Student loan refinancing is the (somewhat elusive) process by which a borrower can obtain a lower interest rate on their student loans, often by taking out a new student loan from a different lender. If this new loan comes with a lower interest rate and more favorable repayment terms, the borrower may save a good deal of money, both on a monthly basis and in total over the course of repayment.

Right now, there’s unfortunately no way to refinance federal student loans within the federal student loan system, which is troublesome for many borrowers who have high-interest federal student loans. Private student loan refinancing largely dried up during and after the financial crisis of 2007-2009. However, in the past few years, new and somewhat unique private student loan refinancing companies have begun offering some options to borrowers. Because these companies and their programs are relatively new, and student loans generally must be repaid over a long period of time, we don’t yet know enough about these companies to say with certainty whether they provide viable long-term solutions for borrowers. What we do know is that these programs tend to be geared towards borrowers with excellent credit and good earning potential, which effectively locks out many borrowers who need the most relief.

One of these new student loan refinancing companies is called SoFi (short for “Social Finance”). SoFi offers student loan borrowers with various refinancing options through a unique investor-based funding mechanism. It’s one of the leaders in this nascent industry.

I recently had the opportunity to sit down with a borrower (we’ll call him “Aaron” to protect his privacy) who refinanced his student loans through SoFi. Aaron agreed to share his experience with me, and he even let me review his loan contract with SoFi. As a student loan attorney, this was an exciting opportunity for me to get an inside look at a new type of student loan.

Background

Aaron was fortunate enough to attend college on a full scholarship. However, he still needed to borrow money to cover some of his educational and living expenses, and he graduated with a private Wells Fargo student loan of around $15,000.00. This loan had a 12.5% interest rate (quite high), and it was on a 30-year fixed repayment term with monthly payments of around $160/month.

Aaron was very unhappy with these loan terms, as he realized that his interest rate was obscenely high and almost of all of his monthly payments were going towards interest (by my calculations, over 90% of Aaron’s initial monthly payments would be going entirely to interest every month). He realized he would pay tens of thousands of dollars in interest before he’d start substantially reducing the principal. So in 2014, Aaron started looking into refinancing options.

Aaron was extremely thorough in his research, and carefully explored every private student loan refinancing program that was available at the time, including one with his current lender. He eventually decided that SoFi was the best option for him based on its advertised programs, their interest rates, and online reviews. He decided to investigate further.

The Initial SoFi Application Process

Aaron was thoroughly impressed with the initial information SoFi offered. According to Aaron, SoFi was “extremely transparent” about the refinancing options it was offering him, and gave him a menu of programs to choose from in terms of repayment terms (five, 10, 20 years, etc.) and interest rates (fixed or variable). SoFi also helped Aaron understand what his monthly payments would look like for each option, and how much he would pay in total (and how much he would save) depending on which option he chose. No other lender, federal or private, had ever been so comprehensive and helpful in walking Aaron through his options.

Aaron decided to submit an application for a SoFi refinancing loan. In a smart move, Aaron decided only to refinance his high-interest private Wells Fargo loan; he did not include his federal student loans in the refinancing, as he knew that he would lose out on important federal student loan benefits like income-driven repayment and Public Service Loan Forgiveness.

The SoFi Application Processing

Aaron was not a fan of how SoFi processed his application, however.

First, SoFi denied his refinancing application. Even though Aaron was refinancing a relatively small amount of debt, had excellent credit with a score of nearly 750, and a good job with a steady income, SoFi determined that Aaron was not a good candidate for refinancing – possibly because of his debt to income ratio, or because of his limited credit history (Aaron had only been out of college for a few years). SoFi suggested that Aaron re-apply with a co-signer, however. He did, and he was pre-approved.

To finalize the application process, SoFi required that Aaron and his co-signer submit documentation of their income. They did so. However, SoFi did not respond for weeks. Aaron followed up, and was told that they had his documentation, but it was out of date now since they required very recent documentation of current income. Aaron and his co-signer then re-submitted their information to SoFi. Again, SoFi did not respond for weeks, and again, Aaron had to affirmatively follow up. Yet again, SoFi required that they resubmit their documentation. This cycle happened at least once more before the documentation was finally accepted and the process could move forward.

The entire application process took nearly four months, and Aaron found this extremely frustrating. He felt that his application was repeatedly “mishandled,” and he needed to engage in “constant hair-pulling” to get SoFi to move his application along. Aaron was quite disappointed with this, especially as compared to his excellent initial application experience.

The Loan Repayment Period

Ultimately, however, Aaron was approved for a refinanced student loan at a 4.99% interest rate – less than half of the interest rate of his previous Wells Fargo loan. Because his monthly payments were going to be reduced so much, Aaron decided to get on a shorter repayment term, resulting in monthly payments of $241/month. This way, Aaron would repay his loan very quickly (five years or less); approximately 75% of his initial monthly payments would go to principal, and it would only go up from there.

