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Applying for Economic Hardship Deferment

Managing student loan payments can feel like a part-time job. It can be even more overwhelming if you’re experiencing financial trouble, whether that’s due to a job layoff, caring for a family member, or for another reason.

The good news is there are options available to those going through a rough financial patch, including the Economic Hardship Deferment program . But even then, it can be difficult to navigate all of the information on which deferment program you may be eligible to apply for based on the reason for your hardship and the type of student loans you have. So that’s what we’re going to discuss today.

Economic Hardship Deferment, also known as student loan financial hardship, is a program offered in certain cases on federal student loans for borrowers who are eligible and having an exceedingly difficult time making their student loan payments for financial reasons.

Below, we’ll discuss the Economic Hardship Deferment program and what it means for you and your loans, who qualifies to make a hardship claim for student loans, how to apply for the program, and whether it’s the right path for you. We’ll also cover alternatives to Economic Hardship Deferment.

What Is Economic Hardship Deferment?

A student loan deferment is when a student loan payment or multiple payments are put on hold for a designated period of time—hitting the “pause button.” An Economic Hardship Deferment is awarded to those who are facing serious financial trouble, as determined by factors such as monthly income and family size.

Those approved for the program can take up to 36 consecutive months of deferment so long as they still meet the qualifications. All participants (except those in the Peace Corps) need to reapply each year.

An important distinction to understand is whether your loans will qualify for a deferment period where interest will accrue, or one where interest does not accrue. Generally, loans that are subsidized will not accrue interest during deferment, whereas an unsubsidized loan will.

In the event your loan qualifies for deferment but will continue to accrue interest, you’ll usually have two options: First, to make interest-only payments on the loan or second, to allow interest charges to rack up.

When you allow interest charges to accumulate on an unsubsidized loan, that interest will be tallied up and added to the balance of the loan at the end of the period. This is a process called “capitalization.”

Not only will you have a new, larger balance to pay off, but any future interest payments will be calculated on top of the new, higher balance, meaning you’re paying interest on top of interest. All else equal, the result is that your monthly payments will likely be even higher than they are now.

Which Loans Qualify for Economic Hardship Deferment?

This is a federal loan program, and not all federal loans qualify. Here are a few examples of loans that may qualify (and check the link below for a full, updated list of eligible loans):

•  National Direct Student Loans (NDSL Loans)

•  Federal Family Education Loans (FEEL Loans)

•  Federal Stafford Loans

•  Federal Perkins Loans

•  Federal Supplemental Loans for Students (SLS Loans)

•  Federal PLUS Loans

•  Federal Consolidation Loans

•  National Defense Student Loans

The Economic Hardship Deferment program is typically available for loans made on or after July 1, 1993.

Private loans taken out from a private bank or lender won’t qualify for the federally run Economic Hardship Deferment program, though your private lender(s) might offer their own hardship programs. If they offer such a program, they will have their own unique qualifications and application process.

It certainly doesn’t hurt to ask if you are in a difficult financial situation. Remember, lenders don’t want you to default on your loans, and are often willing to work with borrowers to find some sort of solution. With both federal and private loans, never hesitate to call the lender, discuss your situation, and explore options.

Who Qualifies for Economic Hardship Deferment?

To make a hardship claim for student loans, you will have to fill out paperwork and provide documentation proving that you are experiencing financial hardship. Some of the eligibility criteria for an Economic Hardship Deferment will depend on your income, family size, and the poverty income guidelines for your family size in the state where you live (150% of the state poverty level or less). It will also depend on what percentage your student loan payment is of your monthly adjusted gross income.

To qualify for Economic Hardship Deferment, you will need your personal information such as your name, Social Security number, and address—and you’ll need to know what type of loan you are requesting economic hardship deferment for.

Here are some examples of what you may need to prove to the loan servicer evaluating your eligibility for deferment:

  1. You’ve already been granted Economic Hardship Deferment on loans made under another federal student loan program.

  2. You’re receiving payments under a federal or state public assistance program during the time in which you request your loan deferment. Examples of such programs include Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), Food Stamps/Supplemental Nutrition Assistance Program (SNAP), or other forms of state assistance.

  3. You are serving as a Peace Corp volunteer.

  4. You work full-time (30 hours per week) and your monthly income does not exceed 150% of the poverty guideline for your family size and state.

To determine whether your family is at or below 150% of the poverty guideline, reference the following table.

