Exploring Student Loan Forgiveness for Nonprofit Employees

Public Service Loan Forgiveness. The unicorn of student debt.

Its very existence is debated. Thousands of federal student loan borrowers pursue it. And for those who could prove they’d decided their lives to doing (the public) good—and followed all the eligibility rules—it was supposed to be attainable.

So far, however, the approval process has been grindingly slow—and difficult—which hasn’t helped borrower skepticism. The Department of Education’s Office of Federal Student Aid reported that of the 110,729 applications processed as of June 30, 2019, 100,835 had been denied—a whopping 91%.

And of the over 90,962 unique borrowers applying, only 1,216 have been accepted—about 1.3%. Although the numbers are improving, it seems that only the most tenacious and patient seekers will survive. The specifics are daunting, follow-through is a must, and a number of applicants don’t qualify from the start.

So is it even worth it to apply? Misinformation abounds. Here are some helpful things to know as you explore your options.

What Is the Public Service Loan Forgiveness Program?

The Public Service Loan Forgiveness Program, often referred to as PSLF, was introduced in October 2007 as a way for those working for a qualifying not-for-profit or the government to obtain forgiveness for their federal student debt after making a decade’s worth of payments. The program took effect in October 2007.

Under the plan, those who have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer may have their remaining balance on a federal direct student loan zeroed out.

That’s a lot of qualifying to be done, so let’s break it down.

What’s Considered Full Time, Qualifying Employment?

For starters, it’s not about the specific job you have, it’s about your employer. The following types should pass muster:

•   Government organizations at any level (federal, state, local or tribal)
•   Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
•   Other types of not-for-profit organizations that are not tax-exempt under Section 501(c)(3), if their primary purpose is to provide certain types of qualifying public services
•   AmeriCorps or the Peace Corps (if you’re a full-time volunteer)

Student loan forgiveness is for eligible not-for-profit and government employees, so if you’re a freelancer or employed by an organization that is working under contract, that won’t count.

To be considered “full time,” you must work at least 30 hours per week. Or, if you work more than one qualifying part-time job at the same time for an average of at least 30 hours, you might meet this standard.

But any time spent on religious-type work (instruction, worship services, or any form of proselytizing) will not be included towards the 30 hours.

What Kinds of Loans Qualify?

Here’s where it starts getting complicated. OK, more complicated.

Only non-defaulted loans received under the William D. Ford Federal Direct Loan Program are eligible for PSLF. If you received a loan under the Federal Family Education Loan (FFEL) program or the Federal Perkins Loan program, you may be able to combine them into a Direct Consolidation Loan, which does qualify, but there’s a catch: Only the payments you make on your new consolidation loan will be applied toward the 120 payment requirement. The FFEL and Perkins payments you made before that won’t count.

And if you combine Direct loans and other federal loans when you consolidate, you’ll lose credit for the payments you already made on the Direct loans.

What Qualifies as a Monthly Payment?

Any payment made after Oct. 1, 2007 may qualify, as long as it’s for the full amount on the bill, is under a qualifying repayment plan, and was made on time (no later than 15 days after the due date) while you were employed full time by a qualifying employer.

Payments made while you were in “in-school status,” under a grace period, or in deferment or forbearance won’t qualify.

But here’s a bit of good news: Your 120 qualifying monthly payments don’t have to be consecutive. If you were out of work or worked for a for-profit company for a while, you won’t lose credit for the qualifying payments you made.

And there are special rules for lump-sum payments made by AmeriCorps or Peace Corps volunteers.

What’s a Qualifying Repayment Plan?

It’s important to know this: Even though the 10-year Standard Repayment Plan qualifies for PSLF, you aren’t actually eligible to receive forgiveness unless you enter into one of the income-driven repayment plans.

That’s because if you’re on a 10-year repayment plan, and you make all the payments, you won’t have a balance left to forgive at the end of that period. So if you plan to pursue PSLF, it may be in your best interest to switch to an income-driven plan ASAP.

What Does it Take to Apply?

First thing’s first. You won’t submit your PSLF application until after you’ve made your 120 qualifying payments. What you will need to complete first is the Employment Certification for Public Service Loan Forgiveness form annually or whenever you change employers.

In the ideal case, the government will use that information to let you know for sure that you’re making qualifying payments. (If you don’t stay on top of this, you can submit an Employer Certification form when you apply for forgiveness.)

