Another Lawsuit Imperils Biden’s Student-Loan Schemes

E arlier this week, SoFi, a private student-loan-refinancing company, unexpectedly filed suit against the Biden administration, arguing that its ongoing pause on student-loan repayment is unlawful. This comes on the heels of the Supreme Court’s hearing arguments in two cases challenging the legality of the administration’s plan to cancel student debt altogether. While the White House is keen on moving forward its agenda on student-loan relief, absent support in Congress for legislative action, even within the Democratic Party, it will be stuck making changes using dubious legal authority that will result in a stream of legal challenges that may thwart its efforts.

Congress put repayment of federal student loans on pause at the onset of the pandemic — authorizing a temporary freeze on the collection of federal student loans with the Coronavirus Aid, Relief, and Economic Security (CARES) Act. CARES halted interest accumulation and allowed borrowers to take a break from monthly payments without penalty. The move made some sense at the time, given the highly uncertain economic environment and concerns over the robustness of the existing safety nets for borrowers.

President Trump used executive authority to extend that pause when the initial legislative fix expired. And President Biden has been extending the pause periodically throughout his term, seemingly without regard to whether this $5 billion per month intervention is economically justified. By the end of the current extension (expected late this summer), the pause will have cost the nation an estimated $195 billion.

SoFi, which filed the legal challenge against this effort, is a private financial firm that has made a business of refinancing federal student loans at lower interest rates. Its business model exploits the fact that the interest rate charged in the federal loan program is higher than the market interest rate for some borrowers, namely those with high earnings and good credit. These borrowers can refinance their loans (essentially taking on a new loan with better terms and paying off their debt to the Department of Education) similar to how a homeowner would refinance his mortgage if interest rates fall relative to when he first signed the mortgage or if his credit score improved.

Here’s the catch: Borrowers who refinance their loans with SoFi lose all the protections that come with having their loan owned by the government; that includes being eligible for the safety nets afforded to borrowers by the federal student-loan program and potential eligibility for any future loan-forgiveness programs.

At the outset, this wasn’t a huge liability for SoFi. The safety net for borrowers wasn’t exceedingly generous, and borrowers who could benefit from refinancing with SoFi generally wouldn’t have needed to take advantage of it anyway. But the growing desire to relieve borrowers of their obligation, both from the White House and congressional Democrats, is affecting this dynamic.

The repayment pause, which has now lasted for nearly three years, has been especially damning to the company, as borrowers who are currently afforded an effective 0 percent interest rate paired with no payments due in the federal loan program would be foolish to refinance their loans in the private marketplace.

In its filing, SoFi claims that the repayment pause has caused the company enormous damages, with the initial onset of the pause instigating a precipitous drop in volume of 75 percent and a loss of $300 to $400 million in total revenues & $150 to $200 million in profits since March 2020. With even a slim understanding of the marketplace, it’s obvious how the pause has harmed SoFi’s business.

SoFi does not argue that the entirety of the pause has been unlawful. Rather, it argues that the last extension, enacted explicitly to give time for the Supreme Court to rule on the legality of President Biden’s student-loan-cancellation plan, exceeds the authority granted by the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. This is in contrast to previous extensions, which the White House argued were justified by the continuing national emergency caused by Covid-19. Pinning the extension to the national emergency allowed it to fall under the authority explicitly granted by the HEROES Act.

Even if the White House wanted to revise the justification of the latest extension of the pause, it would be a hard sell considering that the White House announced it would end the Covid-19 national emergency on May 11. A pause on student-loan repayment that extends beyond that date would be even harder to justify on the basis of an ongoing pandemic.

Why would SoFi, a company that relies on its good name to recruit clients, aim to strike down a program that would hurt the people it aims to please?

Partially because SoFi really doesn’t have a lot left to lose. As the generosity of the student-loan program continues to expand, the opportunity for SoFi’s defining business model to sustain it will continue to shrink. Without a bold stand, the student-loan-refinancing business is destined to shrivel. And if SoFi’s diversification of its business into the consumer-banking marketplace in 2022 is any indication, it already was anticipating this outcome.

The restart of student-loan repayment is overdue, but an abrupt restart of federal student-loan repayment will likely be disastrous. Borrowers are out of the habit of making payments on their debt, and this inertia alone will likely cause a huge share of borrowers to quickly become delinquent on their debts when the first round of payments comes due. It’s also not clear if the Department of Education has done the homework on restarting student-loan collection. The department itself doesn’t collect student loans, but rather contracts with third-party financial institutions — servicers — to collect these loans according to certain specifications. It isn’t clear that servicers are ready or have been properly instructed on how to restart this behemoth of a program, despite the White House promises that student-loan repayment will resume at some point this year.

SoFi is suing over the extension that has already occurred, but the real battle is over what is to come. While President Biden has committed to restarting student-loan repayment once the Supreme Court rules on the legality of his loan cancellation plan, there’s going to be an awful lot of political pressure for him to extend the pause once again. The outcome of this case could have an outsized impact on the future of federal student-loan policy and the financial lives of millions of American borrowers.

Editor’s note: This article originally understated the extent of SoFi’s estimated losses.