First, determine your family size. This includes you, your spouse, any children who receive more than half of their support from you, any unborn children who are to be born during the deferment period, and anyone else living with you for whom you provide at least half of their support.

Next, find your family size on the following table, and compare to your monthly income.

Family Size   Alaska     Hawaii     All Other States  
1 $1,897.50 $1,745.00 $1,517.50
2 $2,572.50 $2,366.25 $2,057.50
3 $3,247.50 $2,987.50 $2,957.50
4 $3,922.50 $3,608.75 $3,137.50
5 $4,597.50 $4,230.00 $3,677.50
6 $5,272.50 $4,851.25 $4,217.50
7 $5,947.50 $5,742.50 $4,757.50
8 $6,622.50 $6,093.75 $5,297.50
Each additional person, add $675.00 $621.25 $540.00

These figures are from 2018 and are subject to change annually.

You are likely to qualify for the student loan financial hardship program as long as you meet one of these prerequisites. If that is the case, and you would like to pursue the option, contact your lender or student loan servicer. Tell them you would like to apply for Economic Hardship Deferment. At this point, they typically ask you a series of questions and have you fill out an Economic Hardship Deferment Request form .

Pros and Cons of Economic Hardship Deferment


For someone who is in desperate need of reprieve from their student loan payments, the program can be a godsend. You may want to consider taking advantage of this program if the alternative is defaulting on student loans, which can have a long-lasting, detrimental effect on your credit score and history.

If your loans are subsidized, there is no cost to taking an Economic Hardship Deferment.

Periods of deferment are provided to borrowers who need time to find a job, increase their income, or recover from the many myriad of life events that could leave someone in a place of need. There is no shame in this, whatsoever, but it’s a great idea to use the deferment period to work on rebuilding.


With unsubsidized loans, taking a period of deferment will make the loans in question cost more over time. Even if you make interest payments during your deferment, you aren’t chipping away at the principal, and so all of those payments are essentially a wash. If you don’t make interest payments, the total value of those unpaid interest payments will be slapped on top of the loan balance, increasing your loan balance and the amount you’ll owe in interest, over time.

When the period of deferment ends, your monthly payment will likely be higher than it is now, which may be difficult for someone who is already experiencing financial hardship. Use the program if you need it, but know it can come with some costs in the long term.

It is also extremely difficult to qualify for Economic Hardship Deferment. The program utilizes stringent criteria to determine eligibility with income review using poverty level guidelines as noted above. (For example, a single person working full-time and earning $20,000 per year and living in California who is not already on food stamps or other forms of government assistance would probably not qualify for Economic Hardship Deferment.) This makes the program unavailable to many people who are legitimately having difficulty making their loan payments.

Alternatives to Economic Hardship Deferment


If you do not qualify for Economic Hardship Deferment, an option is to request forbearance. Forbearance is similar to deferment, though in no cases will interest cease to accrue, and periods of forbearance generally do not exceed 12 months (and could be shorter). You’ll need to check with your loan servicer to see if you

Income Driven Repayment Plans

There are multiple options for income-driven repayment plans. These options will calculate your monthly payment based off what you earn and stretch the loan term from to 20 or more years.

Though your monthly payments will be lower, which provides some immediate relief, you will pay significantly more in interest over time. It is possible to switch to an alternative repayment plan and back again if your financial situation improves.

Public Student Loan Forgiveness (PSLF) Program

With 10 years of on-time payments at a qualifying job (like a government worker, a teacher, a doctor, or nurse at a qualifying facility), it is possible to have student loans forgiven with the PSLF program. If you go this route, you’ll usually want to switch to an income-driven repayment plan.

Student Loan Refinancing

Another option to consider for both your federal and private student loans is student loan refinancing. Refinancing is the process of switching out your loan or multiple loans with one new loan at an (ideally) lower rate of interest.

The lower rate of interest could save you money on interest payments over the life of the loan. Use a student loan refinancing calculator to see how lower interest rates affect your monthly payments.

It’s important to know that if you refinance federal loans with a private lender, you will lose access to federal student loan programs such as Economic Hardship Deferment or PSLF. That’s because you’ll refinance with a private lender, such as SoFi. (Some private lenders, including SoFi, do offer protections in the event of job loss, so be sure to ask.) No matter your situation, help is available. A great place to start is by calling your loan servicer and discussing your options.