After you submit an Employment Certification form and your loans have been transferred to FedLoan Servicing (if it wasn’t already your servicer), your form is reviewed and you’ll receive notification of the number of qualifying payments you’ve made. You can track that number by logging into your FedLoan account or by looking at your most recent billing statement.

When you have made enough qualifying payments, you can file your PSLF application . But you aren’t through yet: You must be working for a qualifying employer at the time you apply for forgiveness and when the remaining balance on your loan is actually forgiven. (We know—it’s complicated. Definitely review the Department of Education’s website to get all the details.)

What Happens if the Application Is Denied?

Don’t panic. You may still be eligible for forgiveness if you were denied because payments weren’t made under a qualifying repayment plan.

The U.S. Department of Education is currently offering Temporary Expanded Public Service Loan Forgiveness (TEPSLF) opportunity. (The word “temporary” means it won’t be around forever and it may be just as difficult to get a request approved as PSLF.)

You can get more answers at the Office of Federal Student Aid’s Q&A page . Or you can call FedLoan Servicing at 800-699-2908.

Pros and Cons of PSLF

Some of the basic pros and cons of going for PSLF are fairly straightforward.

If you took on tens of thousands of dollars in federal student loans, the prospect of losing at least a portion of that debt is likely huge.

And, as a bonus, the IRS isn’t going to ask you to pay federal income taxes on the loan amount forgiven under the PSLF program. (That isn’t the case with all student loan forgiveness programs.)
The big drawback, of course, is the time and effort required for the chance to get a PSLF application approved.

And if, after all that, you don’t receive forgiveness—because the government changes the rules, because you decided to go another direction with your career, et cetera—you may have missed out on other opportunities to pay down your debt.

Federal student loans come with lots of benefits and protections, but with an income-driven repayment plan, you’ll be looking at a 20- to 25-year loan term (depending on the federal student loans you have).

With income-driven repayment, your payments are lower, it’s usually because the loan term is longer, not because your interest rate has improved. Your interest rate will stay the same under this plan.

Applying for Public Service Loan Forgiveness could be worth the challenge, if you’re pretty sure you’ve got what it takes—both in mental fortitude and when it comes to fulfilling the requirements.
But it isn’t the only option for getting student debt under control.

Refinancing Your Student Loans

If you work through a private lender like SoFi to consolidate and refinance your student loans, you may be able to get a competitive interest rate and a better fit of loan term.

But it is important to remember that if you refinance with a private lender you will lose federal benefits such as Public Service Loan Forgiveness, income-driven repayment plans, and deferment.

With SoFi, there’s no prepayment penalty, and SoFi offers unemployment protection for qualifying borrowers who might run into a rough patch.

And with SoFi, you can combine all your federal and personal student loans into one manageable payment, so you can keep track of your debt.

Interested in refinancing with SoFi? Applying online is easy and takes just minutes.


SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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What To Do If You Can’t Afford Your Private Student Loans?

If you’re having trouble paying your student loans, you’re not alone. More students are taking out more in loans than ever, and it can be hard to make those payments once you graduate—especially if you have other debt and financial obligations.

In 2018’s graduating class, 69% of students took out loans and those who did leave school with an average of $29,800 in debt. For a lot of those graduates, when their private student loan payments are too high, they end up missing payments and potentially defaulting.

A report on student loan default from the Urban Institute predicted 40% of borrowers will default by 2023. The odds of default vary based on background and amount of other debt carried—they found 32% of those who borrowed less than $5,000 defaulted within the first four years and 15% of borrowers with more than $35,000 defaulted in the same timeframe.

That’s still a good percentage of people who can’t pay their student loans. If you’re in the same position, make sure you understand your student loans, both federal and private.

For the purposes of this article, we’ll look at what can happen if you don’t pay private student loans. Then you can start to weigh some options if you can’t afford your student loan payments.

What Happens If You Don’t Pay Your Private Student Loans?

Each private student loan lender will likely be a little different, but generally, missing a student loan payment can put your loan into delinquency, and may incur late fees and/or penalties.

In addition, depending on the loan, interest can accrue on those penalties and on the unpaid principal loan amount, which then can get added to how much you owe. If you miss too many consecutive payments, you may be at risk of defaulting on the loan.

Each private lender has their own terms that trigger student loan default. That typically means multiple missed payments. Even if you declare bankruptcy, it’s unlikely your student loan debt goes away. It’s important to check the terms of your private student loans, since they vary by lender.

