Sep
22
2025
What Are High-Net Worth Individuals?

What Are High-Net-Worth Individuals?

By | Growing Wealth, invest, Investing | Comments Off on What Are High-Net-Worth Individuals?

A high-net-worth individual (HNWI) is generally considered to be someone who has at least $1 million in liquid assets. Liquid assets include cash and investments that can easily be converted into cash.

Someone who has a high net worth may rely on specialized financial services for money management. For example, they may work with a wealth manager or open accounts at a private bank. In terms of financial planning, the needs of high-net-worth individuals may include estate planning, investment guidance, and tax management.

Achieving a high net worth is often done through strategic investing and careful portfolio building. It’s important to keep in mind that high-net-worth individuals may have access to certain investments that the everyday investor would not. Minimizing liabilities is another part of the wealth-building puzzle, as net worth takes debt into account alongside assets.

Key Points

•   High-net-worth individuals (HNWIs) have at least $1 million in liquid assets.

•   Very-high-net-worth individuals (VHNW) have $5 to $30 million in liquid assets.

•   Ultra-high-net-worth individuals (UHNWIs) have $30 million or more in liquid assets.

•   HNWIs may enjoy benefits like reduced fees, discounts on financial services, access to exclusive investments.

•   Increasing net worth involves paying off debts, reducing expenses, and investing early and consistently.

What Defines a High-Net-Worth Individual?

A high-net-worth individual is someone who has substantial wealth. One commonly accepted definition of high net worth is having $1 million or more in liquid assets after all liabilities (debts) are subtracted. Liquid assets include cash and investments like stocks but exclude any assets that can be difficult to sell, such as the individual’s primary home and assets like antiques and fine art.

That said, definitions of high net worth can vary. Financial advisors who are registered with the Securities and Exchange Commission (SEC ) must report how many HNWI clients they have on Form ADV each year. For the purposes of this form, a HNWI is defined as having $750,000 in investable assets or a $1.5 million net worth.

The SEC also refers to high net worth individuals when discussing accredited investors. An accredited investor is defined as having:

•   Earned income of $200,000 or more (or $300,000 for couples) in each of the two prior years, with a reasonable expectation of the same income in future years

•   Net worth of over $1 million either alone or with a spouse, excluding the value of a primary residence



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Benefits Afforded to HNWIs

High-net-worth individuals may get a number of special benefits. For instance, they might qualify for reduced fees and discounts on financial services like investments and banking. They may also be granted access to special perks and events.

HNWI can also invest in things other investors or the general public can’t, such as hedge funds, venture capital funds, and private equity funds.

HNWI Examples & Statistics

The super rich, or HNWIs, are tracked by Forbes on the Real-Time Billionaires List, which is updated daily. As of September 4, 2025, these were the HNWI at the top of the list:

•   Elon Musk with a net worth of $428.4 billion

•   Larry Ellison with a net worth of $272.8 billion

•   Mark Zuckerberg with a net worth of $252.4 billion

•   Jeff Bezos with a net worth of $238.2 billion

•   Larry Page with a net worth of $192.5 billion

Recommended: What’s the Difference Between Income and Net Worth?

How Is Net Worth Calculated?

Wondering how to find net worth? It’s a relatively simple calculation. There are three steps for figuring out net worth:

1.    Add up assets. These can include:

◦   Bank account balances, including checking, savings, and certificates of deposit

◦   Retirement accounts

◦   Taxable investment accounts

◦   Property, such as real estate or vehicles

◦   Collectibles or antiques

◦   Businesses someone owns

2.    Add up liabilities. Liabilities are debts owed. For example, a home’s value can be considered an asset for net worth calculations. But if there’s a mortgage owing on it, that amount has to be entered into the liabilities column.

3.    Subtract liabilities from assets. The remaining amount is an individual’s net worth.

Net worth can be a positive or negative number, depending on how much someone has in assets versus what they owe in liabilities.

Net Worth vs Liquid Net Worth

In simple terms, net worth is the difference between assets and liabilities. Liquid net worth is a subset of net worth that only considers cash and other holdings that can quickly become cash, minus your liabilities (what you owe).

Liquids assets include cash in a savings account, stocks, money market funds, and exchange-traded funds (EFTs). Examples of illiquid assets are real estate, land, hedge funds, antiques, jewelry, and collections (such as cars, coins, or rare stamps).

What Is an Ultra-High-Net-Worth Individual?

A very-high-net-worth individual (VHNWI) is someone holding liquid assets between $5 million and $30 million. To fit the definition of an ultra-high-net-worth individual (UHNWI), you need to have liquid assets of $30 million or more. People who are considered to be ultra-high-net-worth individuals are among the wealthiest in the world.

For example, UHNWIs fall into the top 1% of U.S. households, which requires a minimum of $13.7 million in net worth. However, UHNWIs may or may not be part of the top 0.1% in the U.S., since this requires a net worth of approximately $62 million.

According to Knight Frank’s 2024 Wealth Report, the U.S. is home to the most UHNWIs in the world, which is 208,560.


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How to Get a Higher Net Worth

Reaching high-net-worth status can be a lofty goal but it’s one many HENRYs — high earner, not rich yet — work toward. The typical HENRY makes most or all of their income from working. While they may earn an above-average income, they may not have sufficient disposable income to start building wealth to increase their net worth.

There are, however, some ways to change that. For example, someone who earns a higher income but doesn’t have the higher net worth to reflect it may consider things like:

•   Paying off student loans or other debts

•   Relocating to a less expensive area to reduce their cost of living

•   Rethinking their tax strategy so they’re able to keep more of their income

•   Finding ways to increase income

Coming up with a solid investment strategy is also important for boosting net worth. That includes diversifying across assets like stocks, bonds, and real estate. It’s also important to start early and invest consistently, as this allows you to benefit from compound growth (when the returns you earn start earning returns of their own).

Creating multiple streams of income with investments and/or starting a side hustle can also help with making progress toward a higher net worth. At the same time, it’s important to take advantage of wealth-building assets you may already have on hand.

For example, if you have access to a 401(k) or similar plan at work, then making contributions can be an easy way to increase net worth. If your employer offers a company matching contribution you could use that free money to help build wealth.

