What Is LIBOR?

This month’s to-do list may include submitting a student loan application for a child starting college next year, shopping for a used car now that the old one is making that sputtering sound again, paying a mortgage bill, and paying a credit card statement balance. (Plus a little extra because there weren’t enough funds last month to pay off the statement balance.)

These are fairly run-of-the-mill chores for any adult’s to-do list. But there’s something out there that affects each of those four tasks. It’s called the LIBOR.

Every item on that list—a student loan, car loan, mortgage payment, and credit card bill—comes with an interest rate. The London Interbank Offered Rate, or LIBOR, affects interest rates across the globe.

Chances are, the LIBOR rate has affected almost every American today, either directly or indirectly. So, what is this LIBOR rate that is affecting everyone’s finances?

LIBOR is the interest rate that serves as a reference point for major international banks. Just as average joes might take out loans that carry interest rates, banks loan each other money at an interest rate. This rate is the LIBOR.

The LIBOR rate is recalculated every day and published by the Intercontinental Exchange, aka ICE, an American financial market company.

The LIBOR rate should not be confused with the US prime rate. The LIBOR rate is floating, meaning it changes every day. The US prime rate is another benchmark interest rate, but it stays fixed for an extended period of time.

The LIBOR is an international rate, so it’s based on five currencies: the American dollar, British pound, European Union euro, Swiss franc, and Japanese yen.

It also serves seven maturities, or lengths of time: overnight (also referred to as “spot next”), one week, one month, two months, three months, six months, and one year.

The combination of five currencies and seven maturities results in 35 separate LIBOR rates each day. Borrowers might hear about the one-week Japanese yen rate or six-month British pound rate, for example.

The most common LIBOR rate is the three-month U.S. dollar rate. When people talk about the current LIBOR rate, they’re most likely referring to the three-month U.S. dollar LIBOR.

Every day, ICE polls a group of prominent international banks. The banks tell ICE the rate at which they would charge fellow banks for short-term loans, which are loans that will be paid back within one year.

ICE takes the banks’ highest and lowest interest rates out of the equation then finds the mean of the numbers that are left. This method is known as the “trimmed mean approach,” or “trimmed average approach,” because ICE trims off the highest and lowest rates.

The resulting trimmed mean is the LIBOR rate. After calculating the LIBOR, ICE publishes the rate every London business day at 11:55 a.m. London time, or 6:55 a.m. in New York.

How LIBOR Is Calculated

So far, we know that a group of international banks submits interest rates to ICE, and ICE calculates the trimmed mean to find the LIBOR rate. But there’s more to it than that. Which banks are involved, and how do the banks decide what rates to submit?

ICE selects a panel of 11 to 16 banks from the countries of each of its five currencies: The United Kingdom, United States, European Union, Switzerland, and Japan. This group of banks is redetermined every year, so banks may come and go from the panel.

The chosen banks must have a significant impact on the London market to be selected. (The L in LIBOR does stand for London, after all.) Some of the current US banks are HSBC, Bank of America, and UBS, just to name a few.

The banks have a pretty complex way of determining their rates called the “Waterfall Methodology.” There are three levels to the waterfall. In a perfect world, every bank from the panel would be able to provide sufficient information in Level 1, and that would be that. But if a bank can’t provide adequate rates for Level 1, it moves on to Level 2; if it doesn’t have submissions for Level 2, it moves on to Level 3.

•   Level 1: Transaction-based. A bank determines rates by looking at eligible transactions that have taken place close to 11 a.m. London time.

•   Level 2: Transaction-derived. If a bank doesn’t have rates based on actual transactions, they provide information that’s been derived from reliable data, such as previous eligible transactions.

•   Level 3: Expert judgment. A bank only gets to Level 3 if it can’t come up with transaction-based or transaction-derived rates. In this case, its bankers submit the rates they believe the bank could afford to charge other banks by 11 a.m. London time.

Seems complicated, doesn’t it? And bankers from every bank on the panel go through the Waterfall Methodology every business day.

After the ICE Benchmark Administration (IBA) receives all the banks’ rates, they cut the lowest and highest numbers and use the remaining data to find the “trimmed mean,” and—tada!—that’s the LIBOR for the day.

