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The Free Application for Federal Student Aid or FAFSA® form is required for students who are interested in receiving federal financial aid. Dependent students must report parents’ information when they fill out the FAFSA form, but this can become complicated when a student has parents who are divorced.

The federal government treats divorced parents differently than parents who are married. Understanding the requirements for the financial information required by the FAFSA could help students improve their chances of receiving federal student aid and potentially lower the amount of student loans they need to obtain a degree.

Continue reading for more information on filling out the FAFSA if your parents are divorced or separated.

What Complicates FAFSA for Divorced Parents?

The FAFSA treats parents who are divorced differently than it treats parents who are married. If a student’s parents are married, information about both parents must be included on the FAFSA form. If a student’s parents are divorced or separated, the parent who provided more financial support during the last 12 months is considered “the contributor” and must provide their information. If both parents provided an equal amount of financial support, the parent with the greater income and assets is the contributor and must provide their information.

If the contributing parent has remarried by the time a student is filing the FAFSA, your stepparent is considered a parent if they have adopted you. If they haven’t adopted you, the form may still prompt your parent to provide your stepparent’s information depending on their tax filing status.

Recommended: Important FAFSA Deadlines for Students and Parents

FAFSA Tips for Students with Divorced Parents

Here are some important questions to ask yourself and tips for completing the FAFSA application with divorced parents:

Who to Count as Parents for FAFSA

According to the FAFSA, a “parent” means your legal (biological and/or adoptive) parent.

If your parents are divorced, the FAFSA requests information from the parent who provided more financial support during the previous 12 months. If both parents shared support equally, you’ll provide information for the parent who earns more.

If your parent is remarried, you may need to provide information on the stepparent, as well.

What Is a Custodial Parent?

In the past, FAFSA defined a custodial parent as the parent you spend the most time living with during the year. The parent responsible for filing the FAFSA is now determined based on whichever parent provides more financial support to the student.

What About Stepparents and Common-Law Spouses?

Generally, you’ll need to provide the financial information for a stepparent who is married to the custodial parent.

Should Alimony Be Included as Income?

Any alimony or child support received by the custodial parent should be reported on the FAFSA.

Parent’s Education Level

The FAFSA will ask you to include the education levels of your parents. You only need to include information about either your birth or adoptive parents. In this section, the FAFSA does not need information about your stepparent.

What If My Divorced Parents Still Live Together?

If your parents live together, but are divorced, the marital status should be “Unmarried and both legal parents living together.” You need to provide information about both of them on the FAFSA form.

If your parents live together, but are separated, the marital status should be “married or remarried.” Do not use “divorced or separated.” You should provide information about both of them on the FAFSA form.

Additional Sources to Finance Tuition

Many students seek alternative financial aid to finance college if they do not qualify for federal aid or if the amount of federal aid allocated will not cover the entire tuition cost.

About half of college tuition and living expenses are paid by the income and savings of a student’s family members, according to a Sallie Mae study, “How America Pays for College 2025.”

Federal Aid

There are many other sources that could help a student obtain funding for tuition, books, and living expenses. When filling out the FAFSA, students are applying for federal financial aid. This includes federal student loans, the federal work-study program, and some federal grants. However, many states and colleges use the information from the form to award their own grants, scholarships, and loans.

Federal aid is provided on a first-come first-served basis, so it can potentially be helpful to file your FAFSA early. Check out even more detailed information in SoFi’s FAFSA guide.

Federal student loans can be either subsidized or unsubsidized.

Subsidized federal loans are given to students based on financial need. The interest on these loans is subsidized by the federal government, which means students will not be responsible for repaying the interest that accrues while they are enrolled at least part time or during their grace period.

Unsubsidized loans are not awarded based on need and will begin accruing interest as soon as the loan is disbursed.

Recommended: Types of Federal Student Loans

Scholarships

If federal aid is not enough to cover the cost associated with attending college, there are other options available to help you pay for college. Two sources of funding are grants and scholarships. These are highly sought after by students because they do not have to be repaid. Many of them require students to apply annually.

SoFi’s Scholarship Search Tool can help you find scholarships based on your location, level of study, and more.

Part-Time Job

Some students may also consider getting a part-time job to help pay for tuition or living expenses. Consider looking both on and off campus, or even online.