The Takeaway

High-net-worth individuals are typically described as people who have $1 million or more in liquid assets. Those with $5 to $30 million in liquid assets may be labeled as “very high net worth”, and those with more than $30 million in liquid assets are generally considered ultra-high-net worth individuals.

While HNWIs enjoy access to exclusive financial opportunities, the path to building wealth is rooted in strategies anyone can use. These include consistent investing, minimizing liabilities, and focusing on long-term growth.

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FAQ

What are different types of high-net-worth individuals?

There are several types of high-net-worth individuals. Those who are high net worth have more than $1 million in liquid assets. Individuals with at least $5 million in liquid assets are considered very high net worth. If a person has more than $30 million in liquid assets they are considered ultra high net worth.

Where are most of the HNWIs located?

The U.S. has the highest number of high-net-worth individuals (HNWIs). According to Knight Frank’s 2025 Wealth Report, the number of individuals living in the U.S. with at least $10 million in net worth is 905,000. Next comes China (with 472,000), followed by Japan (122,000), India (86,000), and Germany (70,000).

Do high-net-worth individuals include 401(k)?

A 401(k) is part of your net worth, which is defined as your total assets (what you own) minus your total liabilities (what you owe). However, a high-net-worth individual (HNWI) is generally defined as someone who has at least $1 million in liquid assets. Liquid assets include cash and investments that can easily be converted into cash. A 401(k) usually isn’t considered a liquid asset unless you’ve reached the age of 59 ½, since making a withdrawal prior to this age can trigger a penalty.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


Photo credit: iStock/Cecilie_Arcurs

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For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.

Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

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Sep
18
2025
eggs in a nest mobile

Building a Nest Egg in 5 Steps

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Building a Nest Egg in 5 Steps

A nest egg can help you save for future goals, such as buying a home or for your retirement. Building a nest egg is an important part of a financial strategy, as it can help you cover any emergency costs that might crop up and allow you to become financially secure.

A financial nest egg requires some planning and commitment. In general, the sooner you start building a nest egg, the better.

Key Points

•  A financial nest egg is important for securing long-term goals and handling unforeseen expenses.

•  Setting SMART financial goals means they are specific, measurable, achievable, relevant, and time-bound.

•  Managing finances through a budget helps in allocating resources towards building a nest egg.

•  Automating savings allows for consistent contributions to a nest egg, which could help with achieving financial goals.

•  Putting money in savings vehicles with compound interest potentially accelerates growth, supporting both long-term and short-term needs.

What Is a Nest Egg?

A financial nest egg is a large amount of money that an individual saves to meet financial goals. Usually, a nest egg focuses on longer-term goals such as saving for retirement, paying for a child’s college education, or buying a home.

A nest egg could also help you handle emergency costs, such as unexpected medical bills, pricey home fixes, or car repairs. There is no one specific thing a nest egg is for, as it depends on each person’s unique aims and circumstances.

Understanding How a Nest Egg Works

To successfully build a nest egg, there are a few factors to keep in mind.

•  You have to have a plan. Unlike saving for short-term goals, building a nest egg takes time and you need a strategy to make it happen. A common technique is to save a certain amount of money each month or each week.

•  You need a place to stash your savings. This may sound obvious, but in order to save money every week or month, you have to put it in a savings account of some sort, such as a high-yield savings account. If you “save” the money in your checking account, you may end up spending it instead.

•  Make it untouchable. In order for your nest egg to grow so that you can reach your savings goals by a certain age, you have to protect it. Consider it hands-off.

How Much Money Should Be in Your Nest Egg?

There is no one correct amount a nest egg should be. The amount is different for each person, depending on their needs and what they are saving for. If you’re using your nest egg for a down payment on a house, for instance, you’ll likely need less money than if you are planning to use your nest egg for retirement.

If your nest egg is for retirement, one common rule of thumb is to save 80% of your annual income. However, the exact amount is different for each person, depending on the type of lifestyle they want to have in retirement. For instance, someone who plans to travel a lot may want to save 90% or more of their annual income.

What Are Nest Eggs Used for?

Nest eggs are typically used for future financial goals, such as retirement, a child’s education, or buying a house.

A nest egg can also be used to cover emergency costs, such as expensive home repairs, medical bills, or car repairs.

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5 Steps to Building a Nest Egg

1. Set a SMART Financial Goal

The SMART goal technique is a popular method for setting goals, including financial ones. The SMART method calls for goals to be (S)pecific, (M)easurable, (A)chievable, (R)elevant, and (T)ime bound.

With this approach, it’s not enough to say, “I want to learn how to build a nest egg for emergencies.” The SMART goal technique requires you to walk through each step:

•  Be Specific: For example, if you’re saving for emergencies, target an amount to save in an emergency fund. One rule of thumb is to save at least three to six months’ worth of living expenses, in case of a crisis like an illness or a job layoff.

•  Make it Measurable and Achievable: Once you decide on the amount that’s your target goal, your next task is to figure out how to reach that goal. If you want to save money from your salary to reach a total of, say, $3,000 for your emergency fund, you could put $200 a month into a high-yield savings account until you reach your goal. Be sure to create a plan that’s measurable and doable for your situation.

•  Keep it Relevant and Time-bound: The last actions in the SMART method are to keep your goal a priority, and to adhere to a set timeframe for achieving it. For example, if you commit to saving $200 per month for 15 months in order to have an emergency fund of $3,000, that means you can’t suddenly earmark that monthly $200 for something else.

2. Create a Budget

Saving money takes time and focus. Making a budget is a way to help you save the amount you need steadily over time. There are numerous budgeting methods, so find one that works for you as you build up your nest egg.

You could try the 50-30-20 plan, for instance, in which you allocate 50% of your money to musts like rent, utility payment, groceries, and so on; 30% to wants, such as eating out or going to the movies; and 20% to savings. You could also explore zero-based budgeting. Try out your selected method to ensure that you can live with it.

3. Pay Off Debt

Debt can be a major obstacle to building a nest egg, especially if it’s high-interest debt like credit card debt. If you’re struggling to pay down debt, making it a priority to repay what you owe can help save you money on interest and also reduce financial stress.

Adding debt payments into your monthly budget is one way to help keep your debt repayment plan on track. In addition, there are specific methods you can use to repay debt.

Debt Repayment Strategies

These are two popular debt repayment strategies you might want to explore — the avalanche method and the snowball method.

