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Q: How Often Do Recessions Occur?

Since World War II, a recession has occurred, on average, every six years, though the actual timing can and has varied.

Oct

2022

What Is a Recession?

By Rebecca Lake | Financial Independence, Growing Wealth, Investing | No Comments

Generally speaking, a recession is a period of economic contraction. Recessions are typically accompanied by falling stock markets, a rise in unemployment, a drop in income and consumer spending, and increased business failures.

Recessions tend to have a wide-ranging economic impact, affecting businesses, jobs, everyday individuals, and investment returns. But what are recessions exactly, and what long-term repercussions do they tend to have on personal financial situations? Here’s a deeper dive into these economic contractions.

Different Recession Definitions

A recession is usually defined as a drop in gross domestic product (GDP) — which represents the total value of goods and services produced in the country — for at least two quarters in a row. However, this is not an official definition of a recession, just a shorthand that many economists and investors use when analyzing the economy.

Moreover, consumers and workers may believe that the economy is in a recession when unemployment or inflation rises, even though economic output may still be growing.

Recessions are officially defined and declared by the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER).

💡 Recommended: Recession Survival Guide and Help Center

NBER’s Definition

The NBER defines a recession as a significant and widespread decline in economic activity that lasts a few months. The economists at the NBER use a wide range of economic indicators to determine the peaks and troughs of economic activity. The NBER chooses to define a recession in terms of monthly indicators, including:

• Employment. Job growth or job loss can be used to gauge the likelihood of a recession and serve as a litmus test of sorts for which way the economy is moving.

• Personal income. Personal income can play a direct role in influencing recessionary environments. When consumers have more personal income to spend, that can fuel a growing economy. But when personal income declines or purchasing power declines because of rising interest rates, that can be a recession indicator.

• Industrial production. Industrial production is a measure of manufacturing activity. If manufacturing begins to slow down, that could suggest slumping demand in the economy and, in turn, a shrinking economy.

These indicators are then viewed against the backdrop of quarterly gross domestic product growth to determine if a recession is in progress. Therefore, the NBER doesn’t follow the commonly accepted rule of two consecutive quarters of negative GDP growth, as that alone isn’t considered a reliable indicator of recessionary movements in the economy.

Additionally, the NBER is a backward-looking organization, declaring a recession after one has already begun and announcing the trough of economic activity after it has already bottomed.

Julius Shiskin Definition

The shorthand of using two negative quarters of GDP growth can be traced back to a definition of a recession that first originated in the 1970s with Julius Shiskin, once commissioner of the Bureau of Labor Statistics. Shiskin defined recession as meaning:

• Two consecutive quarters of negative gross national product (GNP) growth

• 1.5% decline in real GNP

• 15% decline in non-farm payroll employment

• Unemployment reaching at least 6%

• Six months or more of job losses in more than 75% of industries

• Six months or more of decline in industrial production

It’s important to note that Shiskin’s recession definition used GNP, whereas modern definitions of recession use GDP instead. GNP, or gross national product, measures the value of goods and services produced by a country both domestically and internationally. Gross domestic product only measures the value of goods and services produced within the country itself.

How Often Do Recessions Occur?

Economic recessions are a normal part of the business cycle. According to the NBER, the U.S. experienced 33 recessions prior to the coronavirus pandemic. The first documented recession occurred in 1857, and the last was the Covid-19 recession, which started in February 2020 and ended in April 2020.

Since World War II, a recession has occurred, on average, every six years, though the actual timing can and has varied.

U.S. Recessions Since World War II
Start of Recession	End of Recession	Number of Months
November 1948	October 1949	11
July 1953	May 1954	10
August 1957	April 1958	8
April 1960	February 1961	10
December 1969	November 1970	11
November 1973	March 1975	16
January 1980	July 1980	6
July 1981	November 1982	16
July 1990	March 1991	8
March 2001	November 2001	8
December 2007	June 2009	18
February 2020	April 2020	2
Source: NBER

How Long Do Recessions Last?

According to the NBER, the shortest recession occurred following the Covid-19-related shutdowns and lasted two months, while the longest went from 1873 to 1879, lasting 65 months. The Great Recession lasted 18 months between December 2007 and June 2009 and was the longest recession since World War II.

If you consider the other 12 recessions following World War II, they have lasted, on average, about ten months.

Periods of economic expansion tend to last longer than periods of recession. From 1945 to 2020, the average expansion lasted 64 months, while the average recession lasted ten months.

The most recent expansion, i.e., the one that occurred after the Great Recession between 2009 and the beginning of 2020, lasted 128 months.

Between the 1850s and World War II, economic expansions lasted an average of 26 months, while recessions lasted an average of 21 months.

The Great Recession between 2007 and 2009 was the most severe economic drawdown since the Great Depression of the 1930s. This recession was considered particularly damaging due to its duration, unemployment levels that peaked at around 10%, and the widespread impact on the housing market.

6 Common Causes of Recessions

The causes of recessions can vary greatly. Generally speaking, recessions happen when something causes a loss of confidence among businesses and consumers. The recession that occurred in 2020 could be considered an outlier, as it was mainly sparked by an external global health event rather than internal economic causes.

The mechanics behind a typical recession work like this: consumers lose confidence and stop spending, driving down demand for goods and services. As a result, the economy shifts from growth to contraction. This can, in turn, lead to job losses, a slowdown in borrowing, and a continued decline in consumer spending.

Here are some common characteristics of recessions:

1. High Interest Rates

High interest rates make borrowing money more expensive, limiting the amount of money available to spend and invest. In the past, the Federal Reserve has raised interest rates to protect the value of the dollar or prevent the economy from overheating, which has, at times, resulted in a recession.

For example, the 1970s saw a period of stagnant growth and inflation that came to be known as “stagflation.” To fight it, the Fed raised interest rates throughout the decade, which created the recessions between 1980 and 1982.

2. Falling Housing Prices

If housing demand falls, so does the value of people’s homes. Homeowners may no longer be able to tap their house’s equity. As a result, homeowners may have less money in their pockets to spend, reducing consumption in the economy.

3. Stock Market Crash

A stock market crash occurs when a stock market index drops severely. If it falls by at least 20%, it enters what is known as a “bear market.” Stock market crashes can result in a recession since individual investors’ net worth declines, causing them to reduce spending because of a negative wealth effect. It can also cut into confidence among businesses, causing them to spend and hire less.

As stock prices drop, businesses may also face less access to capital and may produce less. They may have to lay off workers, whose ability to spend is curtailed. As this pattern continues, the economy may contract into recession.