Private Student Loans

When other financial aid isn’t enough, private student loans can fill the funding gap for expenses like tuition, housing, and books.

Private student loans are offered by private organizations, like banks or online lenders, and can be more expensive than federal student loans. They also don’t come with the same borrower protections as federal loans, like deferment or income-driven repayment. That’s why private student loans are generally considered an option after students have exhausted all other sources of financing.

The loan terms and interest rate will vary from lender to lender and will likely be determined by the borrower’s financial history and credit score. Those interested in borrowing a private loan should consider shopping around with various lenders to find the best fit for them.

The Takeaway

Navigating the FAFSA process can be complex, especially for students whose parents are divorced or separated. The key is to correctly identify the “contributor” parent based on who provided more financial support, and to understand how stepparents and living arrangements can impact the application. By understanding these nuances and exploring all available funding options — including federal aid, scholarships, grants, part-time jobs, and private student loans — students can maximize their chances of securing the financial assistance needed for their education.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

Does FAFSA require both parents’ income if they are divorced?

If your parents are divorced, you’ll generally report the information for the parent who provided the most financial support for the past 12 months. If your parents split financial support equally, then the parent with the greater income is responsible for completing the FAFSA.

How do you determine who parent 1 and parent 2 are for FAFSA?

The FAFSA doesn’t currently specify a parent “1” or “2.” Instead, it directs you to provide information for the “parent” (if your parents are divorced, this would be the parent who provided more financial support in the past 12 months), then provide information for the “parent’s spouse or partner.”

What is the maximum parent income to qualify for FAFSA?

There are no income limits when it comes to filling out the FAFSA or qualifying for federal financial aid. Even if your parents are high earners, you could still qualify for certain types of aid, such as scholarships or federal student loans. The FAFSA application is free to fill out, so it’s almost always worth taking the time to do so.

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

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

SoFi Bank, N.A. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.

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.

SOISL-Q425-003

Some students view summer as a time to rest and relax, while others see it as an opportunity to get ahead in their college coursework. Since many classes can be done at a community college, summer courses may also cost less than the classes you take during the fall and spring semesters.

If you’ve already sorted out your financing for the fall and spring semesters, you may wonder how you’ll cover the cost of a summer session. The good news is that the aid you get through the FAFSA can typically be used to pay for summer classes too. Here’s what you need to know.

When Can FAFSA Cover Summer Classes?

Filling out the Free Application for Federal Student Aid (FAFSA) gives you access to grants, federal student loans, and work-study funds. Whatever aid you qualify for can be used for any term — fall, spring, and/or summer — provided you’ll be enrolled at least half time.

However, you’ll have to reach out to your school’s financial aid to find out which FAFSA year applies to the summer session. For instance, your school may use the 2025-26 for summer 2026, or they may require the 2026-27 FAFSA.

The type of financial aid you can use to offset the cost of summer classes includes:

•  Grants This is a form of gift aid and generally does not need to be paid back. You may be eligible for federal, state, and school-specific grants.

•  Federal student loans These are fixed-interest-rate loans from the government. Students with financial need may qualify for subsidized student loans. This means the government covers your interest while you are in school and for six months after you graduate. Unsubsidized student loans are available to all eligible students, regardless of need.

•  Work-study This federal program provides part-time work, typically on campus, to help students with financial need earn money to help cover college-related expenses.

If you’re thinking of using financial aid to pay for summer classes, keep in mind that there is a maximum amount of aid (including federal student loans) you can get each year, regardless of when you take your classes. You can refer to your financial aid letter (which you likely received before the fall session started) to see the maximum amounts you have been granted. These annual limits stretch over fall, spring, winter, and summer sessions.


💡 Quick Tip: Make no payments on SoFi private student loans for six months after graduation.

Filling Out FAFSA for Summer Aid

The FAFSA is generally released each year on October 1. However, the 2026–27 FAFSA became available earlier, on September 24, 2025. Since some aid is awarded on a first-come, first-served basis, it’s a good idea to fill out the FAFSA soon after it’s released. This can potentially increase your chances of getting all the aid you qualify for.

If you already have a FAFSA on file for the previous fall/spring academic year, you may not need to file a new one for the summer session. However, as mentioned above, schools have varying rules on what academic year they belong in for financial aid purposes. Before submitting the FAFSA, contact your college’s financial aid office to see if you need to fill out a new FAFSA and which year you should select.