Once a student loan goes into delinquency or default, it will likely affect your credit score. That can possibly affect your ability to take out loans in the future or achieve other financial goals, like buying a house.

In addition, once a private student loan goes into default, the lender can send it to collections.

If you can’t pay your private student loans, you could ultimately face a judgment that could result in a garnishment of your wages. (There are, however, some protections and rights you have when it comes to debt collection on student loans.)

Ideally, if your student loan payments are too high, you might consider other options before risking delinquency or default.

What If You Can’t Pay Your Federal Student Loans?

The first thing you might consider is separating your federal and private student loans. Federal loans often come with more protections and options for repayment plans.

For example, federal loans typically offer income-driven repayment plans based on your income and family size, relative to the amount of student debt owed. There are also required forbearance and deferment clauses on federal loans available to qualified borrowers.

Even though federal student loans (both subsidized and unsubsidized) are government-backed and originated by the U.S. Department of Education, they’re administered by a student loan servicer, which is a private company in charge of the loan. This does not make these loans “private” student loans.

It means you might be making your payments to a private loan company, but it’s still a federal student loan and still comes with federal student loan protections.

Options If You Can’t Pay Your Private Student Loans

If your private student loan payments are too high, however, then the options are slightly different because every private loan lender sets its own terms and conditions. While there are fewer options if you can’t make your private student loan payments, there are still some things you can consider.

1. Talking to Your Lender

If your private student loan payments are too high, then it might be worth talking to your lender.
You could start by getting a copy of your promissory note so that you know all the terms and conditions of your specific loan.

Each private lender sets out its own repayment and deferment options, so your loan may differ from your friends’ loans.

Lenders, however, want to get paid, and it’s not in their interest for you to default. Once you have the terms of your loan in hand, then you can try talking to your private lender about potential alternative student loan repayment plans to see if they’ll work with you on what you can afford or even if you might be able to put your loan payments on hold if you need to.

For example, SoFi offers an unemployment protection plan on its loans, allowing eligible members to temporarily halt payments if they lose their job.

2. Deferment and Forbearance Options

In certain circumstances, deferment and forbearance are available to temporarily put payments for federal loans on hold. However, for private student loans, forbearance and deferment options are not required, but any specifics will be laid by your lender.

Private lenders may offer forbearance and/or deferment in certain circumstances, such as returning to grad school or entering active military duty. If you can’t pay your private student loans, then you may want to see if your lender offers these options.

It’s important to know, though, that in most cases, interest continues to accrue and compound during forbearance or deferment on private student loans. That means the interest on the amount you owe builds up and gets added to the loan principal (which then accrues its own interest), and could end up costing you more in the long run.

3. Making a Student Loan Repayment Budget

This may sound obvious, but it can be important to create a plan and budget for repaying your student loans. Cutting back on some expenses or looking for additional income to allocate towards student loan payments could pay off in the long run.

Because student loan interest accrues and compounds over time, every little bit paid off now can save more money later.

In addition, if a borrower makes as many payments as possible on time, it could save late fees or additional penalties.

There are a few principles for how to tackle student loan payment.

You could start with the loans that have the smallest balances and build momentum (Snowball Method), or start with the highest interest loans to save yourself the most money (Avalanche Method).

You can also benefit from prepaying more than the minimum monthly payment. If you allocate additional payment towards your loan principal, then you won’t accrue interest on that principal you paid down, and you could save yourself money.

4. Refinancing your Student Loans

If your private student loan payments are too high, one way to potentially lower your monthly payments could be to refinance your student loans by extending your term.

If you need lower monthly payments right away, extending your loan term is one way to accomplish this (keeping in mind that a longer-term means you’ll likely pay more in interest over the life of the loan).

Once you’re on more solid financial footing, refinancing could qualify you for a lower interest rate, which could save you money in the long run (since interest adds up and compounds over time).

Lowering Your Student Loan Payments

If you’re struggling to make your student loan payments, then refinancing your private student loans with a longer-term could lower your monthly payments—which could free up money you may need for bills and other necessities.

If your credit score or financial outlook have improved since you first took out student loans, however, then you might be able to qualify for a new loan with better terms and a lower interest rate. When refinancing with SoFi, there are no application or origination fees, and there’s no penalty for paying off the loan early.