Why LIBOR Matters

Wondering why people should care about LIBOR? If they don’t work at a bank, who cares? Well, LIBOR actually affects almost every person who borrows money. Many lines of credit, including credit cards, mortgages, auto loans, student loans, and more, are tied to LIBOR.

All federal student loans come with fixed interest rates. Once the government sets interest rates, that rate remains fixed regardless of what happens with LIBOR because it’s based on the 10-year Treasury note instead.

When it comes to things like private student loans and mortgages, however, Americans can choose between fixed-rate loans and variable-rate loans. With variable-rate loans, the borrower’s rate may increase or decrease along with the LIBOR rate.

That may seem like a scary way to determine rates. What if the LIBOR rate increases to, say, 10%? Many lenders place a rate cap on loans so variable-rate loans can’t become expensive to the point that many borrowers may feel they have no choice but to default on their loans.

So while the LIBOR does affect many variable-rate loans, borrowers shouldn’t worry about rates spiraling out of control.

When the LIBOR rate is low, it could be a good time for consumers to take some steps toward achieving financial goals.

They might consider consolidating or refinancing their loans, or even taking out a personal loan. If their income is steady and credit score is good, a low LIBOR rate could help them land a competitive interest rate.

Someone with no debt or a fixed-rate loan might think, “Phew! It looks like the LIBOR doesn’t affect me.” Actually, LIBOR affects everyone. When the LIBOR rate continues to increase, borrowing can become so expensive that many Americans can’t afford to borrow money anymore.

When people stop taking out loans or using their credit cards, the economy slows down and the unemployment rate could rise as a result. After a while, this could lead to a recession.

Remember the financial crisis of 2008? LIBOR played a big part in that tumultuous time for America.

Subprime mortgages started defaulting, and the Federal Reserve had to bail out insurance companies and banks that didn’t have enough cash. Banks were afraid to lend to each other, so the LIBOR rate surged and investors panicked, leading the Dow to drop by 14%.

And think about what is currently going on in the economy right now. Because of the coronavirus pandemic unemployment rates have skyrocketed and interest rates have dropped dramatically.

But, interest rates will no longer be tied to LIBOR in the near future. 2021 has been set as a deadline for financial firms to move away from using LIBOR. Financial firms are looking to tie to other rates, such as the Secured Overnight Financing Rate (SOFR), instead.

The History of LIBOR

How LIBOR Began

Why does LIBOR exist in the first place? Well, in the 1960s and 1970s, demand for interest rate-based goods such as derivatives started to increase.

The British Bankers’ Association (BBA) represented London’s financial services industry at the time, and the association decided there should be a consistent way to determine rates as demand grew. This led to the creation of the BBA LIBOR in 1986.

The BBA doesn’t control LIBOR anymore. In fact, the BBA doesn’t even exist. The association merged with UK Finance a few years ago. After some struggles and scandals took place on the BBA’s watch, ICE took over LIBOR in 2014. The BBA LIBOR is now the ICE LIBOR.

LIBOR Scandals

Bankers in ICE’s group of banks have been found guilty of reporting falsely low LIBOR rates. In some cases, these lies benefited traders who held securities tied to the LIBOR rate.

In other instances, the banks raked in the dough by keeping LIBOR rates low. People tend to borrow more money from banks when rates are low, so by deceiving the public, banks conducted more business.

In 2012, a judge found Barclays Bank to be guilty of reporting false LIBOR rates from 2005 to 2009, and the CEO, Bob Diamond, stepped down. Diamond claimed other bankers did the exact same thing, and a London court found three more bankers guilty of reporting false LIBOR rates.

After the 2008 financial crisis and 2012 scandal, it became clear that there were some flaws in how LIBOR was determined.

The Financial Conduct Authority of the United Kingdom started overseeing LIBOR, and in 2014, the ICE Benchmark Administration (IBA) took over LIBOR and started changing how things were done.

How LIBOR Is Changing

LIBOR has gone through a lot of changes since 1986. In 1998, the bankers were told to change the question they asked themselves each morning before reporting their rates. Bankers used to base rates on the question, “At what rate do you think interbank term deposits will be offered by one prime bank to another prime bank for a reasonable market size today at 11 a.m.?”