The avalanche method focuses on paying off the debt with the highest interest rate as fast as possible. You continue to pay the minimum monthly amount on all your other debt, but you direct any extra money you have the highest-interest debt. This method can generally save you the most money in the long run.

The other option is the snowball method, which focuses on paying off the smallest debt first while making minimum payments on all other debts. When one debt is paid off, you take the payment that went toward that debt and add it to the next-smallest one, “snowballing” as you go.

This method can be more psychologically motivating, as it’s easier and faster to eliminate smaller debts first, but it can cost more in interest over time, especially if the larger debts have higher interest rates.

Finally if you’re having trouble paying down a certain debt, like a credit card or medical bill, it might be worth calling the lender. In some cases, lenders may work with individuals to create a manageable debt repayment plan. Call the lender before the debt gets out of control.

4. Make Saving Automatic

Automating your savings simplifies the act of saving with automatic transfers of money from your paycheck directly into your savings account. It can be a steady way to build your savings over time, since you don’t even have to think about it or remember to do it.

Not only that, because the money isn’t hitting your checking account, you won’t be tempted to spend it.

Set up automatic transfers to your online bank account every week, or every month. While you’re at it, set up automatic payments for the bills you owe. Don’t assume you can make progress with good intentions alone. Technology can be your friend, so use it!

5. Start Investing in Your Nest Egg

In addition to a savings account, you might also want to explore options like putting some of your money in a money market account or certificate of deposit (CD). Both types of accounts tend to earn higher interest rates than traditional savings accounts.

CDs come with a fixed term length and a fixed maturity date, which can range from months to years. You generally need to leave the money in a CD untouched for the length of the term, or you’ll owe an early withdrawal fee. With a money market account, you can access your money at any time, though there may be some restrictions.

To help build retirement savings over time, consider participating in your employer’s 401(k). Some employers offer matching funds — if you can, contribute enough to your to get the employer match, since it is essentially free money.

The Power of Compounding Interest

When saving money to build a nest egg in certain savings vehicles such as a high-yield savings account or a money market account, the power of compound interest can work to your advantage.

Here’s how it works: Compound interest is earned on the initial principal in a savings vehicle and the interest that accrues on that principal. So, for instance, if you have $500 in a savings account and you earn $5 in interest, the $5 is added to the principal and you then earn interest on the new, bigger amount. Compound interest can help your savings grow. Use a compound interest calculator to see this in action.

Why Having a Nest Egg Is Important

A financial nest egg can help you save for retirement and/or achieve certain financial goals, such as buying a home or paying for your child’s education. By building a nest egg as early as you can, ideally starting in your 20s or 30s, and contributing to it regularly, the more time your money will potentially have to grow.

The Takeaway

Building a nest egg starts with setting financial goals and then creating a specific plan of action to reach them. Using a method like the SMART goal technique, it’s possible to build a nest egg for an emergency fund, a down payment on a house, or retirement. You can use a budgeting system to help stay on track, and automate your savings to make saving simpler.

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FAQ

What is a financial nest egg?

A financial nest egg is a sum of money you save or invest to meet a certain financial goal. A nest egg typically focuses on future milestones, such as retirement, paying for a child’s college education, or buying a home.

How much money is a nest egg?

There is no one specific amount of money a nest egg should be. The amount is different for each person, depending on their needs and what they’re using the nest egg for. For instance, if a nest egg is for retirement, some financial professionals suggest saving at least 80% percent of your annual income.

Why is it important to have a nest egg?

A nest egg allows you to save a substantial amount of money for a financial goal, such as retirement or your child’s education, for instance. By starting to build a nest egg as early as you can, the more time your money has to grow.

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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18
2025
Discretionary Income and Student Loans: Why It Matters

Discretionary Income and Student Loans: Why It Matters

By | Fresh Out of School, Student Loans, student_loan, Terminology | No Comments

Knowing what your discretionary income is (and how discretionary income is calculated for student loans) can help you make decisions about how to best repay your federal loans. That’s because the federal government typically uses discretionary income, which is any adjusted gross income (AGI) you have above a certain percentage of the federal poverty guideline, to determine your monthly payments for income-driven repayment (IDR) plans.

However, because of recent legislation, the options for income-driven plans — and the way monthly payments will be calculated — will be changing. For example, the new Repayment Assistance Plan (RAP) starting in July 2026 won’t use discretionary income to calculate payments. It instead looks at AGI, which could result in higher payments for some borrowers.

Here, we’ll discuss different IDR plans and the ins and outs of discretionary income, as well as upcoming changes to student loan repayment options, so you can figure out a repayment strategy that works for you and your budget.

Key Points

•   Discretionary income, calculated by subtracting a protected amount from adjusted gross income, is important for determining monthly student loan payments under current federal repayment plans.

•   The IBR plan defines discretionary income as income above 150% of the federal poverty guideline, potentially allowing for $0 payments for borrowers under specific income thresholds.

•   Income-driven repayment plans can lower monthly payments but may extend loan terms significantly, resulting in more interest paid over time compared to standard repayment options.

•   Borrowers must recertify their income and family size annually, affecting their monthly payment amounts based on changes in financial circumstances.

•   Refinancing student loans with private lenders can lower payments but forfeits access to federal benefits like income-driven repayment plans and potential loan forgiveness.

What Is Discretionary Income?

The Department of Education (Ed Dept) calculates discretionary income as your adjusted gross income (AGI) in excess of a protected amount defined by a federal IDR plan.

Discretionary income under the Income-Based Repayment (IBR) Plan, for example, is any AGI you have above 150% of the federal poverty guideline appropriate to your family size. If you don’t qualify for a $0 monthly payment on the IBR Plan, your monthly payment is set to 10% or 15% of your discretionary income, depending on when you borrowed your loans.

Discretionary income as defined by the Ed Dept is different from disposable income, which is the amount of money you have available to spend or save after your income taxes have been deducted.

How Is Discretionary Income Calculated?

This is how federal student loan servicers may currently calculate your discretionary income on an income-based student loan repayment plan:

•   Discretionary income under IBR is generally calculated by subtracting 150% of the federal poverty guideline from your AGI.

•   Discretionary income under the Income-Contingent Repayment (ICR) Plan is generally calculated by subtracting 100% of the federal poverty guideline from your AGI.