Since obtaining the refinanced loan, Aaron has been happy. He has found his loan servicer to be helpful and responsive, although SoFi just switched Aaron to a new third-party loan servicer – MOHELA (and it’s too soon to tell if this servicer will continue to provide the customer service that he’s been accustomed too). Aaron has also been pleased with some of the “fringe benefits” of SoFi, including free career advice, networking opportunities, merchandising, and other financial services.

The SoFi Loan Contract

Aaron’s story about his SoFi experience was certainly interesting, but I couldn’t wait to get my hands on the SoFi loan contract to investigate the terms and conditions. What I found was quite eye-opening.

The Good

• SoFi does an excellent job of warning borrowers about the dangers of refinancing federal student loans. By including a federal student loan in a private loan refinancing program, borrowers may be giving up important rights and options including income-driven repayment and profession-based loan forgiveness programs. SoFi provided Aaron with a “warning” page spelling out all of the possible dangers, and also included a detailed disclosure in the loan contract.
• There is no pre-payment penalty if Aaron decides to repay the loan early (which he intends on doing).
• There was no origination fee for Aaron’s loan. This was pleasantly surprising to me. Origination fees are often charged on private student loans as a percentage of the total amount refinanced, and it is a charge that the borrower must repay. Aaron’s refinanced loan through SoFi was, essentially, free.
• SoFi’s loan contract with Aaron provides for 36 months of deferments, as well as hardship-based forbearance. A SoFi forbearance can only be requested in 3-month increments, but there is no cap on the total amount of forbearance a borrower can request. This differs from many other private student loan contracts I have reviewed, which often cap forbearance at 12 months or less.
• SoFi’s loan contract also provides for modified repayment terms at the request of the borrower, including graduated plans and even income-driven plans, which I almost never see in private student loan contracts.
• There are also discharge options spelled out in the loan contract for death and disability. Such options are often absent in many private student loan contracts.

The Bad

• The default clause in SoFi’s contract is remarkably severe. Default can occur after being only 30 days past due on a payment. In contrast, federal student loan borrowers can be delinquent for 270 days before default occurs, and many private student lenders do not consider a loan to be in default until the borrower is past due for 90-180 days. A 30-day default threshold is, in my opinion, extremely and unfairly short. The default clause also allows SoFi to add collections charges to a defaulted loan.
• Even more troubling is that the loan contract allows SoFi to publicly disclose a default to relevant SoFi investors. This makes me significantly concerned about the borrower’s privacy.
• There are no default resolution options built into the SoFi contract.
• The SoFi loan contract also specifically states that the loan is an “educational loan” for bankruptcy purposes, which means that if the borrower ever tries to declare bankruptcy, it’s going to be difficult to discharge.
• The SoFi contract also has a mandatory arbitration clause for any disputes. Such arbitration clauses are often not favorable to consumers because consumers must incur the costs of arbitration, and arbitration is, by definition, outside of the judicial system with no recourse, often in forums that are not consumer-friendly. Under the terms of the contract, a borrower can request a waiver of the mandatory arbitration clause, but they must do so within 60 days of signing the contract.

The Unknown

• Luckily for Aaron, he has not yet encountered a financial hardship or other circumstance that has put him in the position of having to request any relief from SoFi in the form of a deferment, forbearance, or modified repayment plan. The loan contract makes clear that SoFi has “discretion” in granting any such relief (in contrast to federal student loan programs, where borrowers have a statutory right to certain forms of relief). Thus while I think it is great that the SoFi contract contains such an array of options for borrowers in distress, I cannot say with any certainty whether these are truly strong protections.
• Aaron has never missed a payment, so we don’t know how aggressively SoFi enforces its strict default clauses.
• SoFI has just switched Aaron’s third-party student loan servicer to MOHELA, and it’s too early to say whether MOHELA will provide the same level of customer service that Aaron has grown accustomed do.

Conclusion

Aaron told me that despite his bad experience with the application process, he has been quite happy with SoFi. Given the widespread discontent with student loan lenders and servicers, I think this says a lot: even having had a bad experience, Aaron is happy with his lender and would recommend SoFi to others. And we cannot ignore the numbers: there is no question that by refinancing his loan with SoFi, Aaron will save a lot of money.

Speaking for myself, I was particularly happy about SoFi’s disclosures about federal student loan refinancing, as well as the array of options for borrowers in distress including deferment, forbearance, modified repayment plans, and discharge, all of which were included in the SoFi loan contract. These types of relief are noticeably absent in the private lending world, and it was refreshing for me to see a private student loan contract containing these provisions.

Nevertheless, I think it’s still too soon for me to endorse SoFi. The default-related provisions I found are extremely concerning to me. And since SoFi has the final say on whether to grant any relief to borrowers in distress, and Aaron has never been in distress, I do not know whether the excellent customer service experience Aaron has had so far would continue if he started to encounter financial difficulties. I have also yet to see a defaulted SoFi loan, so I do not know how forgiving or aggressive SoFi would be in that context.

Ultimately, we’ll just have to see how these new programs play out over time. Keep following this blog for updates as I get more information.