Filling out the FAFSA for summer aid is the same as filling out the FAFSA for any term. You’ll need to create an FSA ID and then complete and submit your form online at studentaid.gov. You can also print out and mail a paper form.

Alternatives to FAFSA

If you don’t qualify for financial aid or you used up the aid you were awarded during the fall and spring semesters, don’t stress. There are other ways to offset the cost of summer classes.

Summer Jobs

If work-study is not available, you might look for a part-time summer job either on or off-campus to help pay your summer tuition. Working during the summer can also give you valuable work experience and help you start building your resume.

Internships

A paid internship can be an ideal way to earn extra money as a college student. These positions often pay well and allow you to gain experience and connections that could help you find employment after you graduate. Your school’s career center may have leads on internships. You can also search job boards and tap your personal and professional network to find summer internships.

Summer Class Scholarships

Many organizations, companies, and schools offer scholarships (both need- and merit-based) to college students. Typically, there aren’t restrictions on what term students can use the scholarship for, so you can apply for scholarships and use the awards to pay for your summer classes. Private scholarship amounts tend to be small, but if you can cobble together several awards, it could make a significant dent in your summer tuition.

Your school’s financial aid office or career center may be able to help you find scholarships based on your qualifications. You can also use one of the many online scholarship search tools to find scholarships you may qualify for.

Summer Grant Programs

Some universities offer grants that are designed specifically for students looking to take classes during the summer. For instance, Hunter College in New York City offers a Summer Scholarship for undergraduates who take one summer class that counts towards their degree.

Many states also offer college grants that can be used for the summer term. The Pennsylvania Higher Education Assistance Agency, for example, allows eligible students to receive a Pennsylvania State grant for the summer term.

It can be worth reaching out to your school’s financial aid office to find out what summer funding programs may be available. Also visit the department of education for your state to see if there are any summer-specific state grants you might qualify for.

Private Student Loans

If you’ve reached your annual limit for federal student loans and need more funding to cover the cost of summer classes, you might consider applying for a private student loan.

These loans are offered by banks, credit unions, and online lenders and typically come with higher lending limits than federal student loans. In fact, you can usually borrow up to the full cost of attendance from a private lender, minus any financial aid. Interest rates vary by lender, so it’s a good idea to shop around. Generally borrowers (or cosigners) with excellent credit qualify for the lowest rates.

Keep in mind, though, that private student loans don’t offer the same protections (like access to forgiveness programs and income-based repayment) that come with federal student loans.


💡 Quick Tip: It’s a good idea to understand the pros and cons of private student loans and federal student loans before committing to them.

Why Take Summer Classes?

Whether you choose to study at your current college or a local community college, summer classes offer a number of benefits.

You might opt to go to school in the summer to retake classes you struggled with in the past in order to boost your GPA. Or if you’re behind in your credits, you might use the summer term to catch up and make sure that you can graduate on time. You can also use a summer session to knock out core or elective course requirements in order to graduate early.

In addition, taking summer classes could lead to cost savings. Some schools offer reduced tuition for these classes. You also might be able to take classes at a local community college for a lower price and transfer those credits to your school.

Recommended: Can You Get a Student Loan for Summer Classes?

The Takeaway

FAFSA aid can typically be used for any college term — including the summer. Just keep in mind that there is an annual maximum you can take out in federal loans, which includes the summer semester. Grants also usually have annual limits.

Other sources of funding for summer classes include private scholarships, summer college grants, income from a part-time job or paid internship, and private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

Do summer classes count as semesters for FAFSA?

Technically, yes. While there is no specific federal funding for summer classes, the aid you are eligible for can be applied to summer tuition. You can find out from your school’s financial aid office which FAFSA year will apply to summer classes.

Which year of FAFSA covers summer classes?

It depends on the college’s policy. For instance, your school might use the 2025-26 FAFSA for the 2026 summer session or require you to fill out the 2026-27 form. Before submitting the FAFSA, you’ll want to contact your college’s financial aid office to see which FAFSA year you should select.

Is there a maximum amount that you can receive from FAFSA overall?

Yes, there are annual limits on how much you can receive in federal financial aid, which includes grants, loans, and work-study programs. The limit for each type of aid varies by school, year, and other factors. You’ll want to be careful to plan your expenses and financing strategies with these limits in mind.