If you’re filing jointly or you have dependents, that will impact your discretionary income calculations. For married couples filing together, your combined AGI is used when calculating discretionary income. Under an income-driven plan, filing with a spouse can drive up your income-driven monthly payments because of your combined AGI.

If you file separately, your student loan payments will be based on your income alone. However, you may lose some tax benefits, so you’ll have to weigh the pros and cons of this approach to determine which makes more sense for your finances.

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What Income-Driven Repayment Plan Are You Eligible For?

There are now three federal IDR plans that have different eligibility criteria and terms. (There are two others that are no longer accepting new enrollments.) These income-driven repayment plans can reduce monthly payments for people with incomes below a certain threshold.

It should be noted that federal IDR plans don’t apply to private student loans. They’re only an option for federal student loans.

Income-Driven Repayment Plans for Federal Student Loans

The Ed Dept offers the following IDR options for eligible federal student loan borrowers:

•   Income-Based Repayment (IBR) Plan

•   Pay As You Earn (PAYE) Plan

•   Income-Contingent Repayment (ICR) Plan

All current IDR plans generally use discretionary income to determine monthly payments. If there is a change in a borrower’s income or family size, their monthly payment could increase or decrease, depending on the change. Borrowers enrolled in an IDR plan are typically required to recertify their income and family size each year.

For the IBR and PAYE plans, eligibility is determined based on income and family size. As a general rule, to qualify, borrowers must not pay more under IBR or PAYE than they would under the 10-year Standard Repayment Plan. There’s no income requirement for the ICR plan.

Due to the recent legislation, borrowers who consolidated their Parent PLUS Loans into Direct Consolidation Loans are newly eligible for IBR if they enrolled in the ICR plan immediately.

Also because of the legislation, the PAYE and ICR plans will be eliminated in the coming years. For borrowers taking out their first loans on or after July 1, 2026, there will be only one income-driven plan: the Repayment Assistance Program. RAP will set borrowers’ payments at 1% to 10% of their AGI, rather than using discretionary income.

Pros and Cons of Income-Driven Repayment Plans

IDR plans come with trade-offs. While they can lower your monthly payment and help free up your cash flow now, they may extend the life of your loan. The standard student loan repayment plan is based on a 10-year repayment timeline. Current income-driven repayment plans can extend your payment timeline to up to 25 years. And the RAP plan to be introduced in 2026 extends the payment timeline to 30 years.

This means you’ll be paying off the loan longer and possibly paying more in interest over time. If you stay on the IBR plan, the government might forgive any remaining balance after 20 or 25 years of payments. On RAP, the amount may be forgiven after 30 years. But the amount that is forgiven on these plans may be taxed as income.

Navigating the changes to IDR plans can be complicated. PAYE and ICR are due to close by July 1, 2028, so you may have to switch to IBR or the new RAP plan in the next few years. And as noted above, for borrowers who take out loans after July 1, 2026, RAP will be the only income-driven option.

How to Apply for an IDR Plan

To apply for an IDR plan, you can go to StudentAid.gov and log into your account using your Federal Student Aid (FSA) ID. The online application is estimated to take no more than 10 minutes to complete. (If you prefer, you can download a paper application to fill out and then send it to your loan servicer.)

To fill out the application, you’ll need to supply your address, email address, and phone number, as well as information about your family size. You will also need to provide your most recent income tax return (a tool on the site can link your tax information to the application).

Once you complete the application you will see which IDR plans you qualify for. You can select one and then sign the form and submit it. Your loan servicer should send you an email or letter confirming receipt of the application. The servicer will notify you when your application has been processed.

How Does Discretionary Income Affect Student Loan Payments?

Income-driven repayment plans currently use your discretionary income to dictate the amount you’re required to repay each month. In the case of borrowers enrolled in the IBR Plan, payments are set at 10% of discretionary income for loans borrowed after July 1, 2014, and 15% for loans borrowed before that date. On the PAYE plan, payments are set at 10% of discretionary income. On ICR, payments are 20% of discretionary income.

Examples of Monthly Payment Calculations

To calculate your monthly payments on an IDR plan, you’ll need your adjusted gross income (plus your spouse’s if you file a joint return) and your family size, which includes the number of dependents you have, such as your children.

Next, find the federal poverty guideline for your family size and state, and multiply that number by 150%. Subtract this amount from your AGI to get your discretionary income. Your payment on IBR will be 10% of that amount.

Here’s an example:

Let’s say your AGI (plus your spouse’s) is $100,000.

Your family size is 3 (you, your spouse, and one child).

The federal poverty guideline for you is: $26,650.

Using that information, the calculation would look like this:

$26,650 x 1.50 (150%) = $39,975

$100,000 – $39,975 = $60,025

$60,025 x 0.10 (10%) = $600.25

Your payments on the IBR plan would be $600.25 per month.

To get an official payment amount, you can use the Federal Student Aid Loan Simulator to determine your payments.

Annual Recertification Requirements

IDR certification is typically required annually, and you’ll need to recertify your income and family size. This is mandatory even if there has been no change to your situation or income. If you fail to recertify, there may be negative consequences, such as higher monthly payments or even loss of eligibility for IBR.

You’ll be given a recertification deadline, and you’ll need to recertify by that date. As part of the process, you’ll include your family size as well as your most recent federal income tax return. You can recertify online.

If you gave the Ed Dept permission to access your federal tax information when you first applied for IDR, your yearly certification will be automatic. The Ed Dept will notify you about any change to your monthly payment amount.

How Else Can Borrowers Lower Their Student Loan Payment?

Besides IDR, there are other strategies borrowers can use to help lower their monthly student loan payments. These include:

Student Loan Refinancing

Borrowers may be able to reduce their student loan payments by refinancing student loans. With student loan refinancing, you take out a new loan with new terms from a private lender. The new loan is used to pay off your existing student loans.

Depending on your credit and financial profile, refinancing could result in a lower interest rate or a lower monthly payment depending on which terms you choose. Just be aware that you may pay more interest over the life of the loan if you refinance with an extended term.

Refinancing federal student loans with a private lender also forfeits your access to federal IDR plans, Public Service Loan Forgiveness, and Teacher Loan Forgiveness.

To find out how much you might be able to save with refinancing, try our student loan refi calculator.