4. Reduction in Real Wages

Real wages describe how much income an individual makes when adjusted for inflation. In other words, it represents how far consumer income can go in terms of the goods and services it can purchase.

When real wages shrink, a recession can begin. Consumers can lose confidence when they realize their income isn’t keeping up with inflation, leading to less spending and economic slowdown.

5. Bursting Bubbles

Asset bubbles are to blame for some of the most significant recessions in U.S. history, including the stock market bubble in the 1920s, the tech bubble in the 1990s, and the housing bubble in the 2000s.

An asset bubble occurs when the price of an asset, such as stock, bonds, commodities, and real estate, quickly rises without actual value in the asset to justify the rise.

As prices rise, new investors jump in, hoping to take advantage of the rapidly growing market. Yet, when the bubble bursts — for example, if demand runs out — the market can collapse, eventually leading to recession.

6. Deflation

Deflation is a widespread drop in prices, which an oversupply of goods and services can cause. This oversupply can result in consumers and businesses saving money rather than spending it. This is because consumers and businesses would rather wait to purchase goods and services that may be lower in price in the future. As demand falls and people spend less, a recession can follow due to the contraction in consumption and economic activity.

How Do Recessions Affect You?

Businesses may have fewer customers when the economy begins to slow down because consumers have less real income to spend. So they institute layoffs as a cost-cutting measure, which means unemployment rates rise.

As more people lose their jobs, they have less to spend on discretionary items, which means fewer sales and lower revenue for businesses. Individuals who can keep their jobs may choose to save their money rather than spend it, leading to less revenue for businesses.

Investors may see the value of their portfolios shrink if a recession triggers stock market volatility. Homeowners may also see a decline in their home’s equity if home values drop because of a recession.

When consumer spending declines, corporate earnings start to shrink. If a business doesn’t have enough resources to weather the storm, it may have to file for bankruptcy.

💡 Recommended: How to Invest During a Recession

Governments and central banks will often do what they can to head off recession through monetary or fiscal stimulus to boost employment and spending.

Central banks, like the Federal Reserve, can provide monetary policy stimulus. The Fed can lower interest rates, which reduces the cost of borrowing. As more people borrow, there’s more money in circulation and more incentive to spend and invest.

Fiscal stimulus can come from tax breaks or incentives that increase outputs and incomes in the short term. Governments may put together stimulus packages to boost economic growth.

For example, stock market volatility increased wildly amid fears of the coronavirus pandemic and its economic fallout. To ward off recession, the U.S. government put together trillions in Covid-19 stimulus packages that included direct payments to citizens, suspended student loan payments, a boost to unemployment benefits, and a lending program for businesses and state and local governments.

💡 Recommended: 5 Common Recession Fears and How to Cope

Recessions vs Depressions and Bear Markets

Recessions vs Depressions

When a recession occurs, it could stir up uneasy feelings that perhaps the economy will enter a depression. However, there are significant differences between recessions and depression. While recessions are a normal part of the business cycle that last less than a year, depressions are a severe decline in economic output that can last for years. Consider that the Great Recession lasted 18 months, while the Great Depression lasted about ten years, beginning in 1929.

The Great Depression is the most recent example of a depression in the U.S. From 1929 through 1933, as many as 25% of Americans were unemployed, and real GDP declined by 29%. In contrast, the unemployment rate peaked at 10%, and real GDP fell by 4% during the Great Recession.

Recessions vs Bear Markets

A recession is also different from a bear market, even though many think the two events go hand-in-hand.

A bear market begins when the stock market drops 20% from its recent high. If you look at the benchmark S&P 500 index, there have been 13 bear markets since 1945.

Yet, not all bear markets result in recession. During 1987’s infamous Black Monday stock market crash, the S&P 500 lost 34%, and the resulting bear market lasted four months. However, the economy did not dissolve into recession.

That’s happened three other times since 1947. Bear markets have lasted 14 months on average since World War II, and the most significant decline since then was the bear market of 2007–2009.

The first thing to understand is that the stock market is not the same as the economy, though they are related. Investors react to changes in economic conditions because what’s happening in the economy can affect the companies in which investors own stock.

So, if investors think the economy is growing, they may be more willing to put money in the stock market. They will likely pull money out of the stock market if they believe it is contracting. These reactions can function as a sort of prediction of recession.

💡 Recommended: Bear Market Investing Strategies

Is It Possible to Predict a Recession?

Economists and investors try to predict recession, but it’s difficult to do, and they often end up wrong. Economists usually frame the possibility of a recession as a probability. For example, they may say there’s a 35% chance of a recession in the next year.

There are several methods economists use to try to predict recessions. Some of the most common include analyzing economic indicators, such as employment and inflation, as well as consumer and business confidence surveys. Economists build models with these economic indicators as inputs, hoping the data will help them determine the path of economic growth. While these methods can indicate whether a recession might be on the horizon, they are far from perfect.

One issue in predicting a recession is that a lot of data analysts use to forecast the economy are backward looking indicators. These data, like the unemployment rate or GDP, present a picture of the economy as it was a month or more prior. Using this data to paint a picture of the present economy becomes difficult and adds to the complexity of predicting a recession.

However, many analysts believe the yield curve is the best indicator to help predict a recession. When the yield curve inverts, meaning that the interest rate on short-term Treasuries is higher than on long-term Treasuries, it is a warning sign that the economy is heading to a recession. An inverted yield curve has occurred before all 10 U.S. recessions since 1955.

Is the US Heading Into a Recession?

There are debates about whether the U.S. is heading into a recession in 2022 or 2023 due to several factors.

The U.S. economy has been in a precarious situation during 2022. Inflation has been running hot due to supply chain issues related to the economic fallout of Covid-19 and fiscal and monetary policy stimulus. The Federal Reserve started raising interest rates at a historic pace to combat the rising prices. The Fed began an attempt to curb inflation with the hope of a soft landing, in which an economy slows enough that prices stop rising quickly but not so slowly that it sparks a recession.

These factors made the chance of a recession more of a reality. Economic growth, as measured by GDP, declined in the first half of 2022. Because of this, some economists and analysts believe that the economy entered a recession because of the shorthand definition of two straight quarters of negative GDP growth.

However, other commentators note that the unemployment rate was 3.5% as of September 2022, the lowest in 50 years, and hiring was still robust. The strong labor market suggested that the economy couldn’t be in a recession. Economic indicators like industrial production and consumer spending are also growing, showing a potentially resilient economy.

Nonetheless, the U.S. economy faces several headwinds due to inflation, rising energy prices, and a global economic slowdown. So even if the economy is not in a recession as of October 2022, it could still be heading into one in the coming months.

