SoFi Student Loans Suit Spotlights Platform Model’s Resilience and Vulnerabilities

The push and pull on student loans has spotlighted SoFi’s digital platform model and the emergence of online financial service ecosystems.

As widely reported, SoFi has turned to the U.S. court system to try and halt the Biden administration’s continuing moratorium — and the latest in a string of eight extensions — on student loan payments.

For a bit of context: The pause applies to federal student loans and has, cumulatively, been in place for three years.

SoFi’s actions got some blowback on Capitol Hill last week when U.S. Rep. Ayanna Pressley (D-Massachusetts) and Sen. Elizabeth Warren (D-Massachusetts) sent a letter to SoFi alleging that the suit is an “attempt to use the courts to enact a backdoor repeal of this payment pause.”

Whatever happens with the suit, the legal twists and turns and the legal filing itself give a glimpse into just how large SoFi’s stake in the higher education market is. In that segment, as described in company details, SoFi offers private loans for college, graduate school, law school, medical school, and business school students. Many factors can affect your specific eligibility, including your school, degree type, loan amount, credit score, and more.

First things first.

As we’ve spotlighted in this space before — and recently, with our coverage of SoFi’s earnings — SoFi’s model is predicated on forging a continuum of demand (and providing) everything from personal loans to direct deposit accounts to mortgage offerings.

Total deposits at SoFi Bank grew 46% sequentially during the fourth quarter to $7.3 billion.

Personal loan originations of nearly $2.5 billion in the fourth quarter of 2022 were up nearly $820 million, or 50%.

Moratorium’s Impact

But drilling down a bit to see how the student lending business has been affected, the company said that there was a significant decline in student loans in the most recent quarter. Company filings reveal that in the fourth quarter of 2022, for example, the company originated $406.8 billion in student loans, down from $1.5 billion in the same period of 2021.

In the lawsuit, SoFi (specifically, SoFi Lending Corp.) reports that “it competes with the federal government for federal student loan borrowers by offering them private financing under more favorable terms. In addition to lower interest rates and revised loan periods, SoFi also offers deferment and forbearance for eligible borrowers under certain circumstances, such as during periods of graduate education or financial hardship.”

But the moratorium, the company has said — where privately refinanced loans such as SoFi’s are ineligible — “has eliminated the primary benefits of student loan refinancing. In essence, SoFi is being forced to compete with loans with 0% interest rates and for which any ongoing repayment of the principal is entirely optional.”

Against that backdrop, the company said that the volume of its federal student debt refinancing “dropped precipitously… by 2022, SoFi was originating approximately 1/10th of the volume of refinancing compared to 2019.”

As to the financial impact, SoFi contends in the filing that it has lost approximately $300 million to $400 million in total revenues from its federal loan refinancing business during the moratorium. As a result, SoFi has lost roughly $150 million to $200 million in the same time frame.

We note, then, that the student loan business is a high-margin business. The company filings show that the contribution profit of the overall lending business (not just student loans) was a cumulative $1.3 billion.

The read across here is that, at the top end, an incremental $200 million would have been a significant boost to the operating performance of that business.

And here lies a bit of vulnerability. Overall, Lending (again, not just student lending) was 71% of the most recent year’s adjusted net revenues. The company’s growth in its technology platform and financial services, up a respective 62% and 189%, show some ability to offset some of that concentration.

But in the meantime, the labyrinthine, and perhaps long-running, legal dispute will have some hand in shaping the student lending market — and thus, SoFi’s financials — and the ultimate outcome is less than clear at the moment.