Extended and Graduated Repayment Plans

Another option for current federal student loan borrowers is to consider the Extended Repayment Plan or the Graduated Repayment Plan to help lower their monthly payments.

To qualify for the Extended Repayment Plan, you must have more than $30,000 in outstanding Federal Direct Loans or Federal Family Education Loans (FFEL). Monthly payments on this plan are typically lower than payments of the standard 10-year repayment plan because borrowers have a longer period of time — up to 25 years — to pay them off. However, this means you’ll pay more in interest over the extended term.

Due to the recent legislation, the Extended Repayment Plan will be closed to new borrowers as of July 1, 2026. Current borrowers on the plan will continue to make payments on their extended term.

The Graduated Plan allows borrowers to pay off their loans over 10 years. Payments typically start out relatively low and increase gradually (usually every two years). The plan may be right for you if your income is low, but you expect it to rise.

The Graduated Repayment Plan is eligible to most current borrowers, however, the plan will be closed to new borrowers as of July 1, 2026. Borrowers currently on the plan can continue to make payments on the graduated timetable.

Applying for Deferment or Forbearance

You might also be able to qualify for a deferment or forbearance, allowing you to temporarily stop or reduce your federal student loan payments. Reasons you can currently apply for deferment include being in school, in the military, or unemployed. However, as part of the new domestic policy legislation, economic hardship and unemployment deferments will be eliminated for student loans made on or after July 1, 2027.

If you’re in deferment and you have certain federal loans, such as Direct Subsidized Loans, you typically won’t have to pay the interest that accrues during the deferment period.

You could apply for student loan forbearance if your federal student loan payments represent 20% or more of your gross monthly income, you’ve lost your job or seen your pay reduced, or you can’t pay because of medical bills, among other reasons. Note that interest accrues on your loans while they are in forbearance. As part of the new legislation, forbearance will be capped at nine months in any 24-month period beginning on July 1, 2027 for new borrowers.

The Takeaway

The government uses discretionary income to calculate your federal student loan monthly payments under a qualifying IDR plan. IBR and PAYE use a more generous formula to calculate discretionary income than ICR, and they offer lower monthly payments. Over the next few years, your IDR plan options will be whittled down to IBR and the new RAP plan, both of which use different income calculations.

If you’re not relying on income-driven repayment, you may want to consider the Graduated Repayment Plan or the Extended Repayment Plan to help lower your monthly payments, though those plans will be closing to new borrowers in the summer of 2026. Other options include deferment or forbearance or student loan refinancing.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

How does discretionary income impact income-driven repayment plans?

Currently, income-driven repayment plans base your monthly payments on your discretionary income and family size. Typically, the higher your discretionary income, the higher your monthly student loan payments will be. For example, on the Income-Based Repayment (IBR) Plan, your discretionary income is the difference between your taxable income and 150% of the poverty guideline for your family size and state.

What percentage of discretionary income is used for student loans?

The percentage of discretionary income that’s used for student loan payments depends on the income-driven repayment plan a borrower is enrolled in. For instance, on the Income-Based Repayment (IBR) Plan, your discretionary income is the difference between your taxable income and 150% of the poverty guideline for your family size and state. On the Income Contingent Repayment (ICR) Plan, your discretionary income is the difference between your taxable income and 100% of the poverty guideline for your family size and state.

Can refinancing affect your discretionary income calculation?

Yes, but in an indirect way. Refinancing federal student loans makes you ineligible for income-driven repayment plans that base your payments on your discretionary income and family size. If you think you may want to apply for an IDR plan, refinancing is probably not right for you.

How do I find out my discretionary income for student loans?

To calculate your discretionary income for income-driven repayment plans, you’ll need your adjusted gross income (AGI) and your family size (you plus a spouse and any children, if applicable). Next, determine the federal poverty guideline for your family size and state (you can find this information on the Health and Human Services website) and multiply that number by 150% for the IBR plan or 100% for the ICR plan. Subtract the resulting amount from your AGI to get your discretionary income.

Is discretionary income the same as disposable income?

No, discretionary income and disposable income are not the same thing. Discretionary income as defined by the Department of Education under an income-driven repayment plan is any adjusted gross income you have above 150% or 100% (depending on the plan) of the federal poverty guideline appropriate to your family size. Disposable income, by comparison, is the amount of money you have available after income taxes have been deducted.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

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.

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18
2025
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What Happens to Student Loans When You Drop Out?

By | Fresh Out of School, Student Loans, student_loan | No Comments

Dropping out of college is a significant decision that can have far-reaching implications, particularly when it comes to student loans. Many students find themselves in a challenging financial situation after leaving school, unsure of what happens to the loans they’ve taken on and how to manage them.

Here, we’ll walk you through the consequences of dropping out when you’ve already incurred debt, and show you ways to pay off outstanding student loans.

Key Points

•   If you drop out of college, you still have to repay your student loans. Federal loans typically have a six-month grace period before payments start.

•   Missing payments can lead to serious consequences, including credit damage, wage garnishment, and legal action.

•   Income-driven repayment plans can lower monthly payments based on income, and refinancing may reduce interest rates but removes federal protections.

•   Deferment or forbearance may temporarily pause payments, but interest may still accrue.

•   Returning to school at least half-time can defer payments, and refinancing might help if you don’t need federal benefits.

Do I Have to Pay Back My Student Loans If I Drop Out of School?

Regulations dictate that if you leave college or drop below half-time enrollment, you have to start paying back your federal student loans. You may have a grace period (generally, six months) before your first payment is due. Even if payments aren’t due yet, interest may still accrue during the grace period, depending on the type of loans you have.

If you have private student loans, check with your lender to determine when you need to start paying back your loans.

If you’re currently still in school or left very recently before earning a degree, you may be able to request student loan exit counseling from your school, a service normally provided only to graduates. This can help you understand your options, including potential tuition reimbursement. Each school has a different refund policy.

What Happens if I Don’t Pay My Student Loans?

The consequences of late or “delinquent” payments vary by lender, but you can generally expect to be charged late fees each time you miss the due date. If a payment is late by 30 days or more, that information can be reported to the three credit bureaus — Experian®, Equifax®, and TransUnion® — which will negatively affect your credit score.