Now they should ask themselves, “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m.?” The questions may seem similar, but the change in wording showed that the BBA was trying to keep them honest.

In 2017, the IBA held a three-month test period of LIBOR standards in an attempt to limit further scandal.

LIBOR has changed currencies over the years. There used to be more than the remaining five currencies and more than the seven maturities, but some were added and removed after the financial crisis of 2008.

But despite all the attempts at improvements over the years, CEO of the FCA Andrew Bailey has announced that he hopes to stop using LIBOR by the end of 2021.

Some say LIBOR is becoming less reliable as banks make fewer transactions that depend on its rate. The Federal Reserve is proposing American banks use alternative benchmark rates, one option being an index called the Secured Overnight Financing Rate (SOFR) .

Competitive Interest Rates With SoFi

It’s difficult to know what will happen with the LIBOR rate next week, next month, or even at the end of 2021. But one thing’s for sure: benchmark rates continue to affect the US economy and consumers’ loan interest rates.

When members apply for a loan through SoFi, borrowers can choose between variable rates (which would be more directly affected by fluctuations in benchmark rates) or fixed rates on a variety of loan products.

SoFi offers variable-rate or fixed-rate mortgage, variable rate or fixed rate private student loans, or fixed rate personal loans. They may also be able to refinance their student loans or mortgages for more competitive rates if they qualify.

SoFi members can receive other discounts when they borrow through SoFi. For example, when student loan borrowers set up automatic payments, they are eligible to receive a reduction on their interest rate.

Whatever happens with LIBOR, SoFi members can benefit from perks like unemployment protection, exclusive member events, and member discounts.

Searching for a loan with competitive rates? SoFi offers home loans, student loans, and personal loans, as well as refinancing.



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Tips for Reducing Credit Card Debt

Americans are carrying more credit card debt than ever, and when the average credit card annual percentage rate (APR) for purchases hovers around 20% as of this writing, the interest on debt can be as crushing as the balance alone.

On top of a high APR, credit card companies generally charge what is referred to as compounding interest, a calculation that can make them even more challenging to pay off. Compounding interest means interest on a card that is charged not on the outstanding balance alone, but also the interest accrued.

In addition to compounding interest, forgetting to pay at least the minimum by the statement due date could result in a late fee penalty, which in most caseso is also added to the balance accruing interest. Forgetting to pay on time twice in a row, could result in a higher rate of interest charged on the account referred to as a higher penalty rate.

With all the above considered, a small debt could balloon quickly if a person isn’t paying attention to terms and due dates—or simply making only minimum payments.

The ever-increasing bottom line of credit card debt can be enough to keep some persons awake at night. But, working to reduce debt can help alleviate that burden, and could result in things like paying cards off sooner, saving money, a good night’s sleep, improved finances and more, in the process.

Read on for some tips on how different methods might help a person reduce credit card debt.

Start by Creating A Budget

If eliminating credit card debt is the destination, creating a budget is like the road map that gets a person there. About a third of Americans say they have no budget at all, but implementing even a simple budget might help make managing money easier, and could help bring a goal like reducing credit card debt to a more attainable level.

When creating a budget, it’s recommended to start simple. Budgeters can start small with these simple steps:

  1. Gathering financials. It might be a little painful to comb through bills and account statements, but the more information a person has from the start, the more empowered they are to budget accordingly. For example, consider collecting your most recent monthly statements either digitally or physically. These may include, but are not limited to:

◦  Mortgage/Rent

◦  Utilities (water, gas, heat, internet, cable, HOA, etc)

◦  Pay stubs

◦  Credit card or auto loan statements

◦  Student loans or other miscellaneous recurring loans and bills

◦  Subscription services (Amazon, Netflix, Spotify, etc)

Taking the time to gather these documents could help give a person a clearer picture of what they’re spending month over month, but also might serve to highlight recurring or duplicate charges that should be eliminated (like when someone forgets to end their gym memberships months after they’ve stopped going).