Photo credit: iStock/Yuricazac

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

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

SoFi Bank, N.A. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.

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.

SOISL-Q425-002

Going to college or graduate school is a serious investment in your future — both professionally and financially. Naturally, you’ll want to know how much financial aid you’re eligible for, including student loans, grants, and work-study programs.

The amount of federal aid that prospective and current students receive is based on a variety of factors, and everyone’s financial situation is unique. But familiarizing yourself with the following requirements and questions can help paint a clearer picture of how much FAFSA money you will get.

What Are the Eligibility Requirements?

Many incoming and current college and graduate students are eligible for federal aid. Among the basic requirements, you must:

•   Demonstrate financial need (for need-based federal student aid programs)

•   Be a U.S. citizen, national, or eligible noncitizen

•   Have a valid Social Security number, unless you’re from the Federated States of Micronesia, Republic of the Marshall Islands, or the Republic of Palau

•   Be enrolled or accepted for enrollment as a regular student in an eligible degree or certificate program

•   Maintain satisfactory academic progress in college or career school

How Do I Begin the FAFSA?

The first step to completing the FAFSA is creating your FSA user ID and password. From there, you’ll answer a series of questions covering demographic information, schools you are interested in attending, financial details, and information from parents or guardians based on dependency status.

Filling out the FAFSA may feel intimidating, but a little preparation can save you from common FAFSA mistakes, like leaving important fields blank.

What Factors Affect FAFSA Money?

The application includes questions about demographics and finances for students and sometimes their families to answer. Collectively, this information will determine how much need-based and non-need-based aid students qualify for.

Applying for the FAFSA Every Year of School and on Time

Filling out the FAFSA is not a one-time deal. Students must file the FAFSA each year they are enrolled in college or graduate school.

There are several important FAFSA deadlines to be aware of. The federal deadline for the 2025-2026 academic year is June 30, 2026; for the 2026–2027 academic year, the federal deadline is June 30, 2027. This is the latest date you can submit the form. However, many states and colleges have their own priority deadlines for financial aid, which are typically earlier than the federal deadline.

Generally, the earlier you submit the FAFSA the better. This is because some federal, state, and institutional aid programs, including certain grants and federal work-study funds, are limited and distributed on a first-come, first-served basis.

Dependency Status

For FAFSA, a dependent is a student who does not meet any of the criteria for being an independent student. Generally, you are considered an independent student if:

•   At least 24 years old

•   Married

•   A graduate or professional student (law, medicine, etc.)

•   A veteran or active member of the armed forces

•   An orphan, ward of the court, or emancipated minor

•   Claiming legal dependents other than a spouse

•   Homeless or at risk of becoming homeless

Your dependency status affects how much financial aid you’re eligible to receive. In many cases, independent students can be eligible for more financial aid, as they are assumed to be paying their own tuition and living expenses.

Still, dependent students may be eligible for a variety of financial aid opportunities from federal or state governments and colleges through the FAFSA. Most incoming and current undergraduate students are considered dependent. This means that information from parents or guardians, such as tax returns, must be submitted and will affect whether financial aid is awarded and how much.

In special circumstances, students may file for a dependency override. These are awarded case by case, and are typically reserved for students facing exceptional family-related issues or whose parents are unwilling to provide information for the FAFSA.

Student Aid Index

The Student Aid Index (SAI) is a number used by colleges to determine your eligibility for federal student financial aid. It’s calculated using information that you (and your parents) provide on the FAFSA, including student and parent income, student and parent assets, and the family size. It’s designed to determine the total financial resources you and your parents have and the minimum amount needed for your family’s normal annual living expenses.

The financial aid office at your college will subtract your SAI from your school’s cost of attendance to determine your level of your financial need and how much need-based aid you are eligible to get.

You can find your estimated SAI on the confirmation page of your FAFSA form. Once your FAFSA is processed, you’ll see your official SAI within your FAFSA Submission Summary. The SAI range is -1500 to 999999. The lower your SAI, the more financial aid you are likely to qualify for.

Cost of Attendance

Education costs can vary considerably based on merit-based scholarships, in-state vs. out-of-state residency, and other factors. The amount of FAFSA money you receive will also depend on the cost of attendance for your chosen college or university.