The Takeaway

The possibility of a recession can be unsettling, causing you to think of economic hardships and spark fears of personal financial troubles. However, recessions are a regular part of the business cycle, so you should be prepared for one if and when it comes. When it comes to investing, this means building and maintaining a portfolio to meet long-term goals. The resulting portfolio likely holds a balanced mix of assets that accounts for an investor’s time horizon and risk tolerance.

The key to riding out a recession is for investors to stick to their long-term plans, only rebalancing when it will help them reach their long-term goals. With a SoFi online brokerage account, you can start building a portfolio that meets your long-term financial needs. You can trade stocks, ETFs, and IPOs with no commissions for as little as $5.

Take a step toward reaching your financial goals with SoFi Invest.

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Oct

2022

How to Apply for Biden’s Student Loan Forgiveness

By Nancy Bilyeau | Fresh Out of School, Student Loans, student_loan | Comments Off

Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

You can now apply for a one-time cancellation of up to $20,000 on your federal student loan debt through an online form posted on the Federal Student Aid website.

The program provides eligible borrowers with full or partial discharge of federal loans up to $20,000 to Federal Pell Grant recipients and up to $10,000 to non-Pell Grant recipients.

Who qualifies? Individuals who made less than $125,000 in 2021 or 2020, and families that made less than $250,000 in 2021 or 2020.

Read on to learn more about applying for student loan forgiveness — and the deadlines you need to know.

Steps to Take to Apply for Student Loan Debt Cancellation

President Joe Biden announced a student loan forgiveness plan in August that would provide one-time debt relief to low- and middle-income families through $10,000 or $20,000 payments.

The form went live on October 17.

Nearly 8 million borrowers may be eligible to receive relief without applying for it because the DOE already has their income information. But if you are uncertain whether you fall into that group, it’s recommended that you fill out the application.

Qualified borrowers are advised to apply by mid-November in order to receive relief before the pause on all federal loan payments expires on December 31, 2022.

Following these steps will help the application process go smoothly:

Figure Out if You’re Eligible

People with federal student loans may qualify for up to $10,000 in debt relief, and Pell Grant recipients may get up to $20,000. Borrowers are eligible for this relief if their 2020 or 2021 individual income is less than $125,000 or $250,000 for households.

Federal Pell Grants are typically awarded to undergraduate students with low or moderate income. Most borrowers can log in to StudentAid.gov to see if they received a Pell Grant.

Submit Your Application

The application “is simple, easy, and you don’t need to log in or provide supporting documents to apply,” the White House tweeted on October 17.

“We’ll determine your eligibility and will contact you if we need more information,” says the FSA site. “Your loan servicer will notify you when your relief has been processed.”

A beta version of the application was released less than a week before the official application went live. Those who applied during that stage do not need to apply again, according to the White House. The form they submitted will be processed.

You’ll have until Dec. 31, 2023, to submit your application.

Refresh Your Contact Information

You do not need to log in with your student loan servicer to apply for debt relief, but it’s recommended that you make sure your contact information is up to date for notifications. If you don’t know who your federal student loan servicer is, find out now. These companies work with the DOE on the administration of your loans.

If you don’t have a StudentAid.gov account (an FSA ID), you should create an account to help you manage your loans.

A New Deadline for Loan Debt Payments

Everyone who is paying down their federal student loans got a pause in payments starting in March 2020. The deadline to resume payments has been extended more than five times.

“To ensure a smooth transition to repayment and prevent unnecessary defaults,” President Biden said he will extend the pause one more time, through Dec. 31, 2022, with payments resuming in January 2023.

Biden said this past August that there will be no more extensions after his final one.

Changes in Eligibility for Public Service Forgiveness

Along with extending the deadline for loan repayments and creating a one-time federal loan relief payment, President Biden made changes to the Public Service Loan Forgiveness program.

Borrowers who are employed by nonprofits, the military, or federal, state, tribal, or local government may be eligible to have all of their student loans forgiven through the existing Public Service Loan Forgiveness (PSLF) program. This is because of time-limited changes that waive certain eligibility criteria in the PSLF program.

Anyone interested in this opportunity needs to take action immediately. These temporary changes expire on October 31, 2022. For more information on eligibility and requirements, and to apply, go to PSLF.gov .

What About Opposition to the Biden Loan Forgiveness Program?

Biden’s federal student loan forgiveness plan has not met with universal approval. Some say that Biden does not have the authority to institute the plan; others criticize the cost to the economy. The White House said in August that canceling the federal debt will cost the government $240 billion over the next decade. Other estimates have put the price higher.

In late September, six states — Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina — filed a lawsuit to stop the plan, saying the Biden administration overstepped its regulatory authority.

Various court challenges and politicians’ petitions are moving forward. However, as of October 18, the opposition did not appear to have the legal authority to stop the debt cancellation plan from going forward.

The Takeaway

While federal student loan cancellation of up to $20,000 will be sent to about 8 million people automatically, there is now an online application for anyone who wants to apply and meets the income eligibility requirements.

You may want to take steps to get on top of all your student loan debt. Only federal student loans are eligible for cancellation, and only for those who meet certain income requirements. Refinancing your student loans — or what’s left of your student loans after forgiveness — might lead to lower payments, especially as interest rates are rising from historic lows. Explore student loan refinancing with SoFi to find out your options. Just be aware that after you refinance, that amount is no longer eligible for forgiveness.

Find out your rate for student loan refinancing

FAQ

Do you need to apply for the student loan forgiveness?

Nearly 8 million borrowers may be eligible to receive relief without applying — unless they choose to opt-out — because the necessary income data is already available to the DOE.

You may receive the one-time debt cancellation on your federal student loan if you filed the necessary income data through a Free Application for Federal Student Aid (FAFSA) in the last two years or an income-driven repayment application that uses income data from tax years 2021 or 2020.

But if you are at all unsure whether this applies to you, it’s recommended that you fill out an application
online .

How will I know if I qualify for student loan forgiveness?

You will either automatically receive forgiveness on your federal student loan or you’ll receive it after you fill out an application online. You will be notified through an email or text if you qualify and, later, you will be informed by your loan servicer once the money is deducted from what you owe.

What types of student loans will be forgiven?

Only federal loans are eligible for these forgiveness programs, not private student loans. Subsidized loans, unsubsidized loans, parent PLUS loans, and graduate PLUS loans held by the DOE are eligible.

Consolidation loans are also eligible for relief, as long as all of the underlying loans that were consolidated were DOE-held loans and were disbursed on or before June 30, 2022. Additionally, consolidation loans comprised of any FFEL or Perkins loans not held by DOE are also eligible, as long as the borrower applied for consolidation before Sept. 29, 2022.

