SoFi Technologies has leaned on personal loan originations and other budding segments to pad its balance sheet as the federal government's student loan moratorium tanked its bread-and-butter business over the past three years.
But the clock may be ticking on how much longer the fintech can rely on its back-up plan. Building additional business lines takes time, and the Biden administration's actions continue to hamper SoFi's student loan refinancing segment.
Now, the San Francisco-based neobank is suing the U.S. Department of Education to end the moratorium on federal student loan payments, claiming that the latest extension of the payment pause is "unlawful on multiple grounds" and has directly harmed its business.
SoFi alleges that the moratorium has eliminated the appeal of its student loan refinancing business to potential customers. Previously, the neobank could refinance private and federal student loans at competitive interest rates, but borrowers who refinance out of federal loans must waive the related benefits, including the payment pause and President Biden's proposed student loan forgiveness plan.
The loan moratorium has cost SoFi a minimum of $150 million in profits since March 2020, the fintech said in its lawsuit, which was reported earlier by Bloomberg Law.
SoFi has relied on personal loan originations, fees and the bank charter it acquired last year to make up for steady decreases in both its student loan and mortgage businesses, CEO Anthony Noto has said on recent earnings calls. The company exceeded the revenue guidelines it set for 2022, in part by growing its balance sheet significantly, but it's unclear how much longer that will be sustainable.
In the lawsuit, filed Friday in U.S. District Court in the District of Columbia, SoFi called for student loan payments to resume, or, "at minimum," for the moratorium to end for borrowers who are ineligible for Biden's student loan forgiveness plan.
Noto has said on recent earnings calls that he doesn't expect the loan forgiveness plan to impact most of the company's borrowers, who are mainly high-income, high-FICO score consumers. Biden's plan, currently in flux as it awaits a ruling from the U.S. Supreme Court, could relieve up to $10,000 of debt per borrower, and is subject to income caps of $125,000 per individual and $250,000 per household.
"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," a SoFi spokesperson wrote in a statement. "However, it's time for the Administration to follow through on its word to end the federal student loan payment moratorium … or at a minimum, put those not eligible for forgiveness back into repayment."
Although SoFi is one of the more diversified neobanks in the market, student loans and other forms of credit make up about 70% of its revenue, said Keefe, Bruyette & Woods analyst Michael Perito.
"SoFi has been able to manage through this pretty admirably," Perito said in an interview. "You're essentially talking about their longest-tenured and most profitable business being turned off. The way they've managed to do that is by taking a lot of market share as a personal lending business … and trying to fill the gap from the student lending drop-off."
SoFi originated $2.2 billion in student loans and $9.8 billion in personal loans last year, flipping its primary business mix on its head.
In 2022, SoFi originated approximately one-tenth of its student loan refinancing volume compared with 2019, according to the company's lawsuit. The firm estimates it has lost $300 to $400 million in total revenues from its federal loan refinancing business, not including potential growth that the business could have seen.
Prior to the loan moratorium, SoFi originated about $450 million to $500 million of refinanced federal student loans per month, the company said in its lawsuit.
Student loan refinancing was SoFi's revenue engine, and Perito said he thinks it was the most profitable line of business at the company, but SoFi also offers personal loans, home loans, credit cards, investing services and insurance, among other banking products.
SoFi ended 2022 with $19 billion of assets, up from $9.2 billion the previous year. But Perito said that type of shift isn't sustainable, and it's unclear how much longer SoFi can leverage its capital to that degree.
Perito said SoFi has still impressed investors, and it has a promising growth plan in its other segments aside from lending. He said it would help the company if it could rely more on its technology and financial services segments, which are currently operating at a loss.
The company said on its latest earnings call that it has been "investing aggressively" in its financial services segment, which offers products like checking, savings and cash management, and it expects the line of business to turn a profit in 2023 after nearly breaking even in the fourth quarter.
"It's not like student lending or bust," Perito said. "But realistically, that's a business that, if the environment normalizes, they could turn that back on way quicker than they could improve anything else."
The eighth extension of the payment moratorium is slated to last until 60 days after the Supreme Court's ruling or 60 days after June 30, whichever comes first. Previously, the White House has justified the moratorium by pointing to a post-9/11 law that allows the Department of Education to "waive or modify any statutory or regulatory provision" to protect borrowers affected by "a war or other military operation or national emergency." The Trump and Biden administrations have cited the COVID-19 pandemic as the national emergency when implementing and extending the moratorium.
SoFi argued in its suit that the latest extension of the moratorium wasn't due to harm from the pandemic, but instead to alleviate "uncertainty" as Biden's debt cancellation program remains in legal limbo. SoFi also said that the latest extension was announced without a mandatory notice-and-comment period.
Perito said that he thinks the loan moratorium could be extended indefinitely, and he doesn't expect a quick resolution to SoFi's lawsuit, either. He said the lawsuit shouldn't have much effect on the company's stock price. As of Wednesday morning, its value has dropped about two percentage points, in line with the market.
For investors, student lending generally has lost value due to the political uncertainty around the business, Perino said.
"It does put SoFi between a rock and a hard place because on one hand, you have this business that was…what they were known for," Perito said. "They want that business back. They want the revenue back so they can invest and grow and hit their profitability targets. But on the other side of the coin, it's never going to generate the type of market valuation that it could have potentially before this all happened, at least over the intermediate term."