If you stop paying your student loans for 270 days (about nine months), your federal loans go from being delinquent to being in student loan default. When that happens, the balance is due in full, including accrued interest, collection agency fees, and any other fines, fees, and penalties. Student loans generally cannot be discharged during bankruptcy.

The government can go to great lengths to get their money back, including:

•  Garnishing your paycheck, up to 15% of wages after deductions

•  Withholding your tax refund

•  Going after cosigners for the amount due

•  Suing you in court for the outstanding amount, plus court fees and other expenses

Private student loans generally go into default after 90 days (and don’t qualify for the on-ramp protections). Private lenders may also take you to a court or use collection agencies to recoup student loan debt. Defaulting can wreck your credit, making it challenging for you to obtain a mortgage loan, car loan, credit card, homeowners insurance, or new utilities.

Ways to Pay Off Student Loans If You Didn’t Finish School

Once you leave school, it’s a good idea to begin paying off your loans as quickly as you can, paying more than the minimum payment whenever possible. Before paying ahead, though, check to see if any of your student loans have a prepayment penalty. If so, paying early can cost you money.

Should you refinance your student loans? What about income-driven repayment programs? Below are the best options to help ease financial hardship and avoid default.

Income-Driven Repayment Plans

Income-driven repayment (IDR) plans reduce your monthly federal student loan payments based on your discretionary income and family size. They currently extend the length of the repayment period up to 25 years. After that, any remaining loan balance is forgiven, though the canceled amount may be subject to income taxes.

Enrolling in an income-driven repayment plan won’t have a negative impact on your credit score or history. However, income-driven plans aren’t always the lowest monthly payment option. And even when monthly payments are lower, you will pay more interest over time (longer loan terms mean more interest payments).

Borrowers must recertify their income each year. If they fail to do so, they’ll be returned to the standard 10-year amortizing plan.

Keep in mind that under Trump’s new One Big Beautiful Bill, three of the four income-driven repayment plans will end on July 1, 2028. Borrowers must switch to the one remaining plan, the Income-Based Repayment (IBR) plan, or the new Repayment Assistance Plan (RAP).

The Repayment Assistance Plan (RAP) is a new income-driven repayment plan that’s based on borrowers’ adjusted gross income (AGI), with a $50 monthly reduction per dependent. The RAP plan provides cancellation after 30 years of payments, unlike current income-driven repayment plans that provide cancellation after 10-25 years.

Going Half-Time

Students who are enrolled at least half-time in an eligible college or career program may qualify for an in-school deferment. This type of deferment is generally automatic. If you find the automatic in-school deferment doesn’t kick in, you can file an in-school deferment request form.

Recommended: Refinancing Student Loans with Bad Credit

Refinancing Student Loans

While you’re still able to make your student loan payments and your credit is still good, consider student loan refinancing. You can combine multiple loans into one payment, ideally with a better interest rate and terms.

As your financial situation improves, you can make additional payments (as long as you refinance with a company that doesn’t charge a prepayment penalty) or refinance again with a new term that will accelerate payoff and allow you to pay less interest over the lifetime of the loan.
It’s important to note that by refin

It’s important to note that by refinancing your federal student loans, you will not be able to access federal programs like income-driven repayment plans, Public Service Loan Forgiveness (PSLF), and government deferment or forbearance. If you don’t need any of those benefits, a lower student loan interest rate gained by refinancing could be worthwhile.

Serious savings. Save thousands of dollars
thanks to flexible terms and low fixed or variable rates.

What to Do if You Can’t Afford Any Student Loan Payments

If you find yourself in a situation where you cannot afford to make any student loan payments, it’s important to take immediate action to avoid defaulting on your loans. The first step is to reach out to your loan servicer to discuss your options. They can provide you with information about deferment and forbearance, which are temporary solutions that allow you to pause or reduce your payments.

Although deferment or forbearance can give you short-term financial relief, these plans will increase the amount of interest you’ll pay on the loans overall, and can extend the length of the loans.

Student Loan Deferment

Student loan deferment allows eligible borrowers to temporarily reduce loan payments or pause them for up to three years, depending on the type of loan. In most cases, borrowers seeking a deferment will need to provide their loan servicer with documentation that supports their eligibility.

Deferments are typically broken down into qualifying categories:

•   Unemployment. Borrowers receiving unemployment benefits or who are actively seeking and unable to find full-time work may qualify. This deferment is good for up to three years. However, under Trump’s One Big Beautiful Bill, borrowers will no longer be eligible for deferments based on unemployment for loans made after July 1, 2027.

•   Economic Hardship. Individuals receiving merit-tested benefits like welfare, who work full-time but earn less than 150% of the poverty guidelines for their state of residence and family size, or who are serving in the Peace Corps may qualify. This deferment may be awarded for up to three years. Again, under Trump’s One Big Beautiful Bill, borrowers will no longer be eligible for deferments based on economic hardship for loans made after July 1, 2027.

•   Military Service. Members of the U.S. military who are serving active duty may qualify. After a period of active duty service, there is a grace period of 13 months, during which borrowers may also qualify for federal student loan deferment.

•   Cancer Treatment. Borrowers who are undergoing treatment for cancer may qualify. There is a grace period of six months following the end of treatment.

Student Loan Forbearance

There are two types of federal student loan forbearance: general and mandatory. Private lenders sometimes offer relief when you’re dealing with financial hardship, but they aren’t required to, so check your loan terms.

General forbearance is sometimes called discretionary forbearance. That means the servicer decides whether or not to grant your request. People can apply for general forbearance if they’re experiencing financial problems, medical expenses, or employment changes.

General forbearance is only available for certain student loan programs, and is granted for up to 12 months at a time. After the 12 months are up, you are able to reapply if you’re still experiencing difficulty.

Note that starting July 1, 2027, new student borrowers will have a nine-month cap in a 24-month period for student loan forbearance. Borrowers also will no longer be eligible for unemployment or economic hardship deferments and forbearances.

Mandatory forbearance means your servicer is required to grant it under certain circumstances. The Federal Student Aid website has a full list of criteria for mandatory forbearance. Reasons include:

•   Medical residency or dental internship

•   Participating in AmeriCorps

•   Teachers who qualify for teacher student loan forgiveness

•   National Guard duty

•   Monthly student loan payments that are 20% or more of your gross income

If you’re pursuing federal student loan forgiveness, any period of forbearance generally does not count toward your forgiveness requirements.