Do parents get student loan forgiveness?

All DOE-held loans, including PLUS loans for parents and graduate students, are eligible for relief, according to the Biden Forgiveness Plan.

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SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

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Oct

2022

Ace Your Student Loans With The Ultimate Loan Terminology Cheat Sheet

By Kayla McCormack | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

There are so many upsides to investing in your education — the personal enrichment and possibility of a bright and fruitful future being the most obvious. But, there are also some potential downsides that are hard to ignore, one of the main ones — if you’re like so many others — being the debt you may accrue.

If you’re a student loan borrower, you’ve probably noticed that your loans have a language all their own. Getting a grasp on terms like interest rate vs. APR, subsidized vs. unsubsidized loans, and fixed vs. variable interest rates can help you make more informed, confident decisions.

Instead of enrolling in Student Loan Language 101, you can use our quick and dirty reference guide to find some answers without information overload. Borrowing a loan can have long-term financial consequences, so it’s important to fully understand the fees and interest rates that will affect the amount of money you owe. Here are a few of the most important terms to understand before you take out a student loan:

Common Student Loan Terminology

Academic Year

An academic year is one complete school year at the same school. If you transfer, it is considered two half-years at different schools.

Accrued Interest

The amount of interest that has accumulated on a loan since your last payment. You can keep accrued interest in check by making your payments on time each month. However, after a period of missed or reduced payments, accrued interest may be capitalized, which essentially means you’d have to pay interest on the student loan accrued interest.

Adjusted Gross Income (AGI)

AGI is an individual’s gross income, less any deductions or adjustments to income. This includes things like wages, salaries, any interest or dividends you may earn and any other sources of income. You can find your AGI on your federal income tax returns.

Aggregate Loan Limit

The aggregate loan limit is the maximum amount of federal student loan debt a borrower can have when graduating from school. The aggregate loan limit may vary depending on whether you are a dependent or independent student.

Amortization

Amortization refers to the amount of loan principal and interest you pay off incrementally over your loan term. Each student loan payment is a fixed amount that contributes to both interest and principal. Early in the life of the loan, the majority of each payment goes toward interest. But over time as you pay down your loan balance, the ratio shifts and most of the payment goes toward the principal.

Annual Percentage Rate (APR)

The annual rate that is charged for borrowing, expressed as an annual percentage. APR is a standardized calculation that allows you to make a more fair comparison of different loans. Consider the difference between interest vs. APR — APR reflects the cost of any fees charged on the loan, in addition to the basic interest rate. Generally speaking, the lower your APR, the less you’ll spend on interest over the life of the loan.

Annual Loan Limit

The yearly borrowing limit set for federal student loans.

Automated Clearing House (ACH)

An electronic funds transfer is sent through the Automated Clearing House system. The ACH is an electronic funds — transfer system that helps your loan payment transfer directly from your bank account to your lender or loan servicer each month.

The benefits of ACH are two-fold — not only can automatic payments keep you from forgetting to pay your bill, but many lenders also offer interest rate discounts for enrolling in an ACH program.

Award Letter

An award letter is sent from your school and details the types and amounts of financial aid you are eligible to receive. This will include information on grants, scholarships, federal student loans, and work-study. You will receive an award letter for each year you are in-school and apply for financial aid.

Award Year

The academic year that financial aid is applied to.

Borrower

The borrower is the person who took out a loan. In doing so, they agreed to repay the loan.

Campus-Based Aid

Some financial aid programs are administered by specific financial institutions, such as the Federal Work-Study program. Generally, schools receive a certain amount of campus-based aid annually from the federal government. The schools are then able to award these funds to students who demonstrate financial need.

Cancellation

This refers to the cancellation of a borrower’s requirement to repay all or a portion of their student loans. Loan forgiveness and discharge are two other types of loan cancellation.

Capitalization

Capitalization is when unpaid interest is added to the principal value of the student loan. This generally occurs after a period of non-payment such as forbearance. Moving forward, the interest will be calculated based on this new amount.

Capitalized Interest

Accrued interest is added to your loan’s principal balance, typically after a period of non-payment such as forbearance. When the interest is tacked onto your principal balance, your interest is now calculated on that new amount.

Most student loans begin accruing interest as soon as you borrow them. While you are often not responsible for repaying your student loans while you are in school or during a grace period or forbearance, interest will still accrue during these periods. At the end of said period, the interest is then capitalized, or added to the principal of the loan.

When interest is capitalized, it increases your loan’s principal. Since interest is charged as a percent of principal, the more often interest is capitalized, the more total interest you’ll pay. This is a good reason to use forbearance only in emergency situations, and end the forbearance period as quickly as possible.

Cosigner

A third party, such as a parent, who contractually agrees to accept equal responsibility in repaying your loan(s). A student loan cosigner can be valuable if your credit score or financial history are not sufficient enough to allow you to borrow on your own.

With a cosigner, you are still responsible for paying back the loan, but the cosigner must step in if you are unable to make payments. A co-borrower applies for the loan with you and is equally responsible for paying back the loan according to the loan terms on a month-to-month basis.

Recommended: Do I Need a Student Loan Cosigner?

Consolidation (through the Direct Loan Consolidation Program)

The act of combining two or more loans into one loan with a single interest rate and term. The resulting interest rate is a weighted average of the original loan rates — rounded up to the nearest eighth of a percentage point.

Only certain federal loans are eligible for the Direct Consolidation Program. Consolidating can make your life simpler with one monthly bill, but it may not actually save you any money. You may be able to reduce your monthly payments by increasing the loan term, but this means you’ll pay more interest over the life of the loan.

Consolidation (through a Private Lender)

The act of combining two or more loans into one single loan with a single interest rate and term. When you consolidate loans with a private lender, you do so through the act of refinancing, so you’re given a new (hopefully lower) interest rate or lower payments with a longer-term.

Most private lenders only refinance private loans, but SoFi refinances both private and federal loans. By refinancing, you may be able to lower your monthly payments or shorten your payment term. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

Recommended: What Is a Direct Consolidation Loan?

Cost of Attendance

Cost of attendance is the estimated total cost for attending a college based on the cost of tuition, room and board, books, supplies, transportation, loan fees, and miscellaneous expenses. Schools are required to publish the cost of attendance.

Credit Report

Credit reports detail an individual’s bill payment history, loans, and other financial information. These reports are used by lenders to evaluate your creditworthiness.