Consolidating federal loans with private loans, even at a new interest rate, however, does turn the federal loans into private loans. That means you would lose access to federal benefits, such as deferment, forbearance, or income-driven repayment plans.

Refinancing just a private loan creates a new private loan with new terms, and you can keep your federal loans separate if you choose.

Looking to lower your student loan payments? Get pre-qualified online with SoFi to find out your rate and terms.


SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Debt Consolidation Programs: How They Work

If you’re trying to pay off debt, you’ve probably looked into the variety of options that could help. If so, you’ve likely come across debt consolidation programs—and may be wondering what they are.

Debt consolidation programs can help borrowers who may be overwhelmed by debt payments by combining multiple loans into a single payment. Typically these programs are offered by credit counseling organizations. These organizations may offer guidance and financial planning in addition to helping consolidate debt.

A reputable credit counseling organization will likely incorporate guidance to help with managing debts, along with providing educational material, workshops, and other ways to help borrowers work to develop a realistic budget.

A legitimate debt consolidation program should feature counselors who are certified and trained in offering advice on consumer finance issues in order to create a personalized plan, whether it’s to address credit card debt, bad credit, or other needs.

Consolidating debt typically results in a refinanced loan, with a lower or more manageable interest rate and modified repayment terms.

According to the Federal Trade Commission , it is recommended to find a local debt consolidation program offering credit counseling in person.

You may find these accredited, nonprofit programs are offered through channels like credit unions, universities, religious organizations, military bases, and U.S. Cooperative Extension Service branches .

(It’s important to note that everyone’s debt payoff needs differ, so your mileage may vary.)

What Is a Debt Consolidation Program?

Debt consolidation programs can play two roles. For one, they help borrowers combine multiple loans into a single payment, which can make repayment less overwhelming. For another, they act as credit counselors.

With tools for loan repayment strategies and debt management, they can help lower and/or simplify monthly debt payments. These types of programs are usually managed by credit counseling companies.

It’s good to note the difference between debt consolidation programs and an actual loan opened to consolidate debt.

Qualifying consumers can use a debt consolidation loan (typically an unsecured personal loan) to combine multiple debts into a new single loan as well, possibly with a lower interest rate. But there is no counseling offered during the loan application process, and paying down the debt remains entirely the burden of the borrower.

The services outlined above can make a debt consolidation program different from other methods of consolidation or interest reduction, such as a balance transfer for a credit card, or a personal installment loan from a banking institution or lender.

Keep in mind that debt consolidation is also different from debt settlement, which is a process used to settle debts for less than what is owed.

When enrolled in a debt management program, which is one part of a debt consolidation program, a single monthly payment is sent to the credit counseling agency, which then distributes an agreed-upon amount to each credit card or loan company. The goal of the program is to act as an interlocutor for the debt between the borrower and creditor.

While most debt consolidation program companies are nonprofit organizations, nonprofit status does not guarantee services are free, or even affordable.

These organizations can, however, reach out to the lenders on behalf of the borrower to find an affordable repayment plan, which could take shape in the form of waived fees or penalties, lowering interest rates, in exchange for a specific timeline of usually three to five years for the debt(s) to be repaid.

These programs are not loans, which would come from financial institutions. Perhaps most importantly, debt consolidation programs do not make any promises to reduce the amount of debt owed.

Those are debt settlement programs, run by outside companies who negotiate payments with creditors, and can be for-profit, predatory, or may not act in the best interest of the borrower.

A debt management program, on the other hand, could help set borrowers up for future success, when it comes to how to budget and manage money, educating consumers about cutting expenses or ways to increase income in order to gradually eliminate debt.

Pros and Cons of Debt Consolidation Programs

Debt consolidation is typically most beneficial to those struggling with high monthly debt payments. Paying just the minimum balance on debts every month means it could take a long time to pay off the debt, and interest costs could continue to add to the balance. Getting rid of high-interest debts can help make it easier to pay off the principal amount of the loan.

While having a lot of debt is certainly stressful, it’s worth weighing the pros and cons of any debt consolidation program before signing up. Here are some pros and cons to ponder:

Pros
•   Multiple payments are combined into one payment, likely making it easier to pay on time.
•   Credit counseling could help a borrower get back on track with tools like budgeting and other financial advice.
•   Some programs can help negotiate lower interest rates, fees, possibly creating a more affordable payback plan. (Note: Because lowering interest rates may extend the amount of time borrowers would pay their debt off, they may end up spending more on interest in the long run.)

