You’re already investing in your future through internships and career tips, but we know the financial side of college is important too. As you research the different types of student loans available to finance your education, we wanted to share a new type of student loan from SoFi. This is a guest post from SoFi CEO Mike Cagney.
By Mike Cagney, SoFi CEO
Student loans aren’t fun, and they can be confusing. What frustrates us at SoFi is the dogma in the market that students should always exhaust their federal loan options before considering private loans. This can be very bad advice. While we agree that subsidized Direct and Perkins loans are clear no-brainers for students if you are eligible for them, things get more ambiguous with unsubsidized Direct loans and become down right murky with the egregiously burdensome PLUS loan.
To illustrate where the so-called experts fall down, I’m going to demonstrate why you should give back your PLUS loan and replace it with a SoFi student loan. I’m going to compare the loans across four key points: rate, origination fees, borrower protection and community. For illustration, I will assume you are a graduate student in your second of two years of school and you just borrowed $20K this Fall through a PLUS loan on a 15-year term. However, my reasoning will generally apply to any PLUS borrower, including parents, and at any stage in the loan maturity.
The interest rate on the PLUS loan is fixed at 7.9%. That’s more than what General Motors, US Airways, Morgan Stanley and the typical high yield (e.g., junk) bond pay. It’s more than the governments of Spain, Kazakhstan and Iraq pay. Do you think you’re a better credit than the government of Iraq? No offense to Iraq, but we do. That’s why our loan rates range from 5.99% fixed for refinancing to 6.49% fixed for students in school who are deferring payments until after graduation. You’d pay the government $4,563 more in interest than SoFi over the life of your $20K loan.
Origination fees add insult to injury. Not only are you paying more than Iraq on your loan, you also have to pay 4% for the privilege of getting your money. So your $20K loan is actually $20.8K. That means your real interest rate (the annual percentage rate, or APR) is actually closer to 8.5%. Does it actually cost the government $800 to process your loan application and send you your money? With the government you never know, but it costs us a lot less. We don’t charge origination fees – or any fees for that matter.
Many of the experts in student loan space tout the borrower protection of federal loans. Things like income based repayment, economic hardship forbearance and forgiveness in death. Well, we have all those things, too. SoFi is a community based lending program, funded by alumni. None of these things are orthogonal to the spirit and intent of the community. You might be asking – what about loan forgiveness? Well, PLUS loans aren’t eligible for forgiveness for teaching. You can potentially get forgiveness after 10 years of public service – and 10 years of full payments. And remember that alumni community? They can potentially provide forgiveness on your loan if you are pursuing a career one or more of them are passionate about. It’s an innovative program we are piloting next year, and we’re putting $100K of our own money behind it.
Is a loan funded by alumni really any different than a loan funded by the government? Well, can the government provide career advice, mentorship or help you get a job? Does the government have any particular affinity for you? In general, the government is what we call a disinterested lender (however, stop paying your loan and they’ll take a lot of interest in you – the Department of Education says the collection rate on defaulted PLUS loans is 103.5%). SoFi brings together students and alumni of a school in a way to facilitate engagement and support.
If you’ve made it through this blog and you’ve got a PLUS loan, you’re probably thinking how bad your loan sucks. So what should you do? If you’ve taken the loan in the last 120 days, apply for a SoFi loan, and if you get it, give your PLUS loan back. The government allows you to return the loan – and pay back any interest and origination fees – if you do it within 120 days of receiving your funds. We can walk you through step-by-step how to do it. If you’re a graduate or you’ve had a PLUS loan longer than 120 days, apply to refinance it with SoFi. You won’t recoup your origination fees, but you’ll be paying a lot less in interest, keeping most of your borrower protections and accessing the SoFi community.