Student loans: SoFi lawsuit to block payment pause baffles observers

Student loan forgiveness advocates and experts are somewhat puzzled by SoFi Technology's (SOFI) new lawsuit attempting to block the ongoing payment pause on federal student loans.

"A multi-billion dollar lending company is asking the federal government to prioritize its profits over protecting the public interest,” Eden Iscil, a public policy manager at the National Consumers League, told Yahoo Finance. “Millions of individuals with student debt don’t even have a college degree; many of these borrowers are parents who took out loans on behalf of their kids or they're students who couldn’t complete their degrees as the costs quickly added up. Both the Trump and Biden administrations made the correct and legal decision in putting borrowers first."

The lawsuit argues that the moratorium, which has led to millions of dollars in lost profits for the company’s core refinancing business, has no legal basis. The case may end up being irrelevant, others noted, given that last week the Supreme Court heard oral arguments on Biden’s up to $20,000 in student loan cancellation.

“One has to ask what is the point of this lawsuit as the president's student loan forgiveness plan will be resolved by the U.S. Supreme Court this year one way or another and repayment will restart 60 days later,” Mark Kantrowitz, author and student loan expert, told Yahoo Finance. “This lawsuit may soon be rendered moot.”

Late last week, SoFi filed its suit in U.S. District Court in the District of Columbia, saying the eighth extension of the forbearance “to alleviate ‘uncertainty’ for borrowers during ongoing litigation over the debt-cancellation program” is “plainly not a valid basis” under the HEROES Act, which the Education Department used as its justification.

In its 32-page filing, SoFi claimed the loan moratorium “has substantially injured” the company, which has lost $300 to $400 million in refinancing revenue and $150 to $200 million in profits since it began in March 2020.

“Those numbers also significantly understate the Moratorium’s harmful effects, because they do not take into account the growth that SoFi’s federal student-debt refinancing business would otherwise have experienced,” the lawsuit states.

“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 company said in a statement to Yahoo Finance. “However, it’s time for the Administration to follow through on its word to end the federal student loan payment moratorium. This latest extension is an illegal overreach of power.”

The pause on federal student loan payments was enacted under the Trump administration in the spring of 2020 and was extended multiple times under Biden, most recently in December after the president’s loan forgiveness plan got hung up in two lawsuits that are now before the Supreme Court. Both administrations used the HEROES Act, which empowers the Education Secretary to waive or modify laws or regulations concerning federal student loan programs during a military operation or national emergency.

The Education Department asserts the legality of the payment pause and also questioned the motives of the lawsuit.

“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,” an Education Department spokesperson told Yahoo Finance. “The payment pause is legal, as is our plan to provide one-time debt relief to tens of millions of borrowers most at risk of delinquency and default when they return to repayment.”

SoFi has been an open critic of the payment pause, and instead advocated for Biden’s forgiveness plan, which wouldn’t affect any loans the company originated.

The lender was also among several debt servicers that used Biden’s debt cancellation announcement last year to tout private loan refinance options, prompting Sen. Elizabeth Warren (D-MA) to call out those servicers for pushing refinancing that could render some borrowers’ loans ineligible for forgiveness.

The lawsuit is more of the same, advocates say, with SoFi concerned about corporate profits over borrowers, especially considering most borrowers who benefit from the pause might not be eligible for its services because private lenders require credit checks.

“Rather than trying to compete with the government by offering borrowers better terms, SoFi wants to force the government to saddle borrowers with worse terms,” Abby Shafroth, a staff attorney at the National Consumer Law Center, told Yahoo Finance. “SoFi appears willing to wreak havoc on the financial security of millions of struggling Americans to further drive up its already record revenues. Worse, SoFi doesn’t even want the lower-income Americans that the pause is meant to protect as customers — they would simply be collateral damage.”

Even without the payment pause that SoFi is opposing, advocates stress that borrowers should refrain from refinancing their student loans now or risk ineligibility for possible forgiveness and other reforms the Biden administration is looking to implement on income-driven repayment plans.

Most of SoFi's potential refinance customers will be directly hurt by the company's lawsuit to end the payment pause, according to Katherine McKay, associate director of the Financial Security Program at the Aspen Institute. So, borrowers should be cautious about refinancing because they cannot move back into the federal program after leaving it.

“The problem with private lenders refinancing federal student loans is simple: It is almost never financially better for the borrower. They lose the benefits, consumer protections, and loan forgiveness opportunities that come with federal loans,” McKay told Yahoo Finance. “SoFi and similar lenders understand this.”

Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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