Cons
•   Debt consolidation programs do not reduce the principal amount of debt owed.
•   Can easily be confused for more predatory programs offered by some debt consolidation settlement companies.
•   Some programs might charge fees.

Many of the legitimate counseling companies tend to follow a similar setup process, which typically includes an interview with a counselor to go over things like income, expenses, and current bills and loans. The counselor might suggest areas where spending could be reduced and offer educational materials.

The program may also help set up a budget and will send the proposal out to creditors to agree to any new monthly payments, fees, payment schedules, interest rates or other factors, Reputable programs should only charge for set-up and a monthly fee.

It is generally recommended to take extra care with any for-profit organizations requiring a lot of upfront fees, memberships, or fees for each creditor they work with on negotiation.

There is no magic pill to reduce debt, so spending less and budgeting more have been key pillars of a healthy financial foundation.

No company should promise a quick turnaround for becoming debt-free overnight. Historically, credit repair has been a market tainted by fraud, so it’s recommended to tread carefully and do the research before signing on to any program.

Selecting a Debt Consolidation Program

One common and simple way to sign up for this type of debt management program is to contact a reputable nonprofit credit counseling agency. The U.S. Department of Justice offers a list of approved credit counseling agencies by state.

Along with ensuring the agency you’re considering is on this list, you may want to consider doing further research by asking your state attorney general and checking local consumer protection agency websites.

Debt settlement companies often try to sell themselves as the same service, so be wary and check to be sure the organization is offering financial counseling and not making promises to reduce the amount of debt owed.

Based on the interview and assessment of current income and debt, the counselor could either recommend a debt management program, or another solution which could be a personal loan, bankruptcy, or some other form of settlement.

The company should not promise any sort of quick fix or short-term solutions.

The National Foundation for Credit Counseling is responsible for certifying many of these counselors, who must complete a comprehensive training program certifying them to help and educate consumers regarding their finances.

Because most nonprofits are certified, it helps to read consumer reviews of these programs as well, to see how the company operates.

The next step is to check what services are offered and what fees will be charged, such as an initial sign-up fee and recurring monthly fee. Understanding the costs upfront is important, and can help someone avoid a possibly predatory, for-profit business.

Something else you may think to look out for: A settlement company may charge more fees initially on the promise to arrange a reduced lump sum payment of debts.

These companies often instruct consumers to stop making payments entirely on their debt, which could affect credit rating and even may cause the creditor to send the debt to a collection agency. A legitimate program should offer financial advice and counseling on ways to help reduce debt.

Paying Off Debt Independently

Rather than looking into a debt consolidation program to alleviate unwieldy monthly payments, one alternative worth considering is an unsecured personal loan, which could help reduce the overall amount of interest payments and possibly save money on interest in the long run.

While a personal loan doesn’t normally come with the counseling services offered by some consolidation programs, SoFi members also get access to complimentary appointments with SoFi Financial Planners.

This service for SoFi members can cover some of the ground offered by the certified debt counselors under the debt consolidation programs, with an initial call to talk about goals and personal finances.

The SoFi Financial Planner may cover things with members like take-home pay, monthly budgets and spending, loans and debt, and savings, and come up with some next steps.

By consolidating high-interest debt into one lower-interest personal loan, borrowers might find having a fixed monthly payment is a simpler way for them to manage debt. For someone interested in debt consolidation, SoFi personal loans offer various term lengths, and come without fees—unlike many debt consolidation programs.

Consolidating your debt with a personal loan can potentially allow you to pay off your debt at a lower interest rate. An unsecured personal loan could make it easier to focus on just paying down the one loan, with a single monthly payment at a fixed rate and payment amount.

Financial wellness can start with having a plan to be debt-free, and debt consolidation, whether through a certified program or a personal loan, can be one place to start.

Taking out a personal loan with SoFi means complimentary access to SoFi Financial Planners, and no fees to worry about.



SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

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Can I Pay off a Personal Loan Early?

Perhaps you’ve gotten a raise or a bonus, and you want to pay off the remaining balance on a personal loan. Is that possible? The short answer is “yes” and, in many cases, it can be a wise decision.

After all, when you get extra cash, it can often be beneficial to pay off debt. But, if there’s a prepayment penalty, then this loan payoff may be more costly than what you’d expect.