The cost of attendance encompasses tuition, fees, room and board, books and school supplies, and expenses associated with child care or disabilities, if applicable. A lower cost of attendance usually translates to less aid, because the funding can be used only for education purposes.

Not sure where you want to apply? Our College Search tool can help.

How Much Money Will I Get From FAFSA?

The amount of FAFSA money you receive cannot exceed the cost of attendance for your chosen college or university.

Before applying, the Federal Student Aid Estimator is a useful tool to estimate the amount of federal student aid you may qualify for.

Assuming that you meet the eligibility criteria and are applying on time, you may receive some form of federal financial aid, especially if your SAI is less than your cost of attendance. Potential sources of federal student aid include the following programs:

Grants

Unlike loans, grants are free money to put toward your education that does not have to be paid back. After completing the FAFSA, students with proven financial need may receive aid in the form of a Federal Supplemental Educational Opportunity Grant or Pell Grant. Opportunity grants are allocated based on need, other aid awarded, and college budgets. Pell Grants change annually but the maximum award for the 2025–26 academic year is $7,395.

Work-Study

Federal work-study programs typically involve a part-time job on or off campus. Wages are typically set by the college but must meet minimum-wage requirements. Work-study schedules are intended to be structured around students’ classes.

Federal Loans

Eligibility for federal student loans is generally broader than for grants and work-study programs. Federal loans are either subsidized or unsubsidized, with subsidized loans being need-based and including interest deferment and grace periods. On the other hand, unsubsidized loans begin accruing interest as soon as they are paid out to borrowers.

Different types of federal student loans exist, and each has a maximum award amount according to dependency status and year of study. Dependent undergraduate students have an aggregate loan limit of $31,000 for all undergraduate study, while independent undergraduates can take out $57,500. Graduate students can borrow up to $138,500 for undergraduate and graduate study combined.

How Else Can I Pay for College?

If financial aid isn’t enough to cover your tuition and other education expenses, there are ways to make college more affordable.

Scholarships and Grants

Besides scholarships granted by your chosen college, there are opportunities offered by private foundations, community groups, and nonprofit organizations. Awards can be given based on academic merit, need, field of study, or participation in a specific sport or activity. An online scholarship search tool can help you unearth available awards filtered by school type, field of study, state, and more.

Try to stay on top of scholarship and grant applications and deadlines as they can come and go quickly. Winning a scholarship or a grant is basically finding free money, and you don’t want that money to go unclaimed.

The Takeaway

When determining how much federal financial aid you’re eligible for, remember that several key factors come into play: your dependency status, your Student Aid Index (SAI), and your school’s cost of attendance.

Filing your FAFSA application early and every year is crucial, as some aid is awarded on a first-come, first-served basis. If federal aid, grants, and scholarships aren’t enough, there are still other avenues to explore to make college more affordable.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

How much does FAFSA usually give you?

FAFSA determines your eligibility for federal student aid, not a fixed amount. While the average federal award is $16,360, amounts can vary widely depending on your financial need and the school’s cost of attendance. Also the average award doesn’t include state or institutional student aid, which can also help you pay for school.

How can I check how much money FAFSA will give me?

You can get an estimate of how much federal student aid you may get by using the Federal Student Aid Estimator on the Federal Student Aid website (StudentAid.gov). To see the actual amount of federal (and other) financial aid you are able to get, you’ll need to wait for a financial aid offer from the colleges you apply to.

What does a 12,000 SAI mean?

A 12,000 Student Aid Index (SAI) is an eligibility index number, not a dollar amount that you are expected to pay. A college financial aid office will subtract your SAI (and any other grants or scholarships you’re receiving) from your school’s cost of attendance to determine your financial need. For example, if the school’s annual cost of attendance is $40,000 and your SAI is 12,000, your financial need is $28,000. This number helps the college decide how much need-based aid you may qualify for, including grants, scholarships, work-study jobs, and loans. However, colleges aren’t always required to meet 100% of your financial need.

What is the highest FAFSA grant?

The highest federal grant available through the FAFSA is the federal Pell Grant. The maximum Pell Grant award changes annually; for the 2025–26 academic year, it is $7,395. This grant is awarded to undergraduate students with exceptional financial need and does not need to be repaid.

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

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

SoFi Bank, N.A. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.

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.