Learn more about refinancing your student loans with SoFi and find your rate in just two minutes.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Student Loan Refinance
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.


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Your 9-Month Pre Baby Financial Checklist

It’s finally happened. After months of trying, the strip on the stick finally turns pink. Or you finally hear the good news from the adoption agency. You are expecting. And you couldn’t be happier.

Amidst all the excitement, it’s important to slow down and consider how much your life is about to change. Have you considered the financial adjustments you’ll have to make as parents? This checklist will help you start preparing for a baby financially, planning ahead, and ensuring that this magical experience remains just that—magical.

Planning Your First Trimester

Knowing Your Numbers

Although they say ignorance is bliss, it rarely is. When it comes to preparing financially for a baby, it’s usually better to know the hard facts than to be caught off guard.

Being aware of what it really costs to raise a child can help ease some anxieties surrounding how to prepare for a baby financially. Some people take out adoption loans to help cover costs for a new baby.

The most recent report on the cost of raising a child through age 17 from the United States Department of Agriculture is from 2015. According to the report , the estimated cost of raising a child from birth to age 17, for a middle-income family, is $233,610. Of course, this is just an estimate; how much a child actually costs will vary depending on your financial situation or spending priorities.

Creating a Budget

A great first step when creating a budget is to consider any high-interest debt—like credit card debt—you may have and figure out how best to pay it off.

This can help ensure your credit score is in check—which plays an important role if big-ticket items such as a new house or a safer car are in your baby budget. In that USDA report we mentioned above, housing accounts for the lion’s share of the cost associated with rearing a child (29%) and transportation was the fourth-largest associated cost (15%), close behind childcare/education (16%).

Taking on the Second Trimester

Checking Your Maternity and Paternity Benefits

The ideal amount of recommended time off after having a baby is six months to a year. However, that’s not possible for many Americans. The Family and Medical Leave Act will protect your job for up to 12 weeks after your child is born or after adopting.

It’s worth noting that the law doesn’t require you be paid for the time off, which is typically up to your employer’s discretion. It also only covers “eligible employees ,” so those who are not technically employees may not qualify for these benefits.

Currently, there are only four states that require paid maternity leave—California, New Jersey, New York, and Rhode Island. And it’s coming to Washington D.C. in 2020. Doing your homework when it comes to family leave might help inform your financial decision making in the next few years.

Having a Conversation with Your Partner

Once you understand your parental leave benefits, you may want to have a serious conversation with your partner about what length of parental leave time is right for your family and what you can afford based on your benefits (or lack thereof). Maybe one of you will decide to become a stay-at-home parent—sometimes this can be more affordable than childcare.

Or maybe one of you will take this opportunity to pursue a career change. These are important conversations to have before the baby comes because these can majorly affect your financial plan. If you (and your partner) decide outside childcare is your best bet, you may want to research options before your new family member arrives.

The Not-So-Fun Stuff

Speaking of fun conversations to have with your partner, have you talked about life insurance or writing a will? Though this part of your financial plan is edging on morbid, it’s still essential for many. After all, you’re having a baby and that really makes you an adult now.

If you don’t already have it, you may want to consider life insurance. Ideally, your life insurance plan should cover your annual gross salary times 10 or more. And if you haven’t already drawn up a will, now may be a good time to do so.

If you already have a will in place, you may want to consider updating your beneficiaries to include your new baby. Lastly, you may want to research how to add your new child to your health insurance plan.

The Final Countdown

Saving for Multiple Goals

Remember that USDA report on the cost of raising a child? Well, it doesn’t account for the cost of college. And though saving for something that’s 18 years away may feel overzealous, the earlier you start saving for your child’s education, the easier it can be down the road.

You might consider contributing to a 529 plan , which is a college savings plan that offers tax and financial aid benefits.

While you’re setting aside savings for your kid, it’s also important that you don’t lose sight of your own retirement goals. Your future-self might thank you for not letting your IRA or 401(k) fall to the wayside even while preparing financially for a baby.

In addition to your retirement funds, it’s also important to keep a healthy emergency fund. You never know when life could throw you a curveball, so it’s important to be prepared, especially with an expanding family to care for.

Hurry up and Wait

While it’s tempting to start buying baby clothes and nursery items, holding off for a bit might be wise.

