DR 066: How to Refinance Your Student Loans – Interview with Dan Macklin of SoFi

Optimized-Refinance Your Student Loans

We’ve been getting lots of reader questions recently on student loans – what to do with them, how to pay them off, and whether or not to consolidate them. Luckily, I was recently contacted by a relatively new company, SoFi.

This company specializes in consolidating and refinancing student loans, and it could offer a great deal for many of our readers. So I sat down with Dan Macklin, SoFi’s Head of Business Development and Co-founder. We talked about how the company started and what it offers for those in student loan debt.

Topics Covered in the Interview

  • How the student loan refinancing company SoFi started
  • How SoFi could save you hundreds or thousands on your student loans
  • What SoFi looks for in borrowers
  • How to invest with SoFi
  • New programs the company is rolling out soon
  • The terms of loans offered by SoFi
  • The types of refinancing loans available and the interest rates on those loans
  • How SoFi’s Entrepreneur Program, Career Services, and Veterans Program work

Resources Mentioned in the Interview

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Interview Transcript

Rob: Dan, welcome to the show.Dan Macklin: Hi, Rob. It’s nice to be here.

Rob: Hey, I appreciate you taking a time out of your day to talk with us. As I mentioned before we started recording, I have gotten a lot of emails from listeners who have school loans and they want to understand how to— should they consolidate them? Should they refinance them?

As I was getting some of those emails, someone from SoFi reached out to me, so I thought it would be good to just have you on the show to hear about what your company offers. To start, Dan, why don’t you give us a little bit of your background and then what SoFi is and what it does for folks?

Dan Macklin: Sure. Again, thanks Rob for the opportunity today. SoFi is a student loan refinancing company. I was in banking for 10 years. I’m originally from the UK. I also worked in Asia, and then went to Stanford for a year to the business school. I decided at the end of that to start a company with a couple of my classmates.

We’re really trying to do something new in the finance space, and we started with students loans. That’s how SoFi was born. Two or three years later, we’ve evolved to be the largest refinancing company of student loans in the country. So far we’ve refinanced about $500 million. We are helping a lot of people save money on the loans that they have.

Rob: Half a billion is a lot. How long have has it been for you to refinance that amount?

Dan Macklin: Our first loan was made two and a half years ago. We started at Stanford with the pilot program there. We started at the business school lending to people there. But the bulk of that $500 million has happened in the last six or eight months.

Month to month growth over the last year has been very strong, and we expect to hit $1 billion before the end of this year. That’s what we’re on track for. Unfortunately, for good or bad reasons, there’s a lot of student debt out there so there’s a big demand for what we’re doing.

Rob: Right. Why don’t you describe for us how SoFi works? If someone has a school loan and they want to consider you guys for possible refinancing, how would they do that?

Dan Macklin: Sure. SoFi is a great solution for people who have graduated already and are working now and earning a salary. For many folks like that— maybe one, two, three, four years out of school already, obviously a lot of those people are still sitting there with a lot of debt around their shoulders.

A lot of that debt is expensive, particularly if you went to graduate school. You may be paying 6.8 percent or 7.9 percent, depending on which government program you took loans from. Many folks have private loans that are higher than that. What SoFi does is consolidate all those loans (as many as you want to) into one loan with SoFi at a lower rate. People who are refinancing through us are saving close to $10,000 on average because we’re reducing their interest rates by two, three, four—sometimes even five percent.

Rob: Why is that? In other words, why is SoFi able to refinance these loans at lower rates when presumably the original lenders are obviously charging much more? How are you able to do that?

Dan Macklin: I think it is because it is a bit of a strange market. Most people took out the loans when they were at school. They were to fund their time at school. At that stage they had no income because they were at school full time. And, too, they were pretty young with very little years of experience, very little credit history.

By the time they come to SoFi, they have already graduated and are now working and have a salary as well as some credit history. Really, we get the benefit of knowing a little bit more about them, and we’re able to give them a loan that is priced more fairly based on their situation at that time. We don’t think that you should be paying the same rate that you took out five of six years before. We think you should be getting a better rate.

Rob: Okay. Speaking of rates, what are the interest rates that you charge?

Dan Macklin: We have two main types of products— a  fixed-rate loan and the variable rate loan. For the fixed rate loan we have different terms: five, ten, and fifteen years. The five-year product goes for 4.99% to 5.99%. At the other end, the 15-year goes for 5.99% to 6.74%. All those rates are deliberately below the 6.8% standard unsubsidized rate that people are typically coming out of.

