What is SoFi?
SoFi is a three-year-old online lender projected to make $4 billion in loans this year across a portfolio that includes refinanced student loans, mortgages, personal loans, and an entrepreneur program.
It got its start in 2011 as a peer-to-peer lender linking up recent Stanford grads looking to refinance their student loans with older Stanford grads with money to invest.
How does SoFi work?
The thinking behind SoFi expands on that original bit of crowd-sourcing and appears so simple on the surface that I’m almost annoyed I didn’t think of it myself.
The idea boils down to linking up two groups:
- Investors sick of the low-interest rate options for their money
- Low-risk student loan borrowers stuck in high-interest rate loans
Interest rates are so low for investors because this has been kept low in response to this being so high as the country continues to recover from this. As an example, the best rate you can get on a savings account these days is around one percent.
The borrower side is only slightly more complicated.
With nearly every other kind of loan out there, high-risk borrowers — where “risk” is determined by credit score and other factors — are charged a higher interest rate than low-risk borrowers to make up for the higher possibility that they won’t pay back those loans.
However, when it comes to student loans, low-risk borrowers are stuck in high-interest rate loans because student loan rates are by Congress and all borrowers get the same rate. Because these loans are distributed according to need rather than ability to pay back the loans, the interest rates can end up being relatively high to account for all the high-risk borrowers in the pool. The current rate on a Grad PLUS loan is around seven percent.
The space in between the one percent investors have available to them and the seven percent that even the safest student loan borrowers pay is where SoFi works its magic.
Why SoFi makes sense for me
A few things determine how much you’ll spend on any loan, including:
- The size of the loan
- How long you stretch out your payments
- Your interest rate
When it comes to my student loans, I’ve been working very hard on the first couple by making thousands more than the minimums every month, but haven’t done nearly enough to combat my high interest rates.
But I should definitely try harder; even lowering my interest rate by just one percent could lower my total payments by $5,000! Let’s see if SoFi can do even better.
How to apply for SoFi
You can get a $100 refund when you apply using this link: https://www.sofi.com/refer/4/11129
SoFi’s application is purposefully simple. And any confusion can quickly be cleared up using one of the three always-on customer service media:
I personally used email to send off a few questions and was pleasantly surprised to receive a response within five minutes each time.
Just enter contact information, information about your degree, information about your job (including income), and information about your loans, and you’ll quickly be presented with this extremely informative page:
There, you can see four things:
- The total payments you’d make if you chose not to refinance and instead stayed on the plan you’re on. As you can see here, I’d pay $126,000 on my remaining $90,000 in loans… because compound interest hurts
- A choice between either a fixed or variable interest rate, and a choice between 5-, 10-, 15-, and 20-year terms. I went with a 5-year term with a variable rate
- How much you’ll save by switching to the plan. If I’m approved, I’ll save over $20,000 with my new loan
- The button to “apply now.” I clicked this 🙂
And that’s it. I’m excited by the possibility of lowering my total payments by tens of thousands of dollars and will report back on the results.
If you’ve refinanced your loan through SoFi or tried to, let me know about your experiences in the comments.