If this is your first born, chances are someone in your life is planning a baby shower for you. Baby showers are typically held four to eight weeks before your due date. You could wait and see what your friends’ generosity or your aunt’s knitting hobby brings you, and then you consider buying whatever is missing on your list.

Another great way to potentially save costs—up front and down the line—is to approach friends and family members who’ve had children to see if they have any hand-me-downs. It’s not as exciting as buying new, but you can save yourself money that could be allocated elsewhere (like that college fund).

Tracking Your Finances with SoFi Money®

Working on your budget before the baby comes? If you’re looking for an easy way to track your money, SoFi Money might be the answer. SoFi Money allows you to track your spending and manage your money, which could include automating debt payments and setting a budget. The best part? It’s all in one place, so you don’t have to juggle 874 spreadsheets.

SoFi Money is a cash management account where you can spend, save, and earn all in one place. You’ll earn 0.20% Annual Percentage Yield (APY) on all your cash and pay no account fees. We work hard to give you high interest and charge no account fees. With that in mind, our interest rates and fees charged are subject to change at any time.

Planning for a baby gets pretty complicated—let SoFi Money simplify your finances.

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.
SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.

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Should You Use Your Savings to Pay Off Debt?

Financial advice can be a little hard to follow. We’re supposed to be saving for emergencies and paying down debt and planning for retirement and investing? Talk about confusing. If you have debt, It may seem easiest to simply throw all your extra cash at your loans instead of setting up a savings account and hope that gets you ahead. And it’s true, paying down your debt is a smart way to stay financially healthy, but should you use your savings to pay off debt? The answer might surprise you.

Here’s what you need to know before emptying your savings account:

The Importance of Saving for Unexpected Expenses

More than half of Americans do not have enough cash easily accessible to manage a $1,000 emergency . That means that a child’s broken arm, a car repair, or even just an unexpected trip to see a sick family member can bring them into the red.

When you take out debt, even to cover small expenses, you usually end up paying more over time as interest accumulates. That means that your $1,000 expense that you put on a credit card can end up costing you much more by the time you actually pay it off. This cycle is one reason why it can be a good idea to have an emergency fund.

An emergency fund can help when hit with an unexpected expense, so you don’t have to rely on credit cards or help from family or friends to meet your needs, which can sink you deeper into debt. But how do you know when to stop saving and start putting that money towards paying off debt instead?

A healthy emergency fund should be able to cover all your expenses for at least three months . Yes, that is much more than that $1,000 emergency, but imagine what would happen if you were to lose your job and be out of work for several months. How would you pay your car payment, your mortgage, or your child’s tuition?

Many of us are tempted to answer that we would put it on a credit card, but relying on credit cards to cover emergency expenses can create a risk that your debt can spiral out of control.

Instead, you might aim to have more than enough to cover day to day living expenses for at least a few months saved up. That way, you know that you won’t be stuck putting ramen noodles on a credit card if you unexpectedly lose your job.

Whether you’re shooting for three months or a full year of savings, an emergency fund should be easily accessible, so that if that emergency arises you have quick access to your cash.

Using Savings to Pay Off Debt

While saving for emergencies is important, so is paying down debt. Everyone’s situation is different, of course, but there may be some major downsides to cashing out your entire savings to pay down debt. For one, using all your savings to pay off debt means that when the $1,000 (or more!) emergency inevitably pops up, you might not have the cash on hand to cover it.

In that case, you could find yourself needing to rely on credit cards to cover the expense, starting the cycle of debt all over again. Think of it this way—it can be much harder to get yourself out of debt if you keep using credit cards to cover unexpected costs.

Instead, you might focus on slowly paying down debt while building up your emergency fund. That way, you can focus on paying off high-interest credit cards without putting more unnecessary expenses on them.

Some people also wonder about using retirement savings to pay off debt. In general, saving for retirement early is one of the smartest things you can do to protect your financial future. The main benefit of saving early for retirement is that your savings have time to grow.

If you pull your retirement out of savings in order to pay down debt, you take away the opportunity for that money to accrue interest over time, which means you can miss out on the extra money when it comes time for retirement.

One other major downside to using retirement to pay off debt is that you may face a major penalty for pulling money out of your retirement accounts early.

So should you ever use savings to pay off debt? Once you save up an emergency fund and make a plan for retirement, you might consider putting some extra cash towards debt, particularly high-interest debt like credit cards. Just remember, prioritizing a healthy cash reserve can help keep you from getting stuck in debt to begin with.