On the variable side, it’s based on one-month LIBOR. In today’s LIBOR rates, that equates to a loan of 2.91% to 4.91%. Obviously with variable those rates could move around if LIBOR moves around. But, roughly half of our customers choose the variable rate because on most occasions they’re fairly confident in paying their loans off relatively quickly, and they like to take advantage of that low rate.

Rob: Okay. Let me dive into the weeds just a moment on the variable rate. If someone goes with the variable rate, how frequently can it adjust?

Dan Macklin: It gets reset on a monthly basis, and it is reset based on where the LIBOR rate is. LIBOR is London Interbank Offered Rate. It’s the rate that financial institutions use to peg their interest rates against. If you look at LIBOR for the last few months, it’s been extremely low and stable. It’s not really going up or down anywhere.

But of course, we can’t predict the future. We don’t know where that rate is going to be. One good thing about our loan is that it’s capped at 8.955%. So, in the very worst scenario where interest rates go sky high because of some huge economic crisis that may happen in the future, the most someone will ever pay is 8.95%. So, if somebody is coming out of paying 6-7% can come down to something around 3%, they can be saving a lot of money for a long time, even if that worst case scenario were to happen in the future.

Rob: All right. I take it that the variable rate is LIBOR plus some amount?

Dan Macklin: Yes. It is one month LIBOR plus 2.75%. That’s the lowest rate. Today, LIBOR is at 0.16% where we get the 2.91%.

Rob: Right. Okay. In listening to you here, it almost sounds like this is more ideal for folks who have unsubsidized loans as opposed to those people who have subsidized loans. Is that right?

Dan Macklin: I think so. Yes. If you are paying a loan rate of 2% or 3% already, then the amount of money that you could save from SoFi is relatively limited as opposed to when you are paying 5-8%, where the savings can be much higher. So, there are convenient savings, and you only have one loan to pay at the end of each month as opposed to maybe five or six. But for whatever reason you already have an extremely low rate, then we may not be able to help everybody.

Rob: Okay. In terms of qualifying for these loans, can you give us a sense as to… Let’s start with credit scores. Is there a minimum credit score? How does one’s credit score affect whether or not they will qualify for a refinance loan and the interest rate that they will get?

Dan Macklin: Sure. It’s going to be more complicated than that. Eligibility for our loans and the rate that you get approved at depend on a number of factors. Those do include credit scores, so that certainly is an important thing that helps us in deciding which rate to give you. But, it’s also depends on your employment status, your income and a number of other things.

Rob: And I know that underwriting is a very confidential part of most finance companies, so maybe there is a limit to what you can share with us, but is there a minimum credit score that if you’re under, there’s no point applying? Or is it not quite that black and white?

Dan Macklin: As you said, Rob, it’s hard for us to give exact numbers because it’s never quite that black and white. That will depend on a number of factors. You can have one factor that may be less good. It’s not quite as simple as just giving you one number. But generally, the higher your credit score, the higher your salary—that kind of thing, you tend to have a better chance to get approved.

Rob: Right. This is a question I get a lot from folks. When you pull the credit score, are you using the FICO formula for the credit score?

Dan Macklin: Yes. We all use that. We have a number of other things that we’re using, but included within that is FICO.

Rob: Is there a limit to the loan size that they can get?

Dan Macklin: There isn’t. There’s a minimum loan size of $10,000 but there is no maximum.  We frequently have people… Our average loan size, to give you a sense, is around $90,000.

Rob: Oh, my word.

Dan Macklin: That’s probably because the bulk of our customers have been to professional graduate schools (business, medical, law, engineering). These folks typically have more debt – particularly those in the legal and the medical space. We’ve had people with $200,000 – $300,000 loans. Some have up to $400,000 loan size.

Rob: I was going to ask you what the record was. Over $400,00?

Dan Macklin: Yes. We’ve had a $500,000 loan as well. Fortunately, those sizes are not typical, but we certainly have a lot of people with over $100,000 loan.

Rob: Did you just say that you have someone with over $500,000 loan?

Dan Macklin: We did. It’s unusual to get this high. This person was earning a very good salary in the medical space. There are folks who incurred a lot of debt in medical school and still had good career prospects, but that person is saving himself a lot of money. That’s for sure.