  2. Determining expenses vs. income. Once financials are all laid out, a person may have enough information to determine current expenses versus income each month. Using the information you have gathered, such as a recent pay stub, could help a person determine their exact monthly income, post-tax–that’s the net amount they actually take home after taxes, health insurance, and other deductions. After calculating net income, try tallying up monthly expenses you identified (from the documents above) to help determine the average monthly expenses. Hopefully, the amount a person spends is less than they take home for income each month.

  3. Implementing budgeting guidelines. Calculating the above two steps could result in an actual budget creation. There are various ways to perform this task, from spreadsheets to apps; there’s seemingly limitless ways to help create a budget. One good idea is tailoring the budget to the person. One size usually doesn’t fit all when it comes to income and living expenses.

Feeling adrift? There are many tools to choose from but one common type of budgeting method for beginners can be the classic 50/30/20 budget. It doesn’t require complicated spreadsheets, or tricky apps to get started. The 50/30/20 method simply stipulates:

•  Half a person’s take-home pay should go towards “essential spending.” This could mean anything from housing costs and health insurance to groceries and utilities. It can be anything you need to live on a monthly basis.

•  One-third of a person’s post-tax pay should be tagged for “discretionary spending.” This spending is services a person could cut if there were in a pinch, like meals out, monthly streaming service bills, or gym membership.

•  Finally, 20% of post-tax income should be set aside for saving. The rest of a person’s paycheck is ideally reserved for retirement, emergency savings, or in the case of higher interest credit card debt, one idea could be to set aside funds each month to be used in making larger principal payments.

The 50/30/20 budgeting method is common for beginners because of its simplicity and flexibility. Trying to adhere to the percentages can sometimes show budgeters their blind spots, or perhaps highlight areas where they might need to improve. But, it can also be flexible, with percentage points waxing or waning based on an individual’s needs month over month.

The bottom line with budgeting? Something simple can be better than nothing at all. Some may consider that any budgeting structure that helps a person identify things like spending patterns is an improvement from sticking their head in the sand.

Paying More Than The Minimum

When a person has multiple credit card accounts racking up charges and interest, it can sometimes feel overwhelming. They might be unsure of which to prioritize for payoff, if at all, and end up paying the minimum due on every card each month.

But, if a person makes the minimum payment due alone, they might be surprised to learn how much more they may end up paying in interest as the account balance accrues. Paying more than the minimum amount owed each month could lead to saving in the long run since there’s a smaller balance to charge compounded interest on.

It might be tempting to keep paying the minimum balance owed, but a person could end up paying much more for interest charges in the long run because of the compounded interest. Just how much? Check out SoFi’s credit card interest calculator to get a general idea of how much you could possibly save on interest by calculating different repayment options.

Debt Payoff Strategies

Paying off more than the minimum each month is great, but coming up with a payoff strategy could offer a better outcome in the long run. Employing a method that works for your lifestyle could result in things like building momentum, alleviating stress, possibly making it simpler overall to conquer debt.

There are a number of budgetary methods online to help reduce balances on things like credit card debt, but here a few of the most well known are outlined below. Each method generally includes wiggle room in a person’s budget, to help facilitate repayment on outstanding balances.

•  Snowball. Like a snowball rolling down a hill, this method starts with the smallest debt balances first, then builds towards the larger balances. You’d start by determining the balance of debt, from smallest to largest, without considering interest rate. Then, pay the minimum on each bill, with the exception of the smallest—all extra cash is put towards paying off the smallest loan until it’s eliminated. From there, roll that payment amount into the next smallest debt, until it’s gone. Keep the pattern going until all debt is gone.

  Snowball method sometimes gets a bad rap because focusing on small debt balances first could mean paying more interest in the long run. But, the Snowball Method may have a positive psychological effect. Repaying smaller debts faster could lead someone to feel a sense of accomplishment that may then help them power through the rest of the debt repayment process.

•  Avalanche. If small wins off the bat don’t matter much, then some might turn to the Avalanche Method. This strategy starts with paying down the biggest interest rate debt first, paying minimums on all other debts, and contributing all free cash to the bill with the highest interest charges until it’s paid down or off. Continue, paying down debt with the next highest interest rate. Keep going until all debt is gone.