The Takeaway

Should you unexpectedly need to drop out of school, you’ll still be responsible for paying back your student loans. If you’re able to work, you may want to enroll in an income-driven repayment plan — though keep in mind that these programs don’t always offer the lowest monthly payment possible.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

What happens to your student loans if you drop out of college?

If you drop out of college, your student loans will still need to be repaid. The grace period for federal loans typically lasts six months after you drop out, during which you are not required to make payments. Private loans may have different terms, so it’s important to check with your lender.

Can you still receive financial aid if you drop out of school?

Once you drop out, you will no longer be eligible to receive new financial aid. However, you may still have access to any remaining funds from the current academic year. It’s important to contact your school’s financial aid office to understand your specific situation and any potential refund of unused funds.

What is the grace period for federal student loans, and how does it work?

The grace period for federal student loans is usually six months after you drop out of school. During this time, you are not required to make payments on your loans, but interest may continue to accrue on certain types of loans, such as unsubsidized loans. After the grace period, you will need to start making regular payments.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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18
2025
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Guide to Morningstar Ratings

By | Growing Wealth, invest, Investing | Comments Off on Guide to Morningstar Ratings

Morningstar is a well-respected global financial services and research company that provides data, analysis, ratings, and a range of tools to help institutional and individual investors sort through and evaluate some 600,000 investment vehicles.

Since 1984, Morningstar has conducted independent research on stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. While the company collects and analyzes data on many aspects of many different assets, it’s primarily known for its five-star rating system.

Morningstar ratings aren’t predictive. But because their research is conducted independently, they are able to provide an evaluation of past performance, and potential risks and return factors that many investors find useful.

Key Points

•  Morningstar is an independent financial services research firm that collects data on a wide range of securities.

•  Morningstar is principally known for its five-star ratings system, which reflects the past performance of stocks, bonds, mutual funds, and ETFs.

•  The five-star rating system is based on historic data, so while it’s not predictive, these ratings help identify potential risks, as well as the potential for returns.

•  In addition to its ratings, Morningstar offers investors an array of tools, such as stock screeners, portfolio trackers, and more.

•  While well-respected, Morningstar cannot accurately predict the performance of any asset, and investors typically use these and other tools in combination.

What Are Morningstar Ratings?

The Morningstar ratings system is a tool investors can use to compare financial securities such as mutual funds and ETFs, stocks, bonds, and other securities. Particularly valuable to investors: Morningstar ratings evaluate risk-adjusted as well as price-adjusted returns of investments.

Morningstar is an independent financial services company, and thus relies on its own data and research to evaluate the performance, risks, pricing, and other aspects of certain investment products.

Morningstar reviews of mutual funds and ETFs also reflect how a fund performs relative to its benchmark and to its peers. The main Morningstar ratings investors may turn to learn more about a particular investment are the Star Ratings and Analyst Ratings. (Morningstar also has a separate ratings system for individual stocks.)

These ratings can be helpful to investors for a variety of reasons — whether they’re trying to diversify their portfolios, or do some research into socially responsible investing, and trying to find investments that fit their strategy.

Recommended: Stock Trading Basics

How Morningstar Ratings Work

As Morningstar itself describes, the ratings system uses a methodology based on specific categories and risk-adjusted return metrics. The company will only rate a fund that’s been around for more than three years. Morningstar also updates its ratings on a monthly basis.

You can use these ratings to select the funds available in your 401(k), buy stocks online or through a traditional brokerage, or to decide which funds to add to an IRA or a taxable brokerage account.

The “Star Rating” Explained

The Morningstar Star Rating system, usually shortened to Morningstar ratings, is a quantitative ranking of mutual funds and ETFs. Introduced in 1985, the star rating looks at a fund’s past performance, then assigns a rating from one to five stars based on that performance.

As mentioned, Morningstar reviews ETFs and mutual funds with a record of more than three years, so newer funds do not receive a star rating until they’re reached this milestone. The rating methodology utilizes an enhanced Morningstar risk-adjusted return measure. Specifically, the star ratings system looks at each fund’s three-, five-, and 10-year risk-adjusted returns.

Star ratings can serve as a report card of sorts for comparing different funds, based on how they’ve performed historically. The Morningstar ratings are not forward-looking, as past performance is not a foolproof indicator of future behavior. But investors can use the ratings system as a starting off point for conducting fund research when deciding where to invest.

Morningstar ratings are free, and investors who are selecting investments for a traditional IRA, Roth IRA, or other retirement or investment account, may find it helpful to sort through the many available options.

If you’re looking for a tool to help you compare mutual funds or ETFs at a glance based on past performance, the star rating system can help.

Recommended: Investing in Growth Funds

The “Analyst Rating” Explained

The Morningstar Analyst Rating takes a different approach to ranking funds and ETFs. Instead of looking backward, the qualitative analyst rating looks forward to assess a fund’s ability to outperform similar funds or a market benchmark.

Rather than using stars, funds receive a rating of Gold, Silver, Bronze, Neutral or Negative, based on the analyst’s outlook for performance.

The firm does not update analyst ratings as frequently as star ratings. Morningstar reviews for analyst ratings are reevaluated at least every 14 months. The firm typically assigns analyst ratings to funds with the most interest from investors or the most assets.

When ranking funds, analysts look at three specific metrics:

•   People

•   Process

•   Parent

Performance is also taken into account within the People and Process pillars. In order to earn a Gold, Silver or Bronze rating, an analyst must determine that an active fund can beat its underlying benchmark when adjusted for risk.

Generally speaking, these Morningstar reviews go into more detail, in terms of the analysis, ranking, and comparison of funds.

How Morningstar Measures Volatility

Morningstar uses a few key volatility measurements as it aims to minimize risk and maximize returns through strategic diversification. Chief among those measurements are standard deviation, mean, and the Sharpe ratio.

It’s a somewhat complicated process, but using these three measurements in tandem helps Morningstar get a handle on volatility and make appropriate ratings decisions.

Example of a Morningstar Rating

Morningstar star ratings are free to access for investors on the company’s website, and it’s relatively easy to find plenty of examples of Morningstar ratings on the platform. For instance, to find a star rating for a particular fund or ETF you’d simply search for it using its name or ticker symbol.

