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Anthony Noto, the CEO of SoFi
SOFI,
said the company decided to sue over the pause on federal student-loan payments in part to protect shareholder value.
In the weeks since filing the lawsuit earlier this month, SoFi’s leadership hasn’t said much about the decision-making process surrounding the case, which, if SoFi wins, would push more than 40 million federal student-loan borrowers back into repayment. Some customers have said the suit has them considering moving their money from the bank, and experts in corporate reputation warn it could tarnish the company’s image as a consumer-focused fintech company.
During an exchange with an analyst at a conference hosted by Bank of America
BAC,
Tuesday, Noto provided some insight into how the company weighed those concerns when considering whether to file the lawsuit.
“Strategically, do you worry about litigation potentially damaging the brand at all from a consumer perspective?” Mihir Bhatia, a Bank of America analyst, asked Noto, according to a transcript provided by AlphaSense/Sentieo.
Noto told the analyst that filing the lawsuit “was not an easy decision for us,” and “something we really thought through quite meaningfully,” adding that company officials consulted stakeholders and SoFi’s board before moving forward with the suit.
“We definitely recognize the risk, but we also recognize the importance of being a leader in this country and a leader in this industry,” Noto said. “I’m also protecting our shareholders and our shareholder value, which is critically important.”
The pause on federal student-loan payments, interest and collections, which began in March 2020, has cost SoFi between $300 and $400 million in revenue and between $150 million and $200 million in profits, according to the company’s legal filings. Though SoFi now offers a suite of products, including bank accounts and personal loans, the company made its name offering borrowers the opportunity to refinance their student loans at lower interest rates. During the payment pause, the rate on federal student loans has been set at 0%. As a result, “the Moratorium has eliminated the primary benefits of student loan refinancing,” the company wrote in its complaint.
Suit could tarnish SoFi’s image
While the pause has hurt SoFi’s bottom line, the suit could tarnish the image the company has tried to build as a firm that’s more consumer-focused than other financial institutions, experts say. Bhatia touched on this tension, noting that SoFi has “always been about what’s right for you, what’s good for your money, and now you’re going and asking a court to say, ‘Hey, tell these consumers to start making payments,’” Bhatia said, adding, “just wondering how you balance that,” referencing press articles discussing the issue.
If SoFi’s lawsuit winds up becoming a viral story, say, because they win it, borrowers resume payments and the White House tweets about it that could impact the company financially, said Jonathan Bundy, an associate professor of management at Arizona State University’s W. P. Carey School of Business.
“SoFi really made an effort to connect to the younger generations by selling itself as a different kind of bank and to the extent that attracted customers — at least this analyst who was asking the question thinks it must have — if it loses that goodwill, that could be pretty damaging to its bottom line,” Bundy said.
Noto acknowledged that the company stood to gain from the government lifting the freeze on federal student-loan payments, but he also said that student-loan borrowers would benefit from the payment pause ending, because if it continues the student-loan refinancing market, which offers borrowers “attractive rates” could be at risk.
The federal student-loan program offers every borrower the same interest rate regardless of their ability to repay. SoFi’s refinance business targets consumers who are good credit risks — the company has called them HENRYs, or people who are high earners, not yet rich — and as such is able to undercut the rate they receive from the federal government.
“The student-loan refinancing market needs to be preserved,” Noto said at the conference. “It’s hard to preserve it.”
One of SoFi’s competitors announced last year that it would be shutting down in part because the payment pause was such a big hit to their business. Even if the payment pause ends, student-loan refinance companies may still face challenges. For one, the current high interest-rate environment could make it difficult for these companies to compete with the government’s program. Federal student-loan interest rates are fixed for the life of the debt, meaning that borrowers who took out their loans a few years ago in a lower rate environment may have a decent rate by today’s standards.
In addition, the Department of Education is proposing sweeping changes to student-loan repayment, which could make refinancing less attractive if they come to fruition.
No other student loan companies have sued
Notably, no other student-loan companies or organizations have sued over the Biden administration’s student debt relief initiatives. In a lawsuit filed by six Republican-led states challenging the plan to forgive up to $20,000 for a wide swath of student-loan borrowers, the states have cited the plan’s potential impact on the revenue of the Missouri Higher Education Loan Authority, or MOHELA, which services federal student loans, as a reason the states have the right to sue. But MOHELA was conspicuously absent from the courtroom during oral arguments in the case at the Supreme Court last month.
SoFi’s lawsuit echoes some of the arguments brought by states and organizations challenging the debt-forgiveness plan. For example, the company said in the suit that the Biden administration overstepped its executive authority in extending the payment pause last November. At that time, the White House said that payments would resume 60 days after the litigation over the program is resolved, or 60 days after June 30, 2023, whichever comes first.
At the investor conference, Noto noted that the company supports the forgiveness initiative, which is limited to borrowers earning less than $125,000. The income cap means that some potential SoFi customers may not even qualify for the plan and for those that do, the forgiveness likely won’t wipe out their whole loan balance.
Eugene Simuni, a managing director at MoffettNathanson, an equity research boutique, previously told MarketWatch that if the Biden Administration wins the debt forgiveness cases at the Supreme Court it could be a win for SoFi. That’s because if the forgiveness plan is allowed to move forward it would likely clear the way for payments to resume.
In its suit, the company has asked that, at a minimum, the Biden administration restart payments for borrowers who don’t qualify for the cancellation plan.
“We’re just asking them to do what they’ve said, regardless of the outcome of the Supreme Court decision,” Noto said at the investor conference. “The fact that even after we filed a suit, that they won’t agree in writing to stick to what they said, it tells you they don’t plan to stick to their word,” noting that the Biden administration has previously extended the pause. “It’s frankly unfair that they can act without authority.”
The Department of Education has said it has the legal authority to authorize the debt-relief plan and the payment pause. The agency has maintained on its website that student-loan payments will resume 60 days after the end of the litigation, or 60 days after June 30, 2023.
“This lawsuit is an attempt by a multi-billion dollar company to make money while they force 45 million borrowers back into repayment — putting many at serious risk of financial harm,” a Department spokesperson wrote in an emailed statement. “The Department will continue to fight to deliver relief to borrowers, provide a smooth path to repayment, and protect borrowers from industry and special interests.”