Using a Personal Loan to Save Money On Debt

One reason most people are tempted to use their entire savings to pay off debt is that they know that the longer they take to pay, the more interest will accrue. Which means that, in the long run, you may end up paying large amounts of interest on top of the initial amount you borrowed.

This is especially true with high-interest debt, like credit cards. One alternative to dumping all your savings into your debt, while still (ideally) saving money on interest, is to consolidate your debt with a personal loan.

Using a personal loan to pay off debt may sound counter-intuitive at first, but many people find that taking out a personal loan to pay off high-interest debt can be a major money-saving measure because, in general, credit card interest rates tend to be much higher than personal loan interest rates.

Consolidating high-interest debt by trading it in with a personal loan may help you lower your interest rate, which may help to save you some serious cash on your debt—and help you pay it off faster.

Looking to tackle your debt with a personal loan from SoFi? There are no origination fees or prepayment penalties. See your rates in just two minutes.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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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Return on Education: How Graduate Degrees Impact Lifetime Earnings

That master’s degree in art history may help you understand cubism, but is it going to help you buy a Picasso one day? While material gain is not the only driving factor in most people’s decision to pursue higher education, it is worth considering, especially as more Americans become conscious of graduating with large outstanding student loan debt.

Lifetime Earnings by Education

When you’re considering graduate school, you have a lot to think about, including which programs best fit your interests, where the school is located, how much it costs, and how you’ll pay for it. The price of some grad programs can be dizzying: One year at Harvard Business School may set you back over $109,000.

A potentially hefty price tag means you have to consider whether a degree is worth the cost, especially if you have to take out student loans to help you get there. One way to help you do this is to examine the ratio of the cost of obtaining a new degree relative to the income it will help you generate once you graduate.

This measure is very much like return on investment—the ratio between net profit and cost from an investment of resources.

Your time and tuition can be considered your investment resources, and your future income is your profit. For the purposes of this article, we’ll call this measure a return on education, or your ROEd. And of course, your ROEd depends on how much of a boost you get by going for a graduate degree and how much money you put into securing the degree.

So what graduate degrees are yielding students a high ROEd? Unfortunately, a grad degree in the humanities may provide a relatively small boost in income.The average salary for a graduate with an MA in the
is $68,000. Other degrees—especially professional degrees like JDs, MDs, and MBAs—can provide a significant boost to your post graduation prospects. Stanford University Class of 2018 MBA grads have an average starting salary and bonuses of nearly $174,000, the highest in the country.

It’s clear that in some cases a graduate degree can have a huge impact on your lifetime earning potential, offering a high ROEd. Yet, this isn’t always the case, and with a low ROEd, you’ll want to weigh the benefits of a degree carefully.

Weighing a Graduate Degree

Your ROEd and other factors can help you decide whether a graduate program is worth it before you apply to graduate school.

Determining need: Determine whether or not you need a graduate degree to advance in your field. If you want to go into academia, you’ll likely need a PhD. However, if you have an undergrad engineering degree, you may not need more school to rise through the ranks of your company.

Factoring in your undergrad degree: not all undergrad degrees are created equal. Some undergrad degrees, like business, engineering, and mathematics degrees, are relatively lucrative out of the starting gate. Will a grad degree really produce a significantly higher salary? If you asked a Magic 8 ball this question, it would say “signs point to yes”: Someone with a bachelor’s in business can expect to earn an average entry-level salary of $56,720, whereas an MBA can earn a projected starting salary of $78,332.

Considering job prospects: When you achieve your graduate degree, will it be easy for you to find a job? With a PhD in an obscure subject, you may be competing for very few available positions. More general degrees may give you more job options and flexibility to grow.

Examining opportunity cost: The value of one choice relative to another alternative is known as opportunity cost. This concept is particularly relevant when you consider the financial opportunities you might lose by taking a few years off from working while you’re in school.

In other words, you won’t be getting a salary while you’re hitting the books. And if you’re already working at a relatively lucrative position, your opportunity cost could be high. You might want to factor this cost in when considering ROEd.

Note: There are ways to offset opportunity cost, such as working while you’re in school. Some employers will offer to pay for part of your schooling in exchange for an agreement that you will work for them for a given period of time.