  One benefit of this method could be saving on interest payments over the life of each credit card balance, but the downside could be that it takes longer to see any “wins.” But, once things start moving, it should have an avalanche effect, with each loan toppling.

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Consolidating Multiple Debts

If a person’s carrying high-interest debt on multiple credit cards, it can feel overwhelming. Multiple bills, due dates, and accounts could lead to confusion of amounts due, missed payments, and possibly the penalties that can come with missing payments. For some, a credit card consolidation loan might help to cut through the confusion by rolling all their revolving debt into one unsecured personal loan.

How can a personal loan possibly help? If a person has an outstanding amount owed on multiple cards, they may be able to consolidate all the debt into one personal loan with a single fixed rate payment.

What’s more, unsecured personal loans oftentimes come with a fixed interest rate that’s lower than the average credit card rate, which means less interest charges could accrue month over month.

Depending on how quickly a person pays off a personal loan, they could save money on interest over the life of the loan with a lower fixed APR. Streamlining debt might also lead to peace of mind for some—as does a set term with a final payment date, instead of a revolving debt like a credit card. It’s one payment a month, with one rate and a payoff date; instead of multiple open-ended debts of differing amounts with varied APRs.

Unsecured personal loans aren’t for everyone. While their APRs are generally lower than credit cards, not everyone will qualify for the lowest possible rates. And taking out a personal loan is still taking out additional debt, so it’s important to weigh the ramifications of adding a loan to one’s credit history.

Fortunately, applying for a personal loan doesn’t have to be complicated. With SoFi, you can check your personal loan rates online in minutes. You can rest easy with, no fees and a fixed rate and monthly payment.


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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation 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
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Using a Co-Borrower on Your Loan

Qualifying for a loan is sometimes easier said than done. Just because you need a mortgage to buy your first home, or a personal loan to consolidate and pay off credit card debt, doesn’t mean a lender is going to magically understand and give you the exact loan and interest rate you want.

Thankfully, if you’re struggling to qualify for a loan, you can have a friend or family member step in to help. Essentially, you can leverage their income, credit score, and financial history to help you get a loan that’s right for you.

The downside is that this type of borrowing (as in, borrowing money with another person) can get a little jargon heavy. “Co-borrower,” “co-applicant,” and “co-signer” are all terms that are going to come up. Here’s briefly what they mean:

A loan co-borrower basically takes on the loan with you. Their name will be on the loan with yours, making them equally responsible for paying back the loan. They will also have part-ownership of whatever this loan buys—for example, a co-borrower will own half of the home if you take out a mortgage with a co-borrower.

A co-applicant is the person applying for the loan with you. Once the loan is approved, the co-applicant becomes the co-borrower.

A co-signer can help you qualify for a loan, but isn’t your partner on the loan like a co-borrower. A co-signer’s financial history and credit score is factored into the loan decision, but they do not have ownership over the loan, and would only help make your loan payments if you were unable to make them.

We’ll dig a little deeper into co-borrowers and co-signers to help you decide which is right for you.

How does signing a loan with a co-borrower work?

Co-signing helps to assure lenders that someone will be able to pay back your loan. You typically use a co-signer with a stronger financial history than you, which can help you get a loan you might not qualify for on your own (or for better terms than you may qualify for on your own). Lenders might be more comfortable lending to you if your co-signer has a strong credit score and a dependable income, but loan underwriting criteria (that is, the personal financial factors used to determine who gets a loan at what rates and terms) differ from lender to lender.

For example, a parent with a stronger credit history might co-sign their child’s mortgage, allowing the child to get a lower interest rate on their mortgage than they would have on their own. The parent wouldn’t own the home, but they would have to make mortgage payments if their child couldn’t.

When might it make sense to have a co-signer rather than a co-borrower?

People typically consider a co-signer when they know they can’t qualify for a loan on their own, whether because they don’t have enough credit history, their credit score isn’t great, or they don’t earn enough to qualify for a desired loan (among other factors). A co-signer acts as a safety net if you’re unable to make payments on the loan.
When might it make sense to have a co-borrower?