Default

Failure to repay a loan according to the terms agreed to in the promissory note. Defaulting on your student loans can have serious consequences, such as additional fees, wage garnishment, and a significant negative impact on your credit. It’s always better to talk to your lender about potential hardship repayment options, such as deferment or forbearance, before defaulting on a loan.

Deferment

The temporary postponement of loan repayment, during which time you may not be responsible for paying interest that accrues (on certain types of loans). Student loan deferment can be useful if you think you’ll be in a better place to pay your loans at a later date. However, deferment is usually only available for certain federal loans. To potentially cut down on interest, it may be wise to weigh your deferment options.

Delinquency

When you miss a student loan payment, the loan becomes delinquent. The loan will be considered delinquent until a payment is made on the loan. If the loan remains in delinquency for a specified period of time (which may vary for federal vs. private student loans), it may enter default.

Direct Loan

The Direct Loan program is administered via the U.S. Department of Education. There are four main types of direct loans including Direct Subsidized loans, Direct Unsubsidized loans, Direct PLUS loans, and Direct Consolidation loans.

Direct PLUS Loan

Direct PLUS loans are types of federal loans that are made to graduate or professional student borrowers or to the parents of undergraduate students. Direct PLUS Loans made to parents may be referred to as Parent PLUS Loans.

Disbursement

When funds for a loan are paid out by the lender.

Discharge

Student loan discharge occurs when you are no longer required to make payments on your loans. Typically, student loan discharge occurs when there are extenuating circumstances such as the borrower has experienced a total and permanent disability or the school at which you received your loans has closed.

Discretionary Income

Discretionary income is the money remaining after you pay for necessary expenses. An individual’s discretionary income is used to help determine their loan payments on an income-driven repayment plan.

Endorser

An endorser is similar to a co-borrower in that they also sign on to the loan agreement and are responsible for repaying the loan if the primary borrower is unable to do so. Individuals who may not qualify for a Direct PLUS Loan on their own can add an endorser to their application.

Enrollment Status

Determined by the school you attend, your enrollment status is a reflection of your enrollment at the school. Enrollment status includes, full-time, half-time, withdrawn, and graduated.

Expected Family Contribution (EFC)

An estimation of the amount of money a student and their family is expected to pay out of pocket toward tuition and other college expenses.

Federal Work-Study

A type of financial aid, students who demonstrate financial aid may qualify for the federal work-study program, where they work part-time to earn funds to help pay for college expenses.

Financial Aid

Funds to help pay for college. Financial aid includes grants, scholarships, work-study, and federal student loans.

Financial Aid Package

An overview of the types of financial aid you are eligible to receive for college. Financial aid packages provide information on all types of federal financial aid and college-specific aid such as scholarships, grants, work-study, and federal student loans.

Financial Need

Some types of financial aid are determined by financial need. Financial need is defined as the difference between the cost of attendance at your school and the expected family contribution of your school.

Fixed Interest Rate

An interest rate that remains the same for the life of the loan. The interest rate does not fluctuate.

Forbearance

The temporary postponement of loan repayment, during which time interest typically continues to accrue on all types of federal student loans. If your student loan is in forbearance you can either pay off the interest as it accrues, or you can allow the interest to accrue and it will be capitalized at the end of your forbearance.

Use forbearance wisely, because interest that accrues during the forbearance period typically capitalized making your loan more expensive. If you can afford to make even small payments during forbearance, it can help keep interest costs down.

You will usually have to apply for student loan forbearance with your loan holder and will sometimes be required to provide documentation proving you meet the criteria for forbearance. For a loan to be eligible for forbearance, there must be some unexpected temporary financial difficulty.

Forgiveness

Loan forgiveness is another situation in which you are no longer responsible for repaying all or a portion of your student loans. Public Services Loan Forgiveness and Teacher Loan Forgiveness are two types of loan forgiveness programs in which your loans are forgiven after meeting specific requirements, such as working in a qualifying job and making qualifying loan payments.

In August 2022, President Biden announced a loan forgiveness plan for borrowers with student loan debt. Under this plan, borrowers earning up to $125,000 (when filing taxes as single) may qualify for up to $10,000 in student loan forgiveness. He also announced that Pell Grant recipients may qualify to have up to $20,000 of their loans forgiven.

Free Application for Federal Student Aid (FAFSA®)

This is the application students use to apply for all types of federal student aid, including federal loans, work-study, grants, and scholarships. The FAFSA must be completed for each year a student wishes to apply for financial aid.

Recommended: FAFSA Guide

Grace Period

A period of time after you graduate, leave school or drop below half-time during which you’re not required to make payments on certain loans. Some loans continue to accumulate interest during the grace period, and that interest is typically capitalized, making your loan more expensive.

Grad PLUS Loans

Another term to refer to a Direct PLUS loan, specifically one borrowed by a graduate or professional student.

Graduate or Professional Student

A student who is pursuing educational opportunities beyond a bachelor’s degree. Graduate and professional programs include master’s and doctoral programs.

Graduated Repayment Plan

A type of repayment plan available for federal student loan borrowers. On this repayment plan, loan payments begin low and increase every two years. This plan may make sense for borrowers who expect their income to increase over time.

Grant

A type of financial aid that does not need to be repaid. Grants are often awarded based on financial need.

In-School Deferment

Students who are enrolled at least half-time in school are eligible to defer their federal student loans. This type of deferment is generally automatic for federal student loans. Note that unless you have a subsidized student loan, interest will continue to accrue during in-school deferment.

Interest

Interest is the cost of borrowing money. It is money paid to the lender and is calculated as a percentage of the unpaid principal.

Interest Deduction

A tax deduction that allows you to deduct the student loan interest you paid on a qualified student loan for the tax year. Interest paid on both private and federal student loans qualifies for the student loan interest deduction.

Lender

The financial institution that lends funds to an individual borrower.

Loan Period

A loan period is the academic year for which a student loan is requested.

Loan Servicer

A company your lender may partner with to administer your loan and collect payments. For questions about your student loan payments or administrative details such as account information, you should contact your student loan servicer.

Origination Fee

A fee that some lenders charge for processing the loan application, or in lieu of upfront interest. To minimize incremental costs on your loan, look for lenders that offer no or low fees.

Part-Time Enrollment

Students who are enrolled in school less than full-time are generally considered part-time students. The number of credit hours required for part-time enrollment are determined by your school.

Pell Grant

A grant awarded by the federal government to undergraduate students who demonstrate exceptional financial need.

Perkins Loans

Perkins Loans were a type of federal loan available to undergraduate and graduate students who demonstrated exceptional financial need. The Perkins Loan program ended in 2017.

PLUS Loans

Another way to describe Direct PLUS Loans, which are federal loans available for graduate and professional students or the parents of undergraduate students.

