Why not refinance your student loans with SoFi?

Chair shadows

Congratulations! Student loan debt in the U.S. has reached $1.5 trillion as of 2018.

That’s a staggering sum, equivalent to $4,600 for every member of the population, including babies. If you exclude babies (and we will, but we shouldn’t let them get away with it again), the U.S. has around 40 million borrowers, so that’s around $37,000 owed on average per person.

I thought it was crazy when I heard that student loan debt reached $1 trillion, back in 2012. That means that in the last six years, the debt has grown by $500 billion, roughly an increase in $228,000 every day, assuming linearity.

Student Loan Debt Chart
Source: Marketwatch

Is your head hurting yet?

Actually, your head was probably hurting already, because chances are that you yourself are one of those 40 million people with student loan debt.

Chances are also that this payment has been around your neck for years, perhaps over a decade. And if you’ve signed up for one of these good-intentioned-but-possibly-self-defeating income-based repayment plans, your loans might actually be growing each month.

Now that’s depressing.

So you may have heard about a company called SoFi, which allows you to refinance your student loans to get a lower rate or a lower payment. And maybe you’ve wondered if it’s right for you.

Now, this isn’t a specific review of Sofi here. There are other companies that claim to do the same thing, such as Earnest. But just like Uber is a proxy name for Lyft and all the other indentured servitude driving companies, I’ll use SoFi to talk about all of them, since they are by far the most well known.

Is it a good idea to use SoFi refinance your student loans? Well let’s see.

How do these private lenders work?

SoFi and other lenders like them are private entities, who by definition don’t issue “federal” loans. They claim to allow you to transfer your existing loans with improved terms to them, with the idea being that you’ll get a better deal with SoFi than you currently have.

Sofi

The rules are fairly stringent, and not all borrowers will be eligible. But if you are, you can replace your loans, federal and otherwise, with private loans through SoFi.

SoFi, so good, right? (Ugh, sorry.)

Pay it off, or pay less?

But before we continue, we need to talk about what you’re trying to do with your student loans.

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I ask because it isn’t always obvious. You say you want to pay them off, and I’m sure you do. But is your short term goal to pay them off, or to pay less each month? These two are often in conflict, and that conflict is right on the SoFi site.

Check it out. In the section marked “Why refinance with SoFi” the first item you see is: “Serious savings”. Below it there is:

“Refinance to a shorter term and save an average of $15,767 over the lifetime of the loan”

Pro tip: You can save money without refinancing too

But that isn’t a reason to go with SoFi. What they are offering is something that is available to effectively everyone, regardless of loan type. A shorter term means that you accelerate your payments, and pay more each month. But you don’t need to refinance to accelerate your payment. The way you accelerate your payments is to … pay more.

(Mortgage refinancing companies do this same trick, and it’s just as pointless.)

SoWhat?

The big reason to use SoFi as I see it is to get a lower rate. And they do advertise low rates. Currently, they advertise fixed rates of between 3.549% and 7.480%, which, admittedly, is kind of like saying “we offer great rates and terrible rates”. You can find out for free which one you’d be eligible for, but you’d better hope it’s closer to 3.549% than 7.480%.

Taking a federal loan private also has some risks as well. While I don’t think much of income-based repayment and possible loan forgiveness options that the government offers, it’s nice to have them as a safety measure. Those go away when you move to a private loans.

The other thing you need to be comfortable with is moving from a system with a long track record to one that is based in the techno-utopia that is Silicon Valley. Will SoFi be around in a few years? Fortune magazine seems to think that lenders like SoFi going to be less useful in the coming years, as interest rates on federal student loans start matching what you would find in the private sector. And the more one learns about SoFi’s first few years, the less it inspires confidence.

It’s always more on you than on the lender

Refinancing to get a better rate isn’t a terrible idea, but it can be misleading, in that you think that you’re actually doing something to pay off your loans. The problem isn’t the interest rate usually, it’s the rate at which you’re paying off your loans. Focusing on moving money around to save a half a point or more feels like you’re accomplishing something, but you might be better off figuring out how you can throw extra money at your loans.

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So I’m not against SoFi, and other companies like them. I think they are offering a service that has some potential appeal, depending on your unique circumstances. If you have private loans, and/or your interest rate is much higher than the average, it might be useful to look into it.

But in general, I don’t think they move your personal needle all that much. I think you’d be better served by trying to find ways to pay off your loan faster. And you don’t need a company to help you with that.

But enough about me. What do you think of SoFi and other lenders like them?

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