Let’s go back to the example of a parent helping their child qualify for a mortgage loan. If that parent was a co-borrower instead of a co-signer, they would own the home with their child in addition to being equally responsible for the monthly mortgage payments.

Typically, spouses co-borrow when buying property, or if they are taking out a home improvement loan for a remodel. You and your co-borrower may qualify for a larger loan than if you were to take out a loan solo, and this way, you both own the investment and are responsible for loan payments.

The great thing is that some companies, like SoFi, now allow qualified individuals to co-borrow on low interest personal loans. That means you and your co-borrower (whether they’re your spouse, friend, or a member of your family) may be able to qualify for an even better interest rate and fund your financial goals that much more easily.

It is a big decision to take out a loan, so it may be a good idea to make sure that your co-borrower and yourself are 100% ready to take on this financial commitment. Both of you will be on the hook for payments, therefore, creating a plan of action for paying off the loan could potentially help.

Thinking about co-borrowing on a personal loan to make your personal financial dreams a reality? Check out your rate on a SoFi Personal Loan in minutes.


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4 Student Loan Repayment Options—and How to Choose the Right One for You

It’s never too early to think about student loan repayment. Whether you just started college, or you recently graduated and are still in the ‘grace period’ before repayment, strategizing now may help you find a student loan repayment plan that works for you before making you make a single payment.

If you’re graduated, working, and already signed on to one payment plan, it’s easy to overlook the other choices. But you can make changes to your student loan repayment plan even if you’re not in a financial crunch.

It’s also a good idea to re-evaluate your plan over time. As your financial circumstances change, the way you want to manage your student loans may shift.

Before considering your options, take inventory of all your student loans. Be sure to list out the principal, the interest rate, the repayment period, and the servicer for each loan.

All federal student loans issued in recent years have fixed interest rates, but many private student loans or older federal student loans have variable rates. If the rate is variable, be sure to note that as well.

Student Loan Repayment Options

Once you understand your student loans, it’s time to think about your repayment options. The effortless choice, of course, is to do nothing and just pay your bills as they come.

Simply put, it means you pay back your student loan(s) under the interest rate and terms you agreed to when you initially signed the paperwork. For federal student loans, this is formally called the Standard Repayment Plan, and it typically means paying a fixed amount every month for up to 10 years.

There’s no “standard repayment plan” for private student loans; the interest rate may vary based on market factors, and your repayment term might be shorter or longer.

There’s nothing wrong with opting for the Standard Repayment Plan—except that for some borrowers, it’s not the most cost-effective choice. Some borrowers can save by refinancing their loans through private lenders.

Others may be eligible for special federal programs that can reduce the amount owed monthly based on financial circumstances, and in some cases, forgive balances if you meet certain requirements. Here’s what you need to know about various student loan repayment options:

1. Student Loan Consolidation

Federal student loan consolidation lets you combine multiple federal student loans into a single new loan. You can’t consolidate private student loans using this federal program.

When you consolidate your federal student loans into a Direct Consolidation Loan, it doesn’t necessarily reduce your overall interest rate.

Your new loan’s interest rate will be the weighted average of all the old student loans’ interest rates, rounded up to the nearest eighth of a percent. This means your interest rate might actually be slightly higher than the rate you were paying before consolidation on some of your student loans.

When you consolidate, you may also be able to pick a new repayment plan. The Standard plan would still be available, but consolidation can also be a first step toward other plans of action, like loan forgiveness or income-driven repayment.

2. Student Loan Forgiveness

Student loan forgiveness is exactly what it sounds like—it erases some of your student loan debt. Some federal student loans, and Direct Consolidation Loans, are eligible for modified payment plans that forgive outstanding student loan balances.

Health care professionals, teachers, military service members, and those employed full-time by qualifying non-profit or public service organizations may be eligible for certain federal student loan forgiveness programs.

Some types of forgiveness aren’t completely free, however. Federal student loan balances forgiven under income-driven repayment plans may be considered income by the IRS, meaning that you might need to pay taxes on that amount.

Those taxes might still be less than paying the forgiven principal amount, but it can be an unpleasant surprise at tax time if you’re not prepared.