Prepayment

Paying off the loan early or making more than the minimum payment. All education loans, including private and federal loans, allow for penalty-free prepayment, which means you can pay more than the monthly minimum or make extra payments without incurring a fee. The faster you pay off your loan, the less you’ll spend on interest.

Prime Rate

This is the interest rate that commercial banks charge their most creditworthy customers. The basis of the prime rate is the federal funds overnight rate. The federal funds overnight rate is the interest rate that banks use when lending to each other. The prime rate can be used as a benchmark for interest rates on other types of lending.

Principal

Principal is the original loan amount you borrowed. For example, if you take out one $100,000 loan for grad school, that loan’s principal is $100,000.

Private Student Loan

A student loan lent by a private financial institution such as a bank, credit union, online lender, or other financial institution. These loans can be used to pay for college and educational expenses, but are not a part of the Federal Direct Loan Program. These loans don’t offer the same borrower protections available to federal student loans — like income-driven repayment plans or deferment options.

Promissory Note

A contract that says you’ll repay a loan under certain agreed-upon terms. This document legally controls your borrowing arrangement, so read your promissory note carefully. If you don’t fully understand the agreement, contact your lender before you sign.

Repayment

Repaying a loan plus interest.

Repayment Period

The agreed upon term in which loan repayment will take place.

Scholarship

A type of financial aid which typically doesn’t need to be repaid. Scholarships can be awarded based on merit.

Secured Overnight Financing Rate (SOFR)

An interest rate benchmark that is commonly used by banks and other lenders to set interest rates for loans. The SOFR is the cost of borrowing money overnight collateralized by Treasury securities. Starting in June 2023, the SOFR will begin replacing the LIBOR as a benchmark interest rate.

Stafford Loans

Stafford loans were a type of federal student loan made under the Federal Family Education Loan Program. Beginning in 2010, all federal student loans were loaned directly through the William D. Ford Federal Direct Loan Program.

Standard Repayment Plan

The Standard Repayment Plan is one of the repayment plans available for federal student loan borrowers. This repayment plan consists of fixed payments made over an up to 10 year period.

Student Aid Report

After submitting the FAFSA you will receive a student aid report (SAR). The SAR is a summary of the information you provided when filling out the FAFSA.

Student Loan Refinancing

Using a new loan from a private lender to pay off existing student loans. This allows you to secure a new (ideally lower) interest rate or adjust your loan terms.

Subsidized Loan

A Direct Subsidized Loan is a type of federal loan available to undergraduate students where the government covers the interest that accrues while the student is enrolled at least half-time, during the grace period, and other qualifying periods of deferment.

Term

The expected amount of time the loan will be in repayment. Generally speaking, a longer term will mean lower monthly payments but higher interest over the life of the loan, while a shorter term will mean the opposite. Loan terms vary by lender, and if you have a federal loan, you are usually able to select your student loan repayment plan.

Tuition

The cost of classes and instruction.

Undergraduate Student

A student who is enrolled in an undergraduate course of study.

Unsubsidized Loan

A Direct Unsubsidized Loan is a type of federal loan available to undergraduate or graduate students. The major difference between subsidized vs. unsubsidized loans is that the interest on unsubsidized loans is not subsidized by the federal government.

Variable Interest Rate

Unlike a fixed interest rate, a variable interest rate fluctuates over the life of a loan. Changes in interest rates are tied to a prevailing interest rate.

The Takeaway

Understanding key terms is essential for navigating student borrowing. Prioritizing sources of financial aid that don’t need to be repaid like scholarships and grants can be helpful. But these don’t always meet a student’s financial needs. Federal student loans have low-interest rates and, for the most part, don’t require a credit check. Plus they have borrower protections in place, like income-driven repayment plans or deferment options, that make them the first choice for most students looking to borrow money to pay for college.

When these sources of aid aren’t enough, private student loans can help fill in the gap. Keep in mind that, as mentioned, private loans don’t offer the same protections afforded to federal loans. If you’re interested in a private student loan, check out what SoFi has to offer. SoFi’s private student loans are available for undergraduates, graduate students, or the parents of undergraduates. Plus, qualifying borrowers can secure competitive interest rates and the loans have zero fees.

Learn About SoFi Private Student Loans

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FAQ

What are common student loan terms?

Student loan terms include Direct Loans — which are any loans in the Federal Direct Loan program. These include Direct Subsidized and Unsubsidized loans in addition to Direct PLUS Loans.

Beyond federal student loans, students can look into private student loans, which are offered by private lenders.

What are the most important loan terms to understand?

It’s important to understand terms associated with borrowing because you’ll be required to repay the loan. Understand the interest rate and any fees associated with the loan.

What does APR mean in relation to student loans?

APR stands for annual percentage rate. It’s a reflection of the interest rate on the loan in addition to any other fees associated with borrowing. APR helps make it easier to compare loans from different lenders.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

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.

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

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.

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.

SOPS0722003

Oct

2022

Yes! Current Students Can Apply for Biden’s Loan Forgiveness

By Nancy Bilyeau | Debt Payoff, Going to College, Student Loans, student_loan | Comments Off

Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

Students currently enrolled in college and graduate school are eligible to apply for forgiveness of up to $20,000 of the federal student loans they’ve received if they meet certain family income requirements, according to information posted by Federal Student Aid (FSA), an office of the U.S. Department of Education (DOE).

When President Joe Biden’s plan for one-time loan cancellation was announced in August, it was clear that college graduates with federal loans were eligible, as were those who had dropped out of college but still needed to pay back their federal loans.

Now it has become apparent that students enrolled in college before June 30, 2022, will also be able to apply for federal loan forgiveness.

“Borrowers are eligible for debt relief regardless of whether they’re in repayment, in school, or in grace, as long as they meet the income requirements and have eligible loans,” according to the FSA Fact Sheet “One Time Student Loan Debt Relief .”

What Are the Requirements for Students to Apply for Forgiveness?

Current students can apply for forgiveness for federal loans if they received them before June 30, 2022. (Unfortunately, this means that freshmen who started this fall aren’t eligible.) If the students are dependents of their parents, FSA will be looking at the annual income of the parents to certify eligibility, not the student.

“If you were enrolled in school as a dependent student for financial aid purposes between July 1, 2021, and June 30, 2022, your eligibility is based on parent income. After you fill out your own application form, we’ll contact you so your parent can complete a Parent Income Form,” explains the FSA Fact Sheet.

