Most of the Money Wizards out there are among the younger crowd, which means a lot of you have an unfortunate something in common: student loans.
While I was lucky to avoid these demons thanks to extremely generous parents, my brother, who pursued higher education than my slacking self, graduated with exactly $100,000 in debt.
I consider him a bit of an expert on the subject, since he paid down over $50,000 of student loans in just two years.
So when he told me his only regret was not saving money by refinancing through SoFi, I took notice.
If you’ve been watching TV, chances are you’ve seen commercials for SoFi, the student loan refinancing service. SoFi is making some pretty bold claims, the most eye popping being that the average user saves $17,208 by refinancing their student loans through the company.
Now, just because something is on TV doesn’t make it legit (Applying Head On Directly to the Forehead, anyone?) so I thought I’d dive into whether you can really save money on your student loans with this website, and whether or not you even want to.
If you’re busy and/or don’t care about the details, I’ll save you some time: SoFi is in fact legit, and if you’re feelin’ the Bern of student loans, don’t look for a politician to save you – you can in fact save thousands by refinancing those student loans to a lower rate.
Plus, you’ll get $100 free by registering through my referral link.
For the curious among us, read on for details.
What is SoFi?
SoFi, short for Social Finance, is changing the game of student loans by offering refinancing and consolidation of both federal and private student loans. Now SoFi isn’t the first company to offer refinancing, but they are revolutionary in their remarkably low interest rates.
- Fixed rates as low as 3.50%
- Variable rates as low as 2.23%
Refinancing options include 5, 7, 10, 15, and 20 year terms. The shorter the term, the lower the interest rates.
As someone who works in banking, SoFi isn’t balking when they claim to have dirt cheap interest rates. And those rates certainly mop the floor with the standard 6.8% federal rates for my generation.
An interest rate deduction that big is HUGE for your finances.
Imagine the hypothetical recent grad with $50,000 in loans at the government unsubsidized rate of 6.8%. By refinancing from 6.8 to 3.5 percent, he can reduce his payments by almost $1,000 every year!
So, how are SoFi’s interest rates so low?
SoFi sells the loans to private investors, who may be willing to take on lower rates than the federal government or private provider that is currently funding your loan. They also have relatively strict underwriting standards, which reduces some of the risk and allows them to operate on tighter margins.
This makes sense, and is common practice in the lending industry, but predictably, makes too much sense for the federal government.
Someone with a good job, strong cash flow, or strong credit history does not pay the same interest rate for a home loan or business loan as someone who does not, so why should an unemployed interpretive dance major pay the same student loan interest rate as a Stanford MBA ready to go back to work making well over six figures?*
*SoFi founder Mike Cagney admits he was inspired to start the company after speaking with the Stanford financial-aid office, who admitted nobody from the business school had defaulted on a single student loan in 30 years.
Does SoFi cost money?
The short answer is no, moving your loan over to SoFi is free.
A lot of banks make up for cheap interest rates with high fees. SoFi is not one of them. Refinancing with SoFi has NO origination fees, meaning they do not charge you to apply or refinance your loans.
I often see another tricky move in the banking world, and it’s called the “prepayment penalty.” Bankers can include these in your loan agreement, and they are basically terms on how long you have to keep your loan.
Prepayment penalties contractually forbid you from freeing yourself from debt as quickly as possible. In the world of Money Wizards, these things might as well be Voldemort.
Loans refinanced through SoFi carry NO prepayment penalties.
No origination fees and no prepayment penalties is epic.
How does SoFi make money then?
Although SoFi is pretty revolutionary in that they’re a banking business that actually does seem to care about their customers, they are still a financial institution making money off the spread imbedded in your loan.
In other words, SoFi might pay its private investors 3% each, while they loan money to you at 3.50%. That 0.50% spread is their profit.
You just said a bank that cares? Yeah right.
I had the same initial though. Hooray for us skeptics!
After digging around, I actually believe them. SoFi offers a ton of unheard of benefits for its borrowers, including:
- Unemployment protection (SoFi will pause loan payments while they help you find a new job)
- One on one career coaching
- Resume workshops
- Up to 6 months of loan deferment for starting entrepreneurs
- Skydiving for singles (Hey, they like to have fun too!)
And a host of other benefits. From a business perspective, this makes sense. Lenders want you to pay them. To pay them, you need a job. To get a job, you need skills and connections.
This sounds scary, can I just check my interest rate without committing to anything?
Yep, you can check to see your interest rate and approval in less than 2 minutes, for free. And just looking at your options uses a “soft pull” on your credit, meaning checking your interest rate will not hurt your credit score.
You won’t be obligated to take a loan just from applying either. Only once you accept the refinance and continue from there will things get official.
So these guys are legit, or is some website going to take my money and run?
Well for one, you’re not actually paying SoFi anything to start, since they have no origination fees. Nothing comes out of your pocket until you make your first (and lower) interest payment.
But you can ease those fears, because SoFi is as legit as they come.
To date, they’ve funded over $12 billion in loans. That’s approximately $760 million in savings for their 150,000 members.
No need to worry about Nigerian Princes either. SoFi has a full management team and board of well known billion-dollar hedge fund managers, private equity fund owners, venture capitalists, MIT engineers, and even the former co-CEO of Duetsche Bank.
Even Head On couldn’t muster up a SuperBowl commercial.
Who is eligible?