Rob: Yes, I can imagine that with that kind of loan, SoFi would be a godsend if you could get your interest rate cut by a couple of points. Okay, that’s helpful. In terms of eligibility, does it matter where you live or are you in all 50 states?

Dan Macklin: We’re not quite in the 50 states, but we’re in the majority. We’re in 41 states. It’s on our website. We’re in the most populous states, so we cover around at least 96 percent of the population.

Rob: And you have to register in each state? Is that correct?

Dan Macklin: That’s correct. We started in California, and then we got a lending license here. We can export that license to other states. Yes, we’re fully registered in all of those 41 states.

Rob: Since you’re in this space, you’re probably familiar with the folks at Lending Club or Prosper, which obviously have a different kind of model. But, I know they went through that a few years ago. That’s a lot of regulatory stuff that you have to go through. I take it that the plan is to expand into the remaining nine states?

Dan Macklin: Yes. We certainly want to be in every state as quickly as we can. Without boring you with the details, there are various reasons why it gets more complicated in some of the states, but we’ll get through that and we will be everywhere before long.

Rob: And does it matter what school you attended?

Dan Macklin: We actually accept applications from folks who went to more than 2,000 schools. We have an extremely wide and varied schools list now. There are a few that are not on that list, but there are more than 2,000 so I’m sure the majority of the listeners would be eligible in that way.

Rob: What’s the angle there? I can understand that on the state level you obviously have the regulatory stuff you’re taking care of. But, why does it matter what school someone went to?

Dan Macklin: I didn’t mention in the beginning that the reason why we started SoFi – or rather, one of the reasons that makes us unique – is that part of the funding for that loans comes from individuals—predominantly alumni from the schools. Let’s say that we have somebody from Stanford.

Alumni would invest money, and that money would be used to make loans to students including recent graduates from Stanford. Some of that then dictates which schools we go to depending on where the money is coming from.

Rob: I see. Speaking of investing, do you accept new investors?

Dan Macklin: We do. The only platform that provides investors with access to super premium credit (the credit quality that we have is exceptional) is through our portal.

Rob: For someone who is interested in investing, do you show information like default rates and that sort of thing?

Dan Macklin: Yes we do. It’s very heavily regulated industry as you can imagine. It’s limited to accredited investors. These are relatively wealthy folks with $1 million in net worth or people with a very good salary. It’s not yet a mass market investment product, and we’re making moves in that direction. For folks with money and the ability to invest, it’s a great investment.

Rob: Yes, it seems that for some folks it might be more than just the investment but also a way to give back to their school, so to speak.

Dan Macklin: Yes, there certainly is a bit of that. There certainly is a social aspect to it. The name SoFi comes from Social Finance. We take pride in the fact that we think we’re doing good things. We’re helping young people save lots of money. We’re helping them to get on with their lives— start families, get married and do all those things that cost money. Student loans may be preventing them from doing that when they really want to. There is certainly a social aspect but honestly speaking, I think most people do it for the return or maybe a combination of the two.

Rob: If there are folks listening and they happen to be accredited investors, this would at least be an option that they could consider if they want to?

Dan Macklin: That’s correct. You can get more information on our website and we have a team here set up to provide that information.

Rob: Okay. Just a last question on the borrowing aspect. If someone’s application gets approved, they get a certain interest rate. Can they see this information before they actually decide to move forward?

Dan Macklin: That’s correct. There’s no obligation to take a loan when you apply. By law, we are not allowed to do that. We wouldn’t do that anyway. You can apply. It’s a very quick process. It takes about five minutes online. There are very few pieces of information we need.

We will then give you an approval decision. And most importantly, we will give you the rate that you’ve been approved at. If you aren’t saving enough money or you don’t wish to proceed for whatever reason, you’re free to walk away. There is no commitment whatsoever.

Rob: If someone takes five minutes to fill out the information, how long does it take SoFi to actually decide whether they’re actually going to approve an application and at what rate?

Dan Macklin: We actually approve instantaneously a huge number of our applicants. You would get a decision literally within 20 seconds. For some folks, we have to do a little bit more of thinking. They may be more on the edge.  That may take a day or so, but it’s still extremely quick. The whole process from applying to getting a SoFi loan can be as small as seven days.