Making conservative estimates: When calculating your own ROEd, being conservative with how much you think you will earn when you graduate, especially in your first years out of school, can be a big help. A conservative estimate helps keep you from overestimating your ROEd and can give you a better chance of arriving at a decision that’s financially beneficial to you.

Tipping the Balance

One way to improve your ROEd is by lowering the amount you pay for your degree. Look for scholarship programs that can help you pay for your tuition. Also, some degree programs offer full rides to students, often in exchange for teaching undergrad classes.

Sadly, help with tuition can be a rarity for degree programs that typically lead to high-paying jobs, such as MBAs, law degrees, and medical degrees.

If you need to take out student loans to pay for your degree, being smart about terms and interest rates can help you keep your costs down. When you’re considering student loans, shop around for lenders who offer low interest rates, low fees, and favorable terms.

You can refinance your student loans through lenders such as SoFi to help secure lower interest rates or a more flexible loan term. Doing so can be a good idea if you have a better financial profile than when you originally took out your loans.

Lowering the interest rate on your loan can reduce the amount you’ll pay over the life of the loan, helping to improve your ROEd. You can also refinance for a longer loan term—that would get you a lower monthly payment, but wouldn’t help your ROEd because it ultimately might mean paying more interest on your loan overall. Keep in mind that if you do refinance, keep in mind that you’ll lose access to federal loan benefits when refinancing for a private loan.

Also, don’t forget to look into student loan forgiveness programs. If you plan to find employment with a nonprofit or a government organization, you may be able to receive loan forgiveness under the Public Service Loan Forgiveness program after you make 10 years worth of qualifying monthly payments.

You may also want to consider looking for employers who will help you pay back your loans as part of the benefits package they offer to employees.

Intangible Benefits

Though money is an important part of your decision about whether to go to grad school, it isn’t everything. There are lots of benefits that can’t be pegged to a dollar amount, including social connections and whatever extra skills you acquire that aren’t directly related to your degree.

Visit SoFi to learn more about how to pay for graduate school, and how student loan refinancing could aid your repayment plan after grad school.

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.
SoFi Student Loan Refinance
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.


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Does Debt Consolidation Hurt Your Credit?

You may have heard that consolidating your debts can hurt your credit score. So, if you’re considering this financial strategy to free up cash flow and otherwise streamline debts, it’s natural to wonder if that’s true. And like so many questions related to finances, the answer depends upon your specific situation.

It’s important to remember that a combination of many factors can affect credit scores and to understand how those factors are considered in credit score algorithms. We’ll use FICO® as an example—according to them, the high-level breakdown of credit scores is as follows:

•  Payment history (35%): This includes delinquent payments and information found in public records.

•  Amount currently owed (30%): This includes money you owe on your accounts, as well as how much of your available credit on revolving accounts is currently used up.

•  Credit history length (15%): This includes when you opened your accounts and the amount of time since you used each account.

•  Credit types used (10%): What is your mix? For example, how much is revolving credit, like credit cards? How much is installment debt, such as car loans and personal loans?

•  New credit (10%): How much new credit are you pursuing?

Now, here is information to help you make the right debt consolidation decision.

Benefits of Debt Consolidation

When you’re juggling, say, multiple credit cards, it can be easy to accidentally miss a payment. Depending on the severity of the mistake, that can have a negative impact on your credit score. This, in turn, can make it more challenging to get loans when you need them, or prevent you from getting favorable loan terms, like low interest rates. Plus, even if you don’t miss a payment, when you have numerous credit card bills to juggle, you probably worry that one will get missed.

Plus, it’s not uncommon for credit cards to have high interest rates, and when you only make the minimum payments on each of them, you very well may be paying a significant amount of money each month without seeing balances drop very much at all.

So, when you combine multiple credit cards into one loan, preferably one with a lower interest rate, it’s much more convenient, making it less likely that you’ll accidentally miss a payment. And paying less in interest will likely make it easier to pay down your debt.

How you handle your debt consolidation, though, and the way in which you manage your finances after the consolidation each play significant roles in whether this strategy will ultimately help you.

Steps to Take: Before the Debt Consolidation Loan

Debt accumulates for different reasons for different people. For some, unexpected medical bills or emergency home repairs have served as culprits. For others, being underemployed for a period of time may have caused them to start carrying a credit card debt balance. For still others, it may be about learning how to budget more effectively.

No matter why credit card debt has built up, it can help to re-envision a debt consolidation strategy as something bigger and better than just combining your bills. As part of your plan, analyze why your debt accumulated and be honest about which ones were under your control and which were true emergencies.