One notable exception is the Public Service Loan Forgiveness (PSLF) program. After 10 years of payments on a qualified income-driven repayment plan, those who have worked for qualified employers, such as the government or some non-profit agencies, can apply for forgiveness of all of their remaining federal student loan balances.

That forgiveness is not considered taxable income.

Additionally, you can see on this page here which federal student loans qualify for which types of forgiveness, cancellation, and/or discharge.

3. Income-Based Repayment

If the payments under the Standard Repayment Plan seem too daunting, federal student loans offer a variety of graduated and income-driven repayment plans. A graduated repayment plan, for example, means that the payment starts smaller and grows over time, while income-based repayment plans tie the amount you pay to the discretionary income you earn.

These income-driven repayment plans come in a variety of flavors and configurations, but an important takeaway is that, in many cases, you may end up paying more over the life of the loan than you would have on the Standard Repayment Plan.

That’s because, with low monthly payments that stretch out over more years, you could be paying more in interest over time. If your balance is high, your lower, income-adjusted monthly payments may not even be covering the interest that accompanies the principal (the set amount of money you’re given when you take out the loan). So rather than shrinking, your student loan balances could be growing over time as unpaid interest accumulates.

The upside is that if your job situation is less defined and you know you’ll need to tap the reduced payment rates these plans provide, choosing an income-driven repayment plan makes that possible.

Additionally, you’re still able to qualify for some student loan forgiveness programs if the rest of your student loans aren’t paid off after 20 to 25 years of consistent, on-time payments. However, again, it’s worth keeping in mind that you might be on the hook to pay income taxes on the remaining loan amount that is forgiven, depending on the repayment plan you qualify for.

4. Student Loan Refinancing

Refinancing student loans through a private lender offers the opportunity to consolidate multiple student loans into a single payment and potentially decrease your interest rate.

Loan repayment terms vary based on the lender, and terms and interest rates are often more favorable for those with better credit and earning potential (among other financial factors that vary by lender).

For potential borrowers with an interest in saving money over the life of their student loan, refinancing can provide overall value by offering market interest rates.

One important thing to know about refinancing, however, is that once you refinance a federal student loan into a private loan, you can’t undo that transaction and later consolidate back into a federal Direct Consolidation Loan.

This can be relevant for professionals in health care or education where federal student loan forgiveness plans are offered, or for those considering long-term employment in the public sector.

Further, refinancing federal student loans with a private lender renders them ineligible for important borrower benefits and protections, like income-driven repayment and deferment.

Which student loan repayment plan makes the most sense for you? Consider refinancing with SoFi as an option that could potentially save you money.


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 JANUARY 2022 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.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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

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.
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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What Are the Effects of Carrying a Balance on Credit Cards?

There’s no doubt that most Americans love their plastic.

Because many credit cards have low barriers to entry, they are often an easy way to obtain a credit line and build credit. So credit cards are considered a good tool for beginners to use when building their credit history. Additionally, if used responsibly, credit cards can be an important part of building a credit history.

But unfortunately, many people struggle to pay off balances.

More than 60% of U.S. adults had a credit card in 2019, according to Experian . And among households with revolving credit card debt, the average balance was more than $6,800, costing about $1,160 in annual interest, according to a 2019 survey.

Although carrying the balance isn’t necessarily an issue, not paying it off every month may cause interest accrual that can make a balance more challenging to pay off.

So, if you’re like the millions of Americans who carry a credit card balance every month, understanding the effects can help you determine how to reduce your credit card debt.

The Upshot on Carrying a Balance

In addition to remaining in the debt cycle, there are other financial consequences of carrying a balance on a credit card. Here are a couple of things you can expect when you don’t pay your balance off every month.

Effect on Credit Score

Carrying a high balance on a credit card relative to its credit limit could lower your credit score because it increases the credit utilization ratio, or balance-to-limit ratio, which shows the amount of available credit a person has.

To calculate your ratio, divide your total credit card balances by your total available credit. Ideally, you want to keep your credit utilization ratio under 30%. When you exceed this percentage, your credit scores may decrease a lot faster.

Borrowers trying to decrease their credit utilization should know that it can take two or three credit statement cycles for credit utilization levels to decrease when debt is being paid off.