A prepayment penalty is a provision in a loan agreement that states a penalty will be charged if the loan is paid off within a predetermined time frame, say two years.

This post will review ways to find out if your loan has a prepayment penalty, and how the presence of this penalty could affect your decision about whether or not to pay off the personal loan early.

Also included, is information on avoiding a prepayment penalty in the first place, and suggestions for steps you can consider if you want to pay off a loan that has one.

Overview of Prepayment Penalties

It may sound strange that a lender would include this kind of penalty in a loan agreement in the first place.

The reason why it sometimes happens, though, is because the lender may want to ensure you’ll pay a certain amount of interest before the loan is paid off. It is an extra fee that, when charged, helps lenders recoup more money from borrowers.

You can find out if you’d be charged with a prepayment penalty by looking at the loan agreement you signed with the lender.

If you have one, the penalty could be in effect for the entire loan term or for a portion of it, depending upon how it’s defined in the loan agreement.

Types of Prepayment Penalties

Figuring out what your prepayment penalty assessment is can help you weigh the pros and cons of paying off your loan early. First, you can always call the number on your monthly billing statement and ask the servicer what the prepayment penalty assessment is. To confirm this information or to calculate the penalty, here are some suggestions:

•   Interest costs: In this case, the lender would base the fee on the interest you would have paid if you made payments over the total term. So, if you paid your loan off one year early, the penalty might be 12 months’ worth of interest.
•   Percentage of your remaining balance: This is a common way for prepayment penalties to work on mortgages, for example, and you’d be charged a percentage of what you still owe on your loan.
•   Flat fee: Under this scenario, you’d have to pay a predetermined flat fee for your penalty. So, whether you still owed $9,000 on your personal loan or $900, you’d have to pay the same penalty.

Avoiding Prepayment Penalties

If you don’t want to be saddled with this penalty—and you haven’t yet taken out your loan—then you should look at whether the lender you’re considering charges one or not.

If you’ve already taken out a loan and it does have a prepayment penalty, there are some options. First, you could simply decide not to pay the loan off early.

This means you’ll need to continue to make regular payments on the loan, rather than paying off the balance sooner, but this will allow you to avoid the penalty fee. You could also talk to the lender and ask if the penalty could be waived, but there is no guarantee that this strategy will succeed.

If your prepayment penalty may not be applicable throughout the entire term of the loan, you can determine when the penalty expires. If you’re certain that it already has expired, then you may be able to pay off your remaining balance without this fee.

Or, if the penalty will no longer be applicable in the near future, you could pay off the personal loan once there is no longer a prepayment penalty.

Here’s one more strategy—calculate how much you have remaining in interest payments on your personal loan and compare that to the prepayment penalty. You may find that you’ll still save more by paying the loan off early, even if you do have to pay the prepayment penalty.

If you’re in the market for a personal loan, or will be in the future, and you don’t want a loan with a prepayment penalty, ask your potential lender whether one will be included in the agreement. Thanks to the Truth in Lending Act , lenders must provide you with a document that lists all loan fees, and this includes any prepayment penalties.

Types of Personal Loans

In general, there are two types of personal loans—secured and unsecured. Secured loans are backed by “collateral,” which could be a car, a house, or an investment account, for example. Unsecured personal loans, on the other hand, are backed only by the borrower’s creditworthiness, with no asset attached to the loan.

You might hear unsecured personal loans referred to as “signature loans,” “good faith loans,” or “character loans.” In general, these are installment loans where you pay back the amount you borrowed at a certain interest rate over a predetermined period of time, called the term.

Personal Loan Uses

Personal loans can typically be used for a wide range of personal reasons, including:

•   consolidation of credit card balances into a lower-interest loan
•   debt consolidation, which can include credit card balances
•   medical expenses
•   home renovation or repair projects

Let’s say that you’re thinking about consolidating credit card debt into one personal loan. Typically, you’d first total up what you owe on credit cards, and borrow enough money on an unsecured personal loan to pay off all of those credit card balances.

This means you would now make payments on one single personal loan, ideally at a rate that would be lower than the combined rates on your credit cards.

To find out roughly how much you could save, you could use a Personal Loan Calculator. In general, the better credit history you have, the more likely that you’ll be able to get a competitive rate on a personal loan.

