Mick Santos, was one of those customers, which SoFi
SOFI,
+0.18%
calls members. Santos had recently paid off his roughly $45,000 in student debt thanks in part to the lower interest rate he received by refinancing with SoFi. Though his relationship with SoFi was technically over because he’d paid off his debt, Santos told MarketWatch at the time that getting invited to the event made him feel like the company still cherished him. Asked whether he’d consider signing up for other SoFi products, Santos said, “totally,” as servers walked by with trays of hors d’oeuvres.  

And indeed, in the years since Santos paid off his student loans, he’s opened up savings and investing accounts with the company, he said recently. But now, he’s thinking of moving his money after the company filed a lawsuit to stop the COVID-era pause on student loan payments, interest and collections. 

The news of the lawsuit, “was honestly really, really disappointing,” Santos, 34, said, adding the lawsuit dampened the trust the company had built with him.

“What really drew me to them in the first place was that this was started by students for other students to tackle student-loan debt,” Santos said of SoFi’s origin story as a way for students at Stanford’s business school to connect with alumni to finance their education. “This move by them is very off key and to me it just seems like they’re just worried about profits, which is super disappointing.”

The party Santos attended was one of many events the company held over the years to fete its customers. The events are one of the many ways SoFi, which at the company’s launch stood for Social Finance, looks to push the notion that it cares about its customers, and even potential customers. An ad campaign last year, for example, featured people, including an NFL quarterback, who were in a bad relationship with their bank and signed up for a SoFi account instead.

But the company’s suit against the government has some customers and experts questioning the authenticity of SoFi’s message that it prioritizes its members in a way other financial institutions don’t. SoFi is asking the courts to end the COVID-era pause on student loan payments, collections and interest. The pause, during which interest rates have been set at 0%, has been costly for SoFi’s student loan refinance business, which offers federal student-loan borrowers the opportunity to refinance their debt at lower rates, the company said in court filings. But trying to force more than 40 million student loan borrowers back into repayment seems at odds with the image of a consumer-focused financial institution that drew many of its members, experts and customers say.  

“They’ve built a brand on being something different, they’ve been pretty aggressive on targeting millennial and Gen Z customers and trying to be the face of this fintech change of how we bank and keep our money,” said Jonathan Bundy, an associate professor of management at Arizona State University’s W. P. Carey School of Business. “To me it seems pretty inconsistent to file a lawsuit that goes against student loan borrowers.” 

Bundy pointed to the contrast between SoFi’s messaging on its website — “our #1 priority is putting members first,” it reads — and the decision to sue as an example of that inconsistency.  

“To say we want to force repayments again doesn’t seem like it puts members first,” he said. 

A quieter approach to ending the payment pause

For more than a year, SoFi has taken a quieter approach to pushing the Biden administration towards ending the payment pause. The company spent $480,000 on lobbying in 2022 and the number of lobbyists the company hired reached an all-time high last year at 14, according to the Center for Responsive Politics, which tracks money in politics. The company lobbied the Department of Education and the White House and looked to sway Congress on “policy issues related to student loans and the federal response to the COVID-19 virus, including the student loan payment and interest moratorium,” the Center for Responsive Politics found. 

SoFi and other student loan refinance companies shopped a proposal around Capitol Hill to use language in a government funding package to pressure the Biden administration to end the payment pause, Politico reported last year. The payment pause wastes “taxpayer funds by providing payment relief to all borrowers, including wealthy, high-earning borrowers, instead of using those funds for the neediest borrowers,” the language read, according to Politico. 

Wealthy high-earning borrowers are exactly the demographic SoFi covets. The company isn’t shy about noting that it caters to HENRYS — people who are high earners, not yet rich. Its student-loan refinance product is based on the idea that because these borrowers are generally a good credit risk, SoFi can provide them with a lower rate than the federal government, which provides the same interest rate to borrowers regardless of their ability to repay the debt. 

One of the historical criticisms of SoFi and other student-loan-refinance companies is that they “cream-skim” the borrowers most likely to repay off the federal student loan portfolio, leaving the government with a riskier group of loans. By providing a 0% interest rate to these so-called HENRYs, the government is costing SoFi, the company argues. SoFi estimates it has lost between $300 million and $400 million in revenue and between $150 million and $200 million in profits due to the payment pause, according to legal filings. “The Moratorium has eliminated the primary benefits of student loan refinancing,” the company wrote in the suit. 

Dan Dolev, a senior Wall Street analyst at Mizuho, said he views SoFi’s decision to fight back against competition from the government as “a net positive.” 

