This week, student loan refinance giant SoFi filed a lawsuit to end the federal student loan payment and interest pause.
Unsurprisingly, borrower advocates and the Biden administration swiftly responded to the lawsuit. The Education Department called it “an attempt by a multi-billion dollar company to make money while they force 45 million borrowers back into repayment.”
Surprisingly, the real winner in this unexpected turn of events is Joe Biden.
Biden’s Win-Win Scenario
Whether or not the judge rules in favor of SoFi, Joe Biden comes out ahead.
If the court rules against SoFi, it is an obvious big win for Biden. When he hits the campaign trail next year, he can justifiably boast about how he stood up to a multi-billion dollar bank on behalf of borrowers. Further, a Biden win in court would save money for millions of Americans.
If the court sides with SoFi, it is still a win for Biden. Losing in court isn’t something to brag about, but having a judge mandate the end to the payment and interest freeze is still a good outcome for Biden. Before the lawsuit, it appeared that repayment would start around September 1 for millions of student loan borrowers. Those that found themselves in an immediate financial hardship because of the restart might blame Biden for this new challenge. Losing to SoFi provides excellent political cover.
The benefit for SoFi is less apparent.
Why Would SoFi End the Pause?
The basic analysis from the SoFi perspective is pretty straightforward.
SoFi must have concluded that the potential revenue from ending the pause earlier than planned is greater than the cost of litigation.
This conclusion is somewhat surprising.
First, the pause is currently scheduled to end in June at the latest, with payments resuming 60 days later. Litigation is notoriously slow, so even in the best-case scenario for SoFi, the restart may not happen much earlier than originally scheduled.
Second, the cost of litigation for SoFi is high. The legal fees incurred by SoFi could be pretty substantial. Additionally, and perhaps more significantly, SoFi is tarnishing its brand by bringing this lawsuit. SoFi has built its brand around helping millennials and gen-z take control of their finances. Now SoFi is filing a high-profile lawsuit that could hurt millions in their target demographic.
At least some borrowers are angry with SoFi:
@SoFi I am a customer almost finished with my personal loan payments but if you sue to end the student loan pause so you can make more money I will never do business with you again. I alway thought I would look into other products because you are different. You are not
— Dr Dragon Slayer (@DrDragonSlayer4) March 7, 2023
It will be interesting to see how the damage to the SoFi brand compares to any benefits they receive by filing this case.
Another Motivation for SoFi to End the Pause?
SoFi’s biggest fear might be that borrowers and the general public realize that student loan repayment hurts borrowers far more than it helps government coffers.
The pause allowed borrowers the financial flexibility to start businesses, buy homes, and even start families. This is good for the borrowers, but it’s also good for the economy at large.
If an economic analysis of the pause shows that it benefits all, there might be a strong argument for more debt cancellation. Such an event could be devastating to SoFi’s bottom line.
Likewise, SoFi may fear that the Biden administration will indefinitely continue the payment and interest pause. They may think that filing the lawsuit is the only way to get the borrower relief to end.
Did the Biden administration want this lawsuit to happen?
The Department of Education had clear authority under the HEROES Act to extend the payment and interest pause during the pandemic. Then they made two decisions that weakened their justification for an ongoing pause. First, they declared an end to the pandemic, which certainly hurts their argument for a continued pause under the HEROES Act. Second, perhaps more egregiously, they announced that the latest extension was to provide time for the Supreme Court to hear the case.
This latter part is the crux of SoFi’s argument. SoFi says there isn’t a statutory basis for extending it to allow the Supreme Court to resolve the one-time forgiveness. On this point, SoFi could be right. Had Biden said that millions of borrowers are still trying to recover from the financial hardship of Covid-19, SoFi’s case would have been significantly weaker.
Some might say that Biden was honest and transparent about his decision to extend the pause. Those who are more cynical might say he cleverly acted the way he did to bait a company like SoFi into filing the lawsuit they did.
Now that the lawsuit has been filed, Biden wins no matter how the court rules.