Possible benefits of consolidating your credit card debt may include:

•   It’s more convenient to make just one monthly payment, versus several of them, and this can make it less likely that you’ll miss making a payment.
•   Personal loans can have lower interest rates than credit cards, which can save you money in interest.

It can also make good sense to use a personal loan for home improvements, as just one more example. Benefits of doing so include that you can typically expect to pay less in fees and interest when compared to a credit card.
Another plus: if the personal loan is unsecured, your home is not on the line as collateral for the loan.

While there are benefits to borrowing a personal loan, it might not always be the right financial move for everyone. Personal loans offer a lot of flexibility, but if not borrowed wisely, it can tempt borrowers into a cycle of debt.

For example, when using a personal loan to consolidate credit card debt, it could be appealing to begin charging on the now open credit card limit. But doing so can lead to even more debt, as you’d be paying off the credit card and the personal loan.

The interest rates on personal loans may not be as competitive as other, secured loans. While personal loans can have lower interest rates than credit cards, those rates may still be higher than other secured installment loans like a home equity loan or home equity line of credit (HELOC).

Interest rates will likely vary from lender to lender, as well as based on a borrower’s personal financial history, so it’s important to shop around to find the best interest rate and terms for you.

There may also be fees in addition to prepayment penalties. Some personal loans also charge origination fees. This is the fee charged by the lender to compensate for the cost of processing the loan.

Depending on the lender, the fee is usually a percentage of the loan, either taken out of the amount borrowed, or charged on top of the borrowed amount. Policies will likely vary by lender, so be sure to thoroughly read the details of the loan.

Additionally, personal loans can be an entryway to scams . Be sure to fully vet the lenders to avoid any financial malice. Look for lenders who are registered in your state and have a secure website. Other signs of a scam can be a lender asking for upfront payment or guaranteeing approval without reviewing your credit history.

Personal Loans at SoFi

If you’re looking for an unsecured personal loan with no prepayment penalties, consider SoFi. There are no application fees, no origination fees, and no hidden fees.

You can use them to consolidate credit card debt, make home improvements, relocate, repair your vehicle, make a major personal purchase and more.

Ready to explore SoFi personal loans? Here’s how to get started!


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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4 Tips for Paying Off a Large Credit Card Bill

You know which three little words no one wants to hear? Credit card debt. It can go from zero to thousands with one quick swipe or build at a slow creep—a nice dinner here, a trip to the mall there, a gas fill-up to get you through until payday—and before you know it you could be staring at a credit card balance that’s a lot higher than you thought it was.

For Alicia Hintz, a member of the SoFi community, the debt creep started in 2016 with a large and unexpected loss of income—the day before she and her husband were to leave on their honeymoon. (Thanks, universe.)

Prior to that, they’d been toying with the idea of selling their Minneapolis home and moving closer to family in Wisconsin. The income reduction sealed the deal. But their house needed some work to be market-ready. The total bill was more than their savings, and their income wasn’t enough to pay in cash, so to the plastic they went.

For them the improvements were worth the investment—in that they sold their house for more than they paid for it, but almost every penny of it went toward fees, commissions, closing costs, and other expenses.

Alicia’s financial journey is likely to resonate with the 41.2% of American households that carry an average of about $9,300 in credit card debt, according to data reported by the Federal Reserve for Outstanding Revolving Debt. The statistics are sobering to be sure, but here’s a spoiler alert—thanks to some smart planning and a lot of stick-to-it-iveness, Alicia’s story ends on a high note.

4 Debt Payoff Strategies

Fast forward a few months and Alicia and her husband live in Wisconsin but on a much-reduced budget. In fact, it would be six more months before they were able to get their finances back up and running—that’s a lot of time for savings to shrink and debt to grow.

1. Zero Interest Credit Card

To try and combat the loss of income, Alicia opened a 0% interest (also known as a deferred interest) credit card with plans to pay it off within the year. “Before I opened that card, I had always paid off my credit card balance each month in full,” she said in a written interview with SoFi.

But, as is life, things didn’t go as planned. “The first month I didn’t pay off my full balance made me panic,” said Alicia. And on top of day-to-day financial challenges, the couple was invited to a destination wedding in the summer of 2017. In order to get the discounted room rate, they had to pay upfront for the flight and resort—close to $5,000.

“That extra money added to our credit card debt was a steep mountain to climb,” Alicia said. “After we had to pay that, I knew it would be years to get everything paid off.”