“Up until now, they were willing to put up with all these decrees from Biden, from all these regulators, now they’re finally saying enough is enough, it’s hurting our business,” he said. 

But filing the lawsuit could have long-term consequences that outweigh the benefits of a resumption to the student loan refinance business, said Paul Argenti, professor of corporate communication at the Tuck School of Business at Dartmouth. 

“They’re on the wrong side of this issue in terms of the way they’re approaching it,” he said. 

SoFi has called the latest extension of the payment pause “an illegal overreach of power,” in a statement, adding that “it’s time for the Administration to follow through on its word to end the federal student loan payment moratorium.”  

“We have supported and continue to support targeted student loan forgiveness, in addition to the student loan payment moratorium during the economic crisis at the height of the COVID-19 pandemic,” the statement reads.

For SoFi to lobby behind the scenes to try to stem potential continued losses in its student-loan-refinancing business makes sense, Argenti said. But “coming out publicly and introducing a lawsuit raises the stakes,” he said. “It’s going to affect their reputation dramatically.”

Though it’s difficult to measure a reputation’s value, it can impact a company’s bottom line. Research indicates a good reputation can help a company convince consumers to spend more on products, recruit better talent and can even have a meaningful impact on a firm’s market value. 

“A company earns a reputation through consistency of action,” Bundy said. “A lawsuit like this, especially if it gets some press play and some internet buzz, seems inconsistent.” 

“It goes against, at least in my view, that image, or that brand that they’ve been trying to build,” he added.

That inconsistency is part of why the suit irked Santos. He first heard about it from a financial wellness influencer, who urged her followers to stop doing business with SoFi. “At first I was like ‘no, not SoFi’ I couldn’t believe it,” Santos said upon first reading her post. 

“I get that it impacts them and their profitability,” Santos said of the payment pause. “At the same time I felt like at first their priority was helping students and helping them tackle their financial debt and financial wellness overall. To me this doesn’t seem like it.” 

For Santos and his family, the payment pause has helped to build a more stable financial life. His wife has six-figures in student debt from going to school to become a nurse practitioner. Eliminating the stress of her loan payments, at least temporarily, helped the couple feel more secure as they moved across the country to be closer to family and welcomed twins, Santos said. The pause has also helped the family attack Santos’ wife’s debt, he said, because any payments they can make during the freeze go towards principal. 

“Every little inch that was able to give us, it really helped a lot, it still helps a lot right now,” he said. 

Bank account customer considering moving their money

SoFi’s decision to sue the federal government also pushed Michael Morse to think more critically about his relationship with the bank. The 36 year old and his wife recently signed up for checking and savings accounts with SoFi to take advantage of the relatively high interest rates the company is offering as they save for a home. 

In the months since Morse signed on, he’s received notifications “probably a few times a week” from the company advertising their student-loan-refinance product. Morse has about $300,000 in student loans from college and medical school.

Even when the pause lifts Morse has no plans to refinance his debt because he doesn’t want to lose out on the protections and benefits offered by the federal government, including the opportunity to have your loans canceled after at least 20 years of payments.

“When I found out about the lawsuit it was funny, it was another push notification, but it wasn’t from them, it was from my news app,” he said. “It just didn’t really sit well.”  

Like other student-loan borrowers, Morse has taken advantage of the payment pause to put his money towards other priorities. He used the extra funds to help start a telemedicine business and save for a house. The news of the lawsuit has pushed Morse to look around and see if he can find a banking product with a competitive interest rate. 

“The culture of a company is important too and what they stand for,” Morse said.  “When it’s as simple as pulling your money out and putting it somewhere else, you’ve got to vote with your dollars.” 

SoFi’s future not necessarily dependent on student loans

SoFi initially launched in 2011 at Stanford’s business school as a way for current Stanford students to tap the school’s alumni network to finance student loans. In its early years, the company focused on luring customers like recent business school graduates or doctors to refinance their student debt. After a few years, the company expanded its business and started pitching these customers on products like mortgages, personal loans and eventually bank and brokerage accounts. 

Now, SoFi’s future is likely more dependent on selling customers on banking products than on refinancing a student loan. In 2019, student loans contributed 60% of SoFi’s revenue, according to an estimate by MoffettNathanson. Now, student loans account for about 15%, MoffettNathanson estimates. 

The payment pause ending could provide a boost to SoFi’s performance, said Eugene Simuni, a managing director at MoffettNathanson, an equity research boutique, but “it’s not necessary for them to deliver on their financial goals.” 

