Low Risk for SoFi Means Higher Risk and Rates from Government

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Oh HENRY! Is SoFi Creating a Caste System for College Graduates

Nov, 1st 2016

A recent New York Times article stated that SoFi, the online lender and largest private student loans refinancer in the country is trying to attract a specific cohort of student debtors called “Henry’s.”

"HENRY" or High Earning Not Rich Yet, are the exact profile of customer SoFi will loan to. This is a person who just graduated from college with a degree that leads to a high paying job. These occupations include computer programmer, lawyer, doctor and finance specialist to name a few. Generally speaking, these are recent college attendees or graduates with great earnings potential because of their education and specialty with a high probability of becoming rich over time, but aren’t quite there yet.

For all others with student loans, SoFi will deny applications to refinance student loans. That may sound like hyperbole, but it’s not. If you want to borrow money from SoFi to refinance your student loans, you should make more than $142,000 a year. And although SoFi claims it doesn't look at FICO scores in the loan approval process, in practice, people who want a SoFi loan need a 780 FICO score or better in order to get it.

For instance, if somebody who dropped out of college to take a high paying job as a programmer in Silicon Valley wants to refinance their student loan, SoFi can reduce their payments by charging less in interest. Potentially down to as low as 3%. Technically the programmer doesn't need the loan, since their high paying job will allow them to pay regular interest if they make at least $142,000 per year, but how often do people pass up a chance at free money?

Now consider a person who did graduate from college with a degree in Education. That person will be handling one of the most difficult and important jobs for the future of our country: Educating the next generation of HENRY’s.

But because they will likely make a lot less than the programmer who didn’t even graduate, SoFi won't lend a penny to that person. Sure, the teacher may be able to apply for a federal program that forgives part of the student debt, but that teacher will struggle to pay taxes on loan forgiveness, since it will likely be viewed by the IRS as income.

And what about people who are not teachers and thus can't apply for a federal forgiveness program? A Journalism major, or an Engineering major, for example? SoFi won't loan them money either. Not unless they make enough money.

So why does SoFi restrict themselves to such a seemingly small group of student debtors? 

SoFi only lends money to people who show very low risk of defaulting on their loans. Rich people, or in this case HENRYs, fit that description perfectly. SoFi doesn't use its own money for loans. The money used to fund these refinanced student loans comes from investors, so the more they can guarantee a return on their investor’s money, the more investment they receive. What better way to guarantee a loan than by lending money to people who have the highest probability of becoming rich in the not too distant future?

Is it worth it to get a loan from SoFi? It’s really a personal choice.

Sure, if you could slash the interest on thousands of dollars of school debt you would absolutely take a 3% refinancing loan. But there is something to be said for the fact that high earners, who can pay back their federal loans in less time, would help future students with federal loans by paying their interest back to the government which enables them to make lower interest loans to future students and enables the federal government to forgive more debt for lower earning graduates.

Why should a “HENRY” care about this? 

In most cases they won’t, but in the end, what SoFi is doing is removing high earners from the pool of students who can afford to pay back their loans at regular interest rates. In doing that, banks and the federal government are left with high risk borrowers taking out loans funded by our tax dollars to pay for the educations of our lowest earning graduates. Eventually, if the SoFi model continues to grow, that will only force banks and the government to raise interests even more in order to compensate for this level of risk, which will only make it harder for lower income earners to pay their loans. In essence, SoFi is creating a post-college financial caste system that will inevitably add to the growing income inequality America currently faces.

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