A 0% interest promotional period on a new credit card can last as long as 18 billing cycles , which could be a long enough time to make a large dent in the card’s principal balance.

But once the promo period expires, the interest rate can climb to as much as 27% (or higher). A credit card interest calculator can give you an idea of how much that rate will affect your total balance, and it’s important to consider whether you can achieve your payoff goal before the rate rises.

2. Creating a Debt-Focused Budget

Tackling a large credit card bill isn’t likely to be easy, so an important part of the process could be a hard look at what putting extra money toward credit card bills means for the rest of your budget.

One way to approach a solid debt-payoff plan is to begin with an organized budget. You can start by taking a look at the big picture, including all of your monthly expenses as they currently stand, all your income, and all your debt.

One way to make this task easier on yourself is to download an app like SoFi Relay, which pulls all of your financial information into one place.

Your next step might be to focus on your spending. You may see obvious areas where you can cut back, or see if you can get creative to come up with some extra cash flow each month.

“We definitely tried to eat out less and cut back on shopping for clothes,” Alicia said. “But it seemed like every month there were more unexpected expenses that needed to be put on the credit card.”

From there, you can start to focus on a plan that makes credit card payments as equally important as the electric bill. And while you may not be able to pay more than the minimum on all your cards, it’s important to ensure that you pay at least that much if you want to avoid accumulating additional debt.

That’s because, while paying only the minimum can lead to compounded interest rates and larger overall balance over time, skipping payments can also lead to higher, penalty interest rates, late payment fees, and can even affect your credit.

3. The Snowball, The Avalanche and The Snowflake

The snowball and avalanche debt repayment strategies take slightly different approaches to pay down debt, and both involve maintaining the minimum payment on all but one card.

The debt snowball method focuses on the debt with the lowest balance first, regardless of interest rate, putting extra toward that payment each month until it’s paid off.

Then, that entire monthly payment is added to the next payment—on top of the minimum you were already paying. Rinse and repeat with the next card, and it’s easy to see how this method can quickly get the (snow)ball rolling.

The debt avalanche is based on the same philosophy but targets the highest-interest payment first. Getting out from under the highest debt can save a lot of money in the long run, and just like the snowball method, applying that entire payment to the next-highest-interest debt can lead to quick results.

The third snow-related strategy, the debt snowflake, emphasizes putting every extra scrap of cash toward debt repayment. This method played an active role in Alicia’s debt-elimination strategy. “If you have extra money to throw at your loans, even $20, that can still make a difference in your overall amount owed,” she said.

4. Personal Loan

As Alicia’s credit card utilization went up, her credit score went down. She decided to research her options and was ultimately approved for a SoFi credit card consolidation loan at a considerably lower interest rate than her credit cards, which along with making extra payments, helped save her money in the long run.

Now facing one personal loan payment vs. multiple credit card bills, Alicia anticipated being able to pay down the debt sooner than the three-year term she selected. And once again, life happened.

Over the course of those years, her husband took a new job, and they both changed cars, bought a house, and had a baby. They also went to two more destination weddings. This time, though, the extra expenses didn’t derail the plan.

“The loan was paid off within two years,” she said, thanks in part to a conservative budget and using an annual work bonus as a snowflake to make a dent in the balance.

From Someone Who’s Been There

One of the biggest things to remember, Alicia said, is that debt elimination doesn’t happen overnight. “Paying off debt is hard work,” she said. “Take it one month at a time. Some months are easier on your wallet, and others are not—looking at you, December!”

She suggested using the time you’re working to pay off debt to develop good budgeting and spending habits so that your post-debt finances are about saving, not spending.

And another tip from Alicia? Celebrate even the little victories. “When I paid off half my SoFi loan, I celebrated by taking a nice long bath,” she said.

When they reached zero balance, she and her husband went out for ice cream. “You can celebrate by going to the park with your kids, reading an extra chapter in a book, or finding a new series to watch,” she said. “Always celebrate your loan payoffs, no matter how small!”

SoFi personal loans also have no fees and no surprises—just a helpful way to manage your money. Additionally, applying is all online. If you’re looking for ways to consolidate your credit card debt, you can check your rate at SoFi in just two minutes.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Member Testimonials: The savings and experiences of members herein may not be representative of the experiences of all members. Savings are not guaranteed and will vary based on your unique situation and other factors.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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