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I'm considering refinancing some student loans with SoFi from a variable rate of 6% (based on the LIBOR) down to a variable rate 4.16% (based on the LIBOR). The new rate, once I setup auto-pay will include a 0.25% rate reduction, bringing the effective rate to 3.91%. This isn't much related, but in my situation I can't really afford the payments on a fixed-rate (shorter term) option. Since SoFi isn't one of the big banks, it's a bit of a double-edged sword to me. They have better interest rates (as far as I can tell) than big banks, but they're not all that well known (e.g. searching for news stories on SoFi). I've tried to figure out if there's any catch, and I haven't found one yet (e.g. there are no pre-payment penalties). Still, I find myself wondering "Is it too good to be true?" Or, the converse, is there a better P2P lender than SoFi?

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    Are you currently of a variable rate of 6% or a fixed rate of 6% ? – Victor May 12 '14 at 3:54
  • A variable rate of 6% – blong May 12 '14 at 5:05
  • Updated question, since both rates (which are variable) are based on the LIBOR. – blong May 12 '14 at 11:59
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Having looked into SoFi loans myself, I have found a few drawbacks. It may still be worth it overall to grab a better rate, but if a student is going from federally guaranteed loans to private loans, then some of the benefits will go away as well. This is part of the reason private loans may present such a cost savings, since the debtor is ceding certain privileges.

From the SoFi materials:

  • Private education loans are not eligible to be included in a Federal Direct Consolidation Loan.

  • You may be able to consolidate your outstanding federal loans into a Federal Direct Consolidation Loan. The current interest rate for a Federal Direct Consolidation Loan is the weighted average of the interest rates being consolidated rounded up to the nearest one-eighth of one percent.

  • Think carefully before taking out a SOFI LENDING CORP. ReFi Education Loan to pay off your federal loans. If you refinance your federal loans through this SOFI LENDING CORP. ReFi Education Loan, you will not be able to select income contingent repayment or other flexible payment plans that are available to federal student loan borrowers. In addition, federal student loans offer deferment and forbearance options that are not available to you if you take out a SOFI LENDING CORP. ReFi Education Loan.

  • See Studentaid.ed.gov for a description of the benefits and repayment options available to federal student loan borrowers.

This is in addition to the question of rate variability. Federal loans have protections, such as forbearance, income contingent payments, income-based repayment, and so forth. Some federal loans will be low-cost for ten years and then forgiven after that if you are employed in certain professions (e.g. government employee) for the duration. Private loans will generally not have so many protections and options, part of the reason they can cost less.

However, for someone who is already paying a private loan, this is not a drawback.

There are also questions of comparing variability of loans. If the repayment term is the same, then the variable rates may be directly compared (obviously, one would never compare the rate for a 180-month repayment schedule directly to the rate for a 120-month schedule). But the details may differ as to the max rate, min rate, or the speed at which the rate floats. These are important details for loans that still have five or ten years of life in them.

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The biggest caveat is that the rates are variable. I.e.: when the Fed's raise the interest rates - yours will go up to. The rates now are at their lowest, so it will only go up from here. Fixed rates may be higher, but are fixed and will never change.

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    The OP is currently on a variable rate of 6% and wants to move down to a variable of 3.91%, unless this is a typo! – Victor May 12 '14 at 3:54
  • Yes, but how does it change my answer? – littleadv May 12 '14 at 5:05
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    Well that could depend on what rate a fixed loan would be at. At the moment the OP is comparing 2 variable loans. So even if the OP does not change loans he/she will still be on variable. In fact the OP says he/she cannot afford a fixed rate option. – Victor May 12 '14 at 5:29
  • Fixed rates are at 6.74% highest for the longest term, I don't believe the OP can't afford the 0.74% increase for stability. Shorter terms/better credit can get him lower rates. Within the next 15 years the rates will increase. Regardless - the fact that he has variable rate now doesn't make it any less dangerous. – littleadv May 12 '14 at 5:31
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    That may depend on the size of the loan and how long it takes to pay off! This information is not provided. – Victor May 12 '14 at 5:41
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Some historical insight may offer some explanation to the SOFI phenomenon. When they first launched they constrained their lending to strictly top level universities. I remember because I had graduated from a top university and was hit with marketing material. I remember at the time (9/2014) the term HENRY (High Earners Not Rich Yet) was introduced, I can't recall if it came directly from SOFI literature or stuff I looked up about them online, but I do vaguely recall them making the distinction about their competitive advantage in first confining their liability risk to folks from good colleges with good degrees and with good careers even if early in their work history. All of that applied to me. I didn't really have much of student debt but my wife did but they wouldn't allow me to refinance for her. They had some promo too for our alumni group or something, some kind of perk for $3k off your loan or something if you refinance with them. Several years later I see they're sending their SOFI letters much more broadly. My sister and wife and brother and law had such letters sent their way.

I just searched a few minutes ago for "SOFI HENRY" and it seems there's still a bit of that association floating about. Perhaps their success with the early HENRY adopters has paid off and they've widened their pool of student debt more broadly.

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    Marcus by Goldman Sachs had a similar roll-out by only targeting low risk customers. – TTT May 26 '17 at 16:56
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As far as the 'too good to be true' goes, if you're looking at the advertised rates, wait until you look at their actual quoted rate for you specifically before you decide it sounds too good to be true.

I have great credit (700-760 ish depending on which of the 3) and a reasonably high income, and a lot of the student loan refinancing companies would advertise "Fixed rates as low as 3.xx%", but when I actually got a quote from them they offer me a rate of 5.75% or something similarly high, which isn't nearly as great as what they were advertising. I am not sure how their credit decisions work, but the rates they advertise are for the absolute lowest risk pools possible, and 'normal' people will often receive a less appealing rate.

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