Interest rates on a 20-year fixed rate loan ranged from 5.049% to 7.949%, with total payments on a $10,000 loan ranging from $15,904 to $19,998.
Interest payments on variable rate loans were somewhat less but can change during the course of repayment.
Who is a Good Candidate for SoFi Refinancing?
SoFi claims it can keep its rates lower than other companies in the field with its selective underwriting. By focusing on candidates with high credit scores and solid career prospects, it reduces the risk that would come with offering loans to a bigger audience.
Bottom line: If you’re a college graduate with good credit and a promising career path, SoFi refinancing is worth evaluating. Whenever you make a financial decision that involves years of payments and tens of thousands of dollars in borrowing, it pays to do serious comparison shopping before making a commitment.