SOISL-Q425-001

A mutual fund is a portfolio or basket of securities (often stocks or bonds) where investors pool their money. Nationally, there are more than 7,000 mutual funds investors can choose from, spanning equity funds, bond funds, growth funds, sector funds, index funds, and more.

Mutual funds are typically actively managed, where a manager or team of professionals decides which securities to buy and sell, although some are passively managed, where the fund simply tracks an index like the S&P 500. The main differences among mutual funds typically come down to their investment objectives and the strategies they use to achieve them.

How Mutual Funds Work

Mutual funds pool money from many investors to buy a diversified mix of securities, known as a portfolio. These may include:

•  Stocks

•  Bonds

•  Money market instruments

•  Cash or cash equivalents

•  Alternative assets (such as real estate, commodities, or precious metals)

Mutual funds are typically open-end funds, which means shares are continuously issued based on demand, while existing shares are redeemed (or bought back). In contrast, a closed-end fund issues a set number of shares at once during an initial public offering.

You can buy mutual fund shares through a brokerage account, retirement plan, or sometimes directly from the financial group managing the fund. For example, you might hold mutual funds inside a taxable investment account, within an individual retirement account (IRA) with an online brokerage, or as part of your 401(k) at work.

One of the main advantages of mutual funds is the potential for diversification. If one holding underperforms or loses value, the other investments in the fund may help offset those losses, reducing overall portfolio risk.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

9 Types of Mutual Funds

Before adding mutual funds to your portfolio, it’s important to understand the different types. Some funds aim for growth, while others focus on steady income. Certain mutual funds may carry a higher risk profile than others, though they may offer the potential for higher rewards.

Knowing more about the different mutual fund options can make it easier to choose investments that align with your goals and tolerance for risk.

1. Equity Funds

•   Structure: Typically open-end

•   Risk Level: High

•   Goal: Growth or income

•   Asset Class: Stocks

Equity funds primarily invest in stocks to pursue capital appreciation and potential income from dividends. The types of companies an equity fund invests in will depend on the fund’s objectives.

For example, some equity funds may concentrate on blue-chip companies that tend to offer consistent dividends, while others may lean toward companies that have significant growth potential. Equity funds can also be categorized based on whether they invest in large-cap, mid-cap, or small-cap stocks.

Investing in equity funds can offer the opportunity to earn higher rewards, but they tend to present greater risks. Since the prices of underlying equity investments can fluctuate day to day or even hour to hour, equity funds tend to be more volatile than other types of mutual funds.

2. Bond (Fixed-Income) Funds

•   Structure: Typically open-end; some closed-end

•   Risk Level: Low

•   Goal: Steady income

•   Asset Class: Bonds

Bond funds invest in debt securities, such as government, municipal, or corporate bonds. They give investors a convenient way to access the fixed-income market without buying individual bonds. Some bond funds try to mirror the broad bond market and include short- and long-term bonds from a wide variety of issuers, while other bond funds specialize in certain types of bonds, such as municipal bonds or corporate bonds.

Generally, bond funds tend to be lower risk compared to other types of mutual funds, and bonds issued by the U.S Treasury are backed by the full faith and credit of the U.S. government. However, bonds are not risk-free. Bonds are typically sensitive to interest rate risk (meaning their market value fluctuates inversely with changes in interest rates), as well as credit risk (since a bond’s value is directly tied to the issuer’s ability to repay its debt).

3. Money Market Funds

•   Structure: Open-end

•   Risk Level: Low

•   Goal: Income generation

•   Asset Class: Short-term debt instruments

Money market funds invest in high-quality, short-term debt from governments, banks or corporations. This may include government bonds, municipal bonds, corporate bonds, and certificates of deposit (CDs). Money market funds may also hold cash and cash equivalent securities.

Money market funds can be labeled according to what they invest in. For example, Treasury funds invest in U.S. Treasury securities, while government money market funds can invest in Treasuries as well as other government-backed assets.

In terms of risk, money market funds are considered to be very low risk. That means, however, that money market mutual funds tend to produce lower returns compared to other mutual funds.

It’s also worth noting that money market funds are not the same thing as money market accounts (MMAs). Money market accounts are deposit accounts offered by banks and credit unions. While these accounts can pay interest to savers, they’re more akin to savings accounts than investment vehicles. While money market accounts may be covered by the Federal Deposit Insurance Corporation (FDIC), money market funds may alternatively