Of course, part of the reason the student loan refinance business accounted for a smaller share of revenue in 2022 is because of the payment pause, Simuni said. But after an initial spike once the government eventually lifts the freeze, he estimates the student-loan-refinance business will grow at about 5% to 10% a year, much slower than in the past, and less than the 30% overall annual revenue growth analysts expect from the company. 

The slow growth is in part because the interest rate environment is very different from what it was in 2019. In a low rate environment, SoFi could easily offer lower rates to its target, prime customers than what they were getting on their federal student loans, where the uniform rate accounts for the risk in lending to students with no credit history. But federal student debt is fixed for the lifetime of the loan, which means borrowers who took on debt a few years ago may have a decent rate by today’s standards.

In addition, the Biden administration has proposed sweeping changes to the way federal student loan borrowers repay their debt, which would make the terms more generous and would make refinancing less attractive. 

“There’s always the strike of the pen risk around this business,” Simuni said. “It’s probably not going away, it’s a hot button political issue.” 

President Biden’s student debt relief plan has been legally challenged and is awaiting a ruling from the Supreme Court. If the Supreme Court allows the debt cancellation plan to stand it would be a win for SoFi, because implementing the initiative would clear the way for payments to resume, Simuni said.

The maximum of $20,000 in debt relief that borrowers can receive under the Biden administration plan likely wouldn’t wipe out the debt of SoFi’s potential customers. In addition, some may not qualify for the relief, which requires borrowers to earn less than $125,000 to be eligible. In its complaint, SoFi said that at a minimum, they’d like the court to force payments to restart for borrowers who don’t qualify for the plan. SoFi is suing, Simuni said, to urge the Biden administration to restart payments even if the courts strike down the debt forgiveness plan. 

For SoFi to win the suit, the company would need to establish standing

SoFi’s suit is focused on the most recent extension of the payment pause in November 2022. At that time, President Joe Biden said “it isn’t fair to ask tens of millions of borrowers eligible for relief to resume their student debt payments while the courts consider the lawsuit.” Payments are scheduled to resume 60 days after the Supreme Court makes its decision but no later than 60 days after June 30, 2023.

In its complaint, SoFi called the extension of the payment pause “unlawful on multiple grounds.” The company cited arguments similar to those challenges to the debt relief plan brought up at the Supreme Court. For example, SoFi claims that when the Biden Administration authorized the latest extension of the payment pause in November, it was overreaching in its executive authority. 

SoFi may face similar obstacles to those challenging the debt relief plan in convincing courts to reach a conclusion in the company’s favor. For a court to rule whether the extension of the payment pause is legal, they’ll first have to decide if SoFi has standing or the right to sue under the law. 

In order for parties to bring a lawsuit, they need to show they’re injured by the policy and the court needs to be able to redress the harm. There’s a reasonable argument for a company or organization that services federal student loans to have standing to sue over these policies, said Tara Grove, a professor at the University of Texas School of Law. That’s because any lost revenue is directly related to steps by the federal government that would wipe out these companies’ student loan volume, she said. The Biden Administration acknowledged that student loan servicers would have standing to sue over the debt forgiveness policy in oral arguments at the Supreme Court last month. 

But for a company like SoFi, which doesn’t service federal student loans, establishing standing could be more of an uphill battle, Grove said. 

“Even if the Department of Education restarted federal student loans it’s not at all clear that any of those borrowers would refinance with SoFi,” she said. “Any one of those borrowers could choose either not to refinance at all or to refinance with someone else. My basic conclusion is that this is a tough standing argument because so much of what they’re saying is speculative.” 

Though in the past courts have been skeptical of that kind of standing argument, they may still let the suit move forward, Grove said. “Courts in this area have been willing to push the line on standing on doctrine, so I don’t make any predictions on what the court might do,” she said. 

Notably, no other student loan companies have sued over the Biden administration’s COVID student loan relief policies, which has made it difficult for challengers to the forgiveness initiative to establish standing. Six Republican-led states challenging the debt forgiveness plan have invoked potential losses to the bottom line of the Missouri Higher Education Loan Authority or MOHELA in their argument for why they have the right to sue. But MOHELA was conspicuously absent during oral arguments at the Supreme Court last month. 

That the courts will likely take some time to work through these questions in SoFi’s lawsuit could benefit the company reputationally, Bundy said. But if SoFi wins and becomes the face of the end of the student loan payment pause it could change the narrative surrounding the company, he said. 

“If it’s successful I think that would be reputationally speaking very bad for SoFi,” he said.