You can also view Morningstar ratings and picks for funds by category, such as small-cap funds or U.S. or international index funds.

Here’s an example of a Morningstar rating for the Vanguard Total International Stock Index (VTIAX), as of Sept. 6, 2025. This fund, which is in the foreign large-blend category and is an index fund, has a three-star rating from Morningstar — and a Gold Morningstar analyst rating.

The fund has a lower expense ratio for its category of 0.09%, a minimum investment of $3,000 and $525.7 billion in assets.

While the three-star rating may sound middle-of-the road, it’s likely due to the fund’s slightly higher risk profile. But the Gold analyst rating indicates that the fund has a lower cost, and an extensive market-cap-weighted portfolio that tracks the FTSE Global All Cap ex US Index, which has over 8,000 constituents, providing investors with diversification in overseas equities.

This is just one example. Morningstar researches and provides ratings for thousands of assets in a range of categories and products.

Are Morningstar Ratings Accurate?

Morningstar fund ratings are designed to be a guide as you invest; they cannot predict how well a fund is likely to perform. For example, there’s always going to be risk involved when investing, so don’t expect any rating to be a sure-thing.

Assessing the Reliability of Morningstar Ratings

So, how well do Morningstar ratings perform over time and are they an accurate guide for investing? According to Morningstar’s own analysis of its ratings system, the star ratings can be a useful jumping-off point for investors. That analysis resulted in three key findings:

•   Funds with higher star ratings tend to have lower expense ratios and be cheaper for investors to own.

•   Higher-rated funds tend to be less volatile and experience less dramatic downward swings when the market is in flux.

•   Funds that received higher star ratings tended to produce higher returns for investors compared to funds with lower ratings.

The analysis didn’t look specifically at how star ratings and fund performance aligned through different bull and bear markets. But the ultimate conclusion Morningstar drew is that the Star Ratings tend to steer investors toward cheaper funds that are easier to own and stand a better chance of outperforming the market.

Use Expense Ratios

According to Morningstar, fees are one of the best predictors of future performance, at least for Star Ratings. For funds and ETFs, that means it’s important to consider the expense ratio, which represents the cost of owning a fund annually, calculated as a percentage of fund assets.

Actively managed funds typically carry higher expense ratios, as they require a fund manager to play an important role in selecting fund assets. Passively managed funds and ETFs, on the other hand, often have lower expense ratios.

So which one is better? The answer is that it all comes down to performance and returns over time. A fund with a higher expense ratio is not guaranteed to produce a level of returns that justify higher fees. Likewise, a fund that has a lower expense ratio doesn’t necessarily mean that it’s a poor investment just because it’s cheaper to own. Morningstar’s research found that the average one-star fund cost significantly more than the average five-star fund.

As you do your own research in comparing funds and ETFs, consider both performance and cost. This can help you find the right balance when weighing returns against fees.

How Should Investors Use Morningstar Ratings?

How much do Morningstar ratings matter in the grand scheme of things? The answer is, it depends on what you need from investment research tools.

Morningstar reviews of mutual funds and ETFs can be helpful for comparing investments, especially if you’re just getting started with the markets. Morningstar is a respected and trusted institution and both the Star and Analyst Ratings are calculated using a systematic approach. The reviews aren’t just thrown together or based on a best guess.

They’re designed to be a guide and not a substitute for professional financial advice. So, for instance, you may use them to compare two index funds that track the same or a similar benchmark. Or you may use them to compare two ETFs that are representative of the same market sector.

Risks of Morningstar Ratings

Morningstar ratings are not an absolute predictor of how a mutual fund or ETF will perform in the next five minutes, five days, or five years. After all, there’s no way to perfectly forecast how any investment will perform as the market changes day to day or even minute-to-minute.

One risk to avoid with Morningstar ratings is relying on them solely as your only research tool and not doing your own independent research. Again, that means checking expense ratios as well as looking at the underlying assets of a particular fund and its investment strategy (i.e., active vs. passive) to determine how well it aligns with your goals and risk tolerance.

Looking only at Morningstar reviews without doing your own due diligence could cause you to invest in funds that aren’t the best fit for your portfolio. Or you may overestimate how well a fund will perform, only to be disappointed later.

Morningstar Ratings for Funds

Morningstar’s original rating system of one to five stars enabled investors to evaluate a fund’s past performance within four broad asset classes: domestic equity funds, international equity funds, taxable bond funds, and municipal bond funds.

One useful aspect of the ratings is that they include risk-adjusted and cost-adjusted returns for investors. Given that most investors own several, sometimes many different mutual funds and ETFs in their portfolios and retirement accounts, Morningstar also offers a Category rating — which allows investors to evaluate a fund within a smaller more relevant grouping of related assets.

Also, as it bears repeating, a good, average, or poor Morningstar rating does not mean that an investment is risk-free.

Other Investment Risk Rating Providers

Morningstar is just one of many companies that offers investment ratings. Bloomberg, Nasdaq Market Data Feeds, S&P Global Market Intelligence, MarketWatch, Thomson Reuters, and others all offer investment ratings, rankings, stock and fund screeners, and other tools.

In addition, many financial institutions collect and analyze their own data and offer proprietary metrics and tools that investors can also use to assess those products.

Investors should take into account who is collecting the data, and where that data comes from, when deciding what type of investment rating to use for their own portfolios.

The Takeaway

Having reliable research tools can help you make educated decisions about where and how to invest. Morningstar ratings are one tool you can use. But keep in mind that there are many ratings services on the market, and that Morningstar’s ratings are far from the only research tool out there.

It’s also important for investors to keep in mind that all investments involve risk, whether they’re highly rated or not.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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FAQ

How reliable are Morningstar ratings?

Morningstar ratings are generally considered to be high-quality in the financial industry, but that doesn’t mean that these ratings are always spot-on. All investing involves risk, and even a high rating doesn’t guarantee that an investment will pan out.

Is a Morningstar rating of “5” good?

Morningstar uses a scale of one to five stars to rate investments, with five stars being the highest, or best-quality investment. So, yes, a five-star rating is generally considered good, although not risk-free.

Why do investors use Morningstar?

Individual and institutional investors alike use Morningstar ratings to help sort through and evaluate the hundreds of thousands of available investment products. Morningstar has developed a reputation for being reliable, because its data is collected and analyzed independently of any financial firm.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


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