Current undergraduates and graduate students can apply for forgiveness, as can those who did not complete their degree. “Current students and borrowers who have federally held undergraduate, graduate, and Parent PLUS loans that were distributed on or before June 30, 2022 are eligible for the relief, said Megan Walter, a policy analyst for the National Association of Student Financial Aid Administrators,” in U.S. News & World Report.

For dependent students, the important question is “What is the income of your parents?” The income cutoff for this one-time debt cancellation is $125,000 for a single parent or $250,000 for the household. If the student’s parents meet this eligibility requirement, then the student could receive up to $10,000 in debt relief.

As for the $20,000 in debt relief that has been announced, the only students eligible to apply for it are those who have already received a Pell Grant and whose parents’ household incomes do not exceed $250,000.

A Pell Grant is awarded to undergraduate students with low or moderate income. If you’re unsure, you can log in to StudentAid.gov to see if you received a Pell Grant.

When Will the Loan Forgiveness Application Be Available?

The application for one-time federal student loan forgiveness went live online on Oct. 17, 2022. After you apply, the DOE will determine your eligibility and will contact you if they need more information. Your loan servicer will notify you when your relief has been processed.

Qualified borrowers whose repayments are set to resume or start in 2023 are advised to apply without delay in order to receive relief before the pause on all federal loan payments expires after Dec. 31, 2022.

Which Federal Student Loans Are Eligible for Forgiveness?

Subsidized loans, unsubsidized loans, parent PLUS loans, and graduate PLUS loans held by the Department of Education (ED) are eligible for forgiveness programs. The following specific types of federal student loans with an outstanding balance as of June 30, 2022, also qualify for relief:

• William D. Ford Federal Direct Loan (Direct Loan) Program loans

• Federal Family Education Loan (FFEL) Program loans held by ED or in default at a guaranty agency

• Federal Perkins Loan Program loans held by ED

• Defaulted loans (includes ED-held or commercially serviced Subsidized Stafford, Unsubsidized Stafford, parent PLUS, and graduate PLUS; and Perkins loans held by ED)

Consolidation loans are also eligible for relief, as long as all of the underlying loans that were consolidated were ED-held loans and were disbursed on or before June 30, 2022.

Additionally, consolidation loans comprised of any FFEL or Perkins loans not held by ED are also eligible, as long as the borrower applied for consolidation before Sept. 29, 2022, says the FSA website.

What About Private Student Loans?

Private (non-federal) loans are not eligible for Biden’s debt relief. Also, if you consolidated federal loans into a private loan, the consolidated private loan is not eligible for debt relief. Once you refinance, you cannot apply for any of Biden’s forgiveness programs for that loan.

Will the Canceled Student Loan Debt be Taxable?

One-time student loan debt relief won’t be taxed at the federal level. Some states may be taxing this debt relief, however, so check with your state of residence for the latest information.

The FSA site said, “If you would like to opt out of debt relief for any reason — including because you are concerned about a state tax liability — contact your loan servicer by phone or email and tell them that you don’t want to receive one-time student loan debt relief.”

Is Federal Student Loan Relief a Certainty?

Biden’s debt relief plan may face obstacles. The burden placed on students by their large loans has been a burning controversy for years. Some 43 million Americans are paying down their student loans. The average student debt per person is over $37,000, with half of all student borrowers still owing $20,000 more than 20 years after they entered school.

When President Biden announced his student loan relief plan in August, he said, “In keeping with my campaign promise, my Administration is announcing a plan to give working and middle class families breathing room as they prepare to resume federal student loan payments in January 2023.”

Biden has emphasized that the debt relief targets low- and middle-income families.

Nonetheless, the relief plan has met with opposition. Some say it will worsen inflation, others believe that Biden does not have the authority for a debt cancellation. And there are those who say that debt relief is unfair to people who made personal sacrifices to pay off their loans without government forgiveness.

Several lawsuits have been filed to try to halt the one-time debt cancellation. As of October 12, none had succeeded in stopping Biden’s relief plan.

The Takeaway

Current students are eligible for President Biden’s one-time student loan debt forgiveness of up to $20,000 if their federal loans were disbursed before June 30, 2022, and if income criteria is met. If the student is a dependent, the annual income the FSA will be looking at is that of the parents, not the student. That income can’t exceed $125,000 for a single parent or $250,000 for the household.

3 Student Loan Tips

Can’t cover your school bills? If you’ve exhausted all federal aid options, private student loans can fill gaps in need, up to the school’s cost of attendance, which includes tuition, books, housing, meals, transportation, and personal expenses.

Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.

Even if you don’t think you qualify for financial aid, you should fill out the FAFSA form. Many schools require it for merit-based scholarships, too. You can submit it as early as Oct. 1.

Recommended: FAFSA Guide

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

How old do student loans have to be to qualify for Biden’s forgiveness plan?

Federal student loans received by a student before June 30, 2022 will be eligible for one-time relief as long as the income requirement for eligibility is met.

How long do I have to apply for debt relief?

Once the application is live, you’ll have until December 31, 2023, to submit your application for student loan debt relief.

Photo credit: iStock/Drazen Zigic

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.

In our efforts to bring you the latest updates on things that might impact your financial life, we may occasionally enter the political fray, covering candidates, bills, laws and more. Please note: SoFi does not endorse or take official positions on any candidates and the bills they may be sponsoring or proposing. We may occasionally support legislation that we believe would be beneficial to our members, and will make sure to call it out when we do. Our reporting otherwise is for informational purposes only, and shouldn’t be construed as an endorsement.

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

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.

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.

SOPS1022001

Oct

2022

How to Stop or Reverse ACH Payments: All You Need to Know

By Ashley Kilroy | Budgeting & Goals, Financial Independence, money | Comments Off

Sometimes, no matter how careful you are with your bank account, you may want to cancel an ACH payment, and fortunately, it is very often possible to do so. Even if you previously sent out a recurring automatic payment, you can hit the brakes on that transaction.

Many of us have learned to rely on ACH payments, which can be used for a business’s payroll, tax payments, bill payments, account transfers, and more. You may well pay many of your monthly bills this way, from your utilities to your streaming service subscription. Because of this popularity, consumers and businesses alike can benefit from understanding how ACH works. Beyond that, knowing how to halt a payment — one that could potentially derail your financial health — is vital, too.

With that in mind, here is what you need to know about:

• What ACH payments are

• How to stop ACH payments or cancel an ACH payment

• How to reverse an ACH payment

• How to spot common ACH frauds

Recommended: What is Liquid Net Worth

What Are ACH Payments?

ACH payments are a method of money transfer between banks made through the ACH or Automated Clearing House network. NACHA (National Automated Clearing House Association) governs these transactions, which can be an alternative to other payment options, like credit cards.