There are a few generic eligibility requirements right off the top:
- You must be at least the age of majority and fit to enter a contract
- You must be a US citizen or permanent resident
- You must be employed or have an employment offer to start within the next 90 days
- You must have graduated from an accredited Title IV university or graduate program
- Residents of Nevada are not eligible at this time
The minimum eligible student loan amount was recently lowered to $5,000.
What’s the catch?
Not a catch per say, but two things to keep in mind:
1) Federal Federal student loans do have some benefits, including income based repayment and loan forgiveness for public service employees. I am not a huge fan of either benefit since they principally kick the debt burden down the road, but in certain situations these benefits can be beneficial. Do know that you are signing away these federal benefits any time you refinance outside of the federal government.
2) That alluring near-zero variable interest rate. These extremely low variable interest rates are an incredible deal and for certain people a great choice, but do know what you are taking on.
Variable rate loans are tied to the economy’s interest rates as a whole. Given that interest rates are near an all-time low right now, it is reasonable to assume that interest rates will eventually rise.
I am not a policy maker for The Fed, so I can’t say (nor can anyone else) with certainty what interest rates will do in the immediate future. However, it is reasonable to assume they will rise at some point. Exactly when and how high is anyone’s guess.
SoFi variable rate loans are capped at 8.95% for 5 to 10 year loans, and 9.95% for 20 year loans. Unless you have done careful analysis and are absolutely positive you can afford those rates, stick with the fixed rate product. You won’t ever have to worry about your monthly payment rising, and the predictability of knowing your exact payment required makes for easier budgeting
SoFi is offering up a great product here. Wall Street Journal described them as the Uber of the banking world, and I see the correlation. They are upsetting an old, stale, status quo business model, and providing an incredible benefit to their customers in the process.
Because checking interest rates is completely free, doesn’t impact your credit score, and puts you under no obligation to accept a loan, I highly recommend you at least explore what your options are.
Not only could this save you tens of thousands, but by refinancing through my referral link below, you’ll get $100 free!
Financial Panther says
I did similar to your brother in failing to refinance right away. I didn’t really know much about personal finance or student loans when I graduated (other than to pay it off quickly), and when I finally did learn about SoFi, I dragged my feet for a while.
But refinancing is super easy. Ended up cutting my rate down from a 6.8% and 7.9% rate down to 4.3%, which really helped me to pay down my debt faster.
If you’re in a field where you definitely aren’t going to get loan forgiveness, then I’d always recommend refinancing right away. Most folks in high earning professions, which is what SoFi is looking for, aren’t going to be able to get loan forgiveness anyway.
My last bonus with refinancing with SoFi are the member meetups. SoFi holds quarterly meetups where they have free dinner and drinks at fancy restaurants in whichever city you’re in. And you stay eligible to attend these even if you’ve already paid off your student loans.
Ms. FP and I always enjoy a free dinner at a fancy restaurant every 4 months at a place we’d never be able to afford. A nice little perk that most people don’t know about.
The Money Wizard says
Very cool FP! Thanks for the inside scoop.
*kinda wishing I had student loans now just for those fancy dinners* haha!
I referred my buddy to this based on your posting, but when he called, SoFi told them they will only keep him at his current rate of 6% and extend his payment to 20-years (instead of 10) so his monthly payments are lower. They also said that he has a history of paying down his student debt more than the minimum, and they don’t approve of that! Maybe they’re not as great as you make them sound after all…
The Money Wizard says
SoFi makes no qualms about cherry picking high quality borrowers, so not everyone will qualify for the lower rates.
I haven’t seen anything about accelerated interest payments being detrimental on an application, so that’s a little strange. I’ve contacted a SoFi rep to clarify, and I’ll let you know what they say.
I refinancied via SoFi last year after receiving information via mail and seeing the site referenced on the MMM blog. I refinanced just shy of $30K in graduate student loans at rates of 7% and 7.5%. Via SoFi I chose the fixed interest rate and now sit at 5.74%. I make the same monthly payment I was used to, but it is amazing to see how much further that money is going with a lower interest situation. Over the summer we poured extra money onto the loans from my husband’s overtime and now I’m resting at $21K to pay off. That is $9K cleared in just 1 year!
SoFi was great to work with. I made a lengthy list of questions, called, and immediately had the help I needed. My only complaint is that my loans are now being serviced by MOHELA, the Missouri Higher Education Loan Authority. Their website is dated and tools are somewhat hard to find. A simple change to my monthly payment date set off a chain of events that led to my payment amount being dropped to a lower amount, thus stretching the loan life further. It took two phone calls and yet another form to correct this. The also have a very weird “WARNING” message that attacks you anytime you make an extra payment outside the normal parameters of the monthly setting. It seems almost like they are trying to trick or scare the consumer away from making extra payments.
I have heard from two friends that SoFi was not a better interest situation. These friends have less stable income flows and tend to carry credit card debt, so SoFi wouldn’t lend to them favorably. I am hoping to see more groups like SoFi come to the marketplace to drive a little competition and perhaps open options to riskier borrowers.
I stumbled upon this WSJ article that other might enjoy: http://www.wsj.com/articles/online-lender-sofi-launches-hedge-fund-1457480960. It looks like big shifts in structure might be coming to this marketplace, so check out your options now with the interest rate check tool mentioned above.
The Money Wizard says
Thanks for the first hand info MontanaA! And great job killing those loans, keep it up!
I had looked into SoFi as well after seeing the great marketing about their low interest rates. The problem is that you have to have at least $30,000 in loans to qualify for their low rates; me having $29,750 in loans, just short of the threshold, was offered rates of 6-7.5% which is more than the rate I’m paying the government. Stinks.