Rob: Okay, that’s great. I also saw a couple of other things. The first one is that you have a Job Search Assistance. What is that?

Dan Macklin: This is more of a need for the company. We want to be more than just a good lender. We want to actually provide services with benefits beyond that. Our Job Search Assistance falls into that category.

We have at team of people who are set up to help our SoFi customers and members with their careers. That typically comes into effect if maybe you had an unfortunate incident and you lost your job. We’ve had a few of those. We’ve actually helped more than 28 people to find new jobs using this career coaching which is the Job Search Assistance.

Rob: I also noticed that you have an Entrepreneur Program and a Veterans Program. On a high level, can you explain to us what those are all about?

Dan Macklin: We are very proud of the Entrepreneur Program. We have helped 23 of our borrowers who started their own companies. That helped manifest itself in a variety of ways. Principally, we can defer that person’s loans for up to 12 months which is obviously a huge befit to that individual. They don’t have that financial burden around them, and they can concentrate on starting their company.

But more than that, we give them the ability to connect with investors. Through our own activities as a company, we know many investors. A lot of people investing in the loans are interested in funding these types of companies. So, we’ve managed to pair up our borrowers who have started companies with investors and we’ve helped a lot of them start their own companies which I think is a great thing.

Rob: That is the Entrepreneur Program?

Dan Macklin: That’s correct.

Rob: And then you have a Veterans Program.

Dan Macklin: The Veterans Programs is a way… Obviously, a large number of our customers who’ve been to graduate or undergraduate school are veterans. Further, a lot of our investors are also veterans so we provide for that connection there.

Rob: Okay. And then, apart from the interest portion of the loan, are there other fees that a borrower has to pay?

Dan Macklin: None. There are no origination fees with the loan. There is no upfront cost to refinancing with SoFi. And at the back end, there are no prepayment penalties. You are free to pay perhaps $100 extra every month. There will be no charge for that. Equally, if you get a nice bonus or you run into some money, and you want to pay a big chunk of your loan, there won’t be any fee either.

Rob: Are the payments automated? Are they directly taken from a checking account? Do you have an automation built in?

Dan Macklin: Yes. We prefer auto pays, so you can pay directly from your checking account or bank account on a monthly basis. We actually give 25 basis points deduction if you do that. I think about 95% of our customers do that.

Rob: That’s terrific. I almost kind of wish that you guys were around when I was paying for my law school, but that’s a whole another topic. What’s next for SoFi? Are you going to go beyond school loans?

Dan Macklin: Yes. We actually just have. In the last couple of months we started to move into the mortgage business. We have a license in California and we’re doing a small pilot here with some of our student loan borrowers or refinancing borrowers who are now buying their homes.

We’re looking to grow that and build it out to the rest of the country over the rest of this year. And then we will be launching additional financial products after that. What we started with student loans refinancing was a way to build up a great customer base. Now we’re looking to add more value as they move through other financial needs in their lives.

Rob: Great. Listen, I appreciate your time. This is an interesting product and it will be interesting to see how you guys do, and grow. School debt is just a huge… I’ve heard that it’s at $1 trillion. Is that the right number?

Dan Macklin: Yes. There are lots of different numbers on exactly how big it is but roughly speaking, it’s around a trillion dollars and there’s about another $100 billion added every year as each new class graduates. So it’s a big problem. It’s not going to go away quickly, but we’re doing our little bit to help.

For the folks who find us, we can save them a significant amount of money. It will only take you five to ten minutes to apply, so I would recommend for folks who are interested to go to sofi.com and have a look at us. Just apply, and if you like the rate, then great. We can go from there.

Rob: Great. All right, Dan. Listen, I appreciate your time today.

Dan Macklin: Thank you, Rob. I appreciate it.

Rob: All right, man. Take care.

Dan Macklin: Bye.

I hope you enjoyed the interview, especially if you’ve got expensive student loan debt. If you do, SoFi may be a good option for you to check out, especially if you have private or unsubsidized student loans. If your loans are subsidized, the lower interest rate means you may not want to refinance them at all, since your interest rate is already so low.

But if you do have some unsubsidized or private loans, you may want to check out SoFi. If you do, check it out through this affiliate link. Yes, I’ll get a commission if you follow the link and refinance your loan. But there’s also a benefit for you: a $100 referral bonus in your account.

Published or Updated: May 20, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

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