Accrued Interest

Credit card users who don’t pay off balances every month accrue interest based on the annual percentage rate specified in the credit card terms.

The rate is the approximate interest paid on any balance that’s not paid off when the credit card bill is due, plus any fees. While APRs vary across credit cards and depend on credit history, the average credit card APR ranges from around 13% to 23%.

Most credit cards charge compounding interest. In simple terms, this means that credit card users with a balance that’s carried over from billing cycle to billing cycle end up paying interest on the interest that accrued.

Therefore, if they don’t pay off the balance every month, interest continues to accumulate and is tacked on to the balance.

The majority of credit cards compound interest daily. Therefore, if anything is owed after the payment due date, the balance can easily start climbing.

You can use a credit card interest calculator to get an estimate of how much interest has added to your balance. It might come as a surprise.

Reducing Credit Card Debt

Repaying credit card debt can seem like an uphill battle. But fortunately, with planning, commitment, and tools, it can be achieved. While it might not be an easy feat, taking small steps can help to chip away at credit card debt.
Here are a few options to tackle debt.

Budgeting to Repay Credit Card Debt

No matter how much credit card debt you have, you may want to start with revamping your budget. If you don’t already have one, this is the perfect time to create one. You’ll want to make a list of your monthly expenses and income.

You can record this information in a spreadsheet or a budgeting app, whichever makes it easier to track expenditures.

Once you have a list of the money you have coming in and going out, identify areas where you might be able to cut back on your spending habits. For example, do you find yourself overspending on clothes or eating out more often than not? Wherever you might be overspending, take this opportunity to eliminate some unnecessary expenses.

You may also want to incorporate a debt repayment strategy into your budget to accelerate the process. If you’re someone who is motivated by seeing fast results, you may want to consider the snowball method of repayment.

This strategy prioritizes paying off credit cards with the smallest balances first. Once you pay down the smallest balance, you move on to the second smallest balance, etc.

On the other hand, the avalanche approach could help you save more money in the future, because the goal is to repay credit card balances with the highest interest rates. Once you pay off the balance with the highest interest rate, you move on to the next highest interest rate, continuing until all debt is repaid (while making at least minimum payments on all other balances, of course).

Both debt repayment strategies have advantages and disadvantages, so you may want to consider which method you’ll be most able to stick with or use them as inspiration to create a plan that will work for you.

Opening a Balance Transfer Credit Card

Another option to consider is to open a balance transfer credit card. The idea is to open a new credit card with an introductory interest rate that is significantly lower than your current credit card interest rate. This can allow you to pay off your credit card balance at a lower rate as long as you pay it off in the introductory time frame.

You can potentially pay off your balance within a shorter time while saving money on interest. It’s important to note that the low-interest rate on balance transfer credit cards is usually only offered for an introductory period, usually between six and 18 months. Once that period expires, the rates typically increase.

If you plan to repay the balance before the introductory period ends, a balance transfer credit card might be worth pursuing. Make sure to account for a balance transfer fee—usually 3% to 5%.

As with any other credit card application, your credit history will determine if you qualify and what rate you’ll receive. If your credit isn’t ideal, this might not be an option.

Making Extra Payments

If you don’t want to open a new credit card, you can make extra payments to reduce interest costs. Again, credit card interest is calculated on the account’s daily average balance. Therefore, by making one or more extra payments throughout the month, you can lower the total interest accrued by the time your bill is due.

Even if you can only put a few extra dollars toward each payment, it can help minimize the interest cost.

Using a Personal Loan

If you have high-interest credit card debt, a debt consolidation loan can be an option worth considering. Consolidating all of your debts into a personal loan may help you streamline your finances.

SoFi® offers unsecured personal loans with low, fixed interest rates and fixed monthly payments, so borrowers may be able to save money and enjoy the ease of one predictable payment.

Checking your interest rate and terms will not affect your credit score.1 If the new rate and terms make sense for your financial situation, you can apply for a new loan with no fees, including no origination fees or late fees.

If high-interest debt is causing a revolving sense of dread, a SoFi® personal loan could be the solution.


1Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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.
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