And if you end up using a lower-cost loan to consolidate your bills, consider using any money saved to build up an emergency savings fund to help prevent the accumulation of credit card balances in the future.

The reality is that, if you consolidate your debts in conjunction with a carefully crafted budgeting and savings plan, then debt consolidation can be a wonderful first step in your brand-new financial strategy.

Debt Consolidation: When It Can Help Your Credit Score

Based on the factors used by FICO, here are ways in which a consolidation loan can help credit scores:

Payment history (35%)

Because making payments on time is the largest factor in FICO credit scores, a debt consolidation loan can help your credit if you make all of your payments on time.

Amount currently owed (30%)

Although you may not instantly reduce the amount you owe by, say, consolidating all of your credit card balances into a personal loan, there can be a benefit to your credit score here. That’s because the credit score algorithm looks at credit limits on your cards, as well as your outstanding balances, and creates a formula that calculates your credit card utilization.

Here is more information about credit card utilization, including how to calculate and manage yours.

Credit types used (10%)

As you may know, there are several different types of credit, such as credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. According to myFICO , responsibly using a mix of these, such as credit cards and installment loans, may help your credit score.

However, it’s certainly not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use.

Debt Consolidation: When It Can Hurt Your Credit Score

Now, here are ways that the same initial step—taking out a debt consolidation loan—may hurt your credit.

Payment history (35%)

As is the case with most loans, making late payments on a consolidation loan can hurt your credit score (depending on the severity of the situation). Loans in a delinquent status are mostly likely to have a negative impact on your credit, depending on the lenders’ policies.

Learn more about payment history .

Amount currently owed (30%)

Now, let’s say that you pay off all your credit cards with a personal loan and then you begin using them again to the degree that you can’t pay them off monthly. Any gain that you saw in your credit score will likely disappear as your credit utilization numbers rise again.

Another way that credit consolidation can harm your score is if you combine all of your credit card balances to just one credit card, resulting in a high utilization rate. But if you are able to keep it relatively low, it is less likely to negatively affect your score.

Learn more about amounts owed .

Credit history length (15%)

If you close credit cards that you pay off, you’ll reduce the age of your accounts, overall, and this can hurt your credit score.

Learn more about length of credit history .

Credit types used (10%)

If you combine all of your credit card balances into just one credit card, as described above, you won’t have opened an installment (personal) loan, so that won’t help with diversifying credit types.

Learn more about credit mix .

New credit (10%)

If you apply for a personal loan or a balance-transfer credit card and are rejected, this can cause your credit score to decrease. And if you apply for multiple loans or credit cards, looking for a lender that will accept your application, this can also hurt your score. Multiple requests for your credit report information (known as “inquiries”) in a short period of time can decrease your score, though not by much.

Learn more about new credit .

Concerned about building or rebuilding credit? Check out a few tips SoFi put together on how to strategically boost your credit score.

Investigating a Personal Loan for Debt Consolidation

When it’s time to apply for the personal loan, you’ll want to get a low rate. In February 2019, the average credit card interest rate was reported as 17.67%; this means that, by not consolidating your credit cards into a personal loan with a lower interest rate, you could be paying more interest than if you did.

When choosing a lender, ask about the fees associated with the loan. Some lenders charge fees; others,like SoFi, don’t. You can always use a lender’s annual percentage rates (APRs) as a way to understand the true cost of financing.

Also, you may consider calculating the shortest loan term that your budget can comfortably accommodate because, the more quickly you pay off the debt, the more money you’ll save over the life of the loan because you’re paying less in interest.

You can find more information about saving money as you consolidate your debts, and you can also calculate payments using our personal loan calculator.

Consolidate Your Debt with a SoFi Personal Loan

If you’re ready to say goodbye to high-interest credit cards and to juggling multiple payments each month, a SoFi personal loan may be a good option.

Benefits of our personal loans include:

•  Fast, easy, and convenient online application process

•  Low interest rates

•  No origination fees

•  No prepayment fees

•  No hidden fees

•  Fixed rate loan

You deserve peace of mind. And by taking out a personal loan to consolidate debt, the stress of juggling multiple credit card payments can be history. Ready for your fresh start?

Learn more about how using a SoFi personal loan to consolidate high-interest credit card debt could help you meet your goals.

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

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

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