With ACH, the source of the funds come directly from a bank account. So they are quite seamless and convenient; no paper checks or postage stamps required. They are also open to both consumers and businesses alike as long as they have a U.S. bank account.

One downside of ACH transfers, though, is that they can take longer than options like a wire transfer. When you compare a wire transfer vs. an ACH payment, wired funds can transfer within a day. In terms of how long an ACH payment takes, it may be several days. However, ACH has the upper hand in terms of cost: They are generally less expensive than other payment processing methods and often free.

ACH payments can break down into two categories: ACH credit and ACH debit.

An ACH credit is like a virtual check. The payer tells the ACH network to transfer their account funds to the payee’s account. In contrast, ACH debit (the more popular version of ACH transfer) involves a recipient pulling funds from the payer’s account. (For instance, this kind of payment occurs when you authorize your car loan to be automatically debited on a certain day of each month.) Merchants often prefer this kind of automatic debiting as it reduces the possibility of late or failed payments.

Can ACH Payments Be Canceled or Returned?

So, let’s say you just moved and forgot to cancel your gym membership at your old location. You realize that a payment is about to be sent out. Or maybe you set up a one-time payment to a vendor but notice (oops!) that you typo’d the amount? Now what? Can you stop an ACH payment from a checking account or other bank account?

Breathe a sigh of relief. Yes, you can cancel or return an ACH payment. This is partially possible due to the time frame of ACH transfers. ACH transfers can take multiple days to settle, and, as a result, you have more time to stop or reverse your transaction.

However, rules can vary depending on your bank or financial institution. For example, some may be able to cancel an ACH transfer online or over the phone. Meanwhile, other institutions may require a written form requesting cancellation.

Recommended: Average Savings by Age

How to Reverse ACH Payments

Let’s look at reversing an ACH payment in a little more detail. At some point, an ACH transfer may involve a mistake. It’s easy to type in the wrong dollar amount or otherwise err when it comes to making payments without cash in hand. Regardless of the circumstances, you have to wait for the payment to go through first. Then, you can reverse the ACH payment.

Banks have different ways of conducting this process (we’ll go into more detail on this in a moment), so check with yours on the exact protocol. Once the payment is interrupted, the bank should reach out to the account holder after the payment reverses to confirm the details.

ACH Reversal Requirements

Let’s learn a little bit more about this process. NACHA, the organization that oversees ACH payments, has specific qualifications that determine if an entry is erroneous. If these details are satisfied, you are then allowed to reverse your payment without an issue. To qualify, an entry must meet one of the following conditions:

• Be a duplicate of a previously initiated entry

• Transferred on the wrong date

• Include a mistake in the sender or recipient’s account number

• Transferred the incorrect amount

These scenarios cover many of the situations that would lead you to cancel or reverse a payment.

How to Stop an ACH Payment

So you want to cancel a payment because perhaps it was sent incorrectly or you no longer want to complete the transaction? Let’s learn how to cancel an ACH payment.

In this situation, it’s actually to your benefit that ACH payments take several days to settle. This means you have some time to halt an ACH transaction if you need to. However, every bank operates differently and may have its own rules on how to stop an ACH payment. For example, you may find that your bank can cancel an ACH payment online or over the phone. But other institutions may need you to submit a physical form canceling the transaction. Check with the institution that holds your account to find out how to proceed.

You can also cancel your recurring ACH debit payments. But you have to do that within three business days before the funds are due. You will probably need to contact the entity expecting your payment. The exact method might depend on your situation. Some companies may accept a phone call, while others might need a written authorization.

After that, you’ll need to address the financial institution associated with the transfer and let them know about the change. In some cases, this may require a stop payment order which instructs the bank to hold off on any automated transaction. This gives you time to formally cancel your payment arrangement. This can come with a fee, but it varies bank by bank. Check with yours for details.

How to Update Direct Deposit Details

A quick look at the other side of the coin: Let’s say you are receiving funds by direct deposit (perhaps your paycheck or government payments), and realize you need to update your details. If you have changed bank accounts — maybe you found a high-interest online savings account you can’t resist — you’ll need to let the entity that is sending you funds know your new info. You may be able to do this online for benefits like Social Security payments; otherwise, calling the issuer of the deposit may be another option. If it’s your paycheck you’re concerned about, contact your HR department to see the best way to share your new account specifics.

You’ll probably want to do this a few days before a deposit usually hits, since ACH payments take a few days to process.

Common ACH Frauds

While the ACH network makes sending money to businesses or services fast and simple, it is not perfect. As a result, people can use the system to their advantage. It is possible for a company or consumer to face fraud when making an ACH transfer.

There are various tools at criminals’ disposal these days. But they may only need two details to commit ACH fraud: your bank routing number and your business checking account number. With this information, the criminal may be able to use your finances to pay for anything from services to goods. And they can have the additional option to make these payments either online or by phone.

Typically, fraudsters collect this information via malware and phishing emails. Web transactions are also an easy way to obtain your personal data. For example, scammers might offer you overseas money, discounted products, or other appealing lies. They hope that you will be fooled and enter your account details so they can then commit fraud.

You can protect yourself against fraud by being wary of text messages and emails asking for account verification (they may be phishing and/or have malware embedded) and taking the time to double-check, by phone or other means, requests to update your information. Your bank may also be able to place an ACH block or filter on your account to prevent unauthorized transactions. Contact your bank’s fraud prevention team to learn your options.

The Takeaway

The ACH network is a valuable payment processor that consumers and businesses in the U.S. rely on. However, situations can arise that may trigger you to want to stop or reverse a payment, such as if you had entered details incorrectly. Fortunately, it’s possible to stop ACH payments from your checking account or reverse the ACH payment. Then you can notify the others impacted and get your banking transactions back on the right track again.

Here’s another way to bank better: Check out SoFi Banking. When you open our checking and savings accounts with direct deposit, you’ll earn a competitive APY. What’s more, you won’t pay any account fees; no monthly or minimum balance charges. So you keep more of your hard-earned dough.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

How long will it take to reverse an ACH payment?

A rejection or return of an ACH payment can usually be settled within two business days. However, some cases can take as long as two months (or 60 days) if the transaction is disputed.

Can you amend an ACH transfer?

Yes. ACH users can revoke their ACH payment authorization and stop the transfer. However, they must notify their biller as well as the bank or credit union that holds the account from which the funds would be deducted.

How do I stop ACH payments on my checking account?

If you want to stop an ACH payment, you’ll need to contact your bank at least three days before the ACH transfer’s date. This may involve an ACH payment stop request submitted in writing within a 14-day time frame. A small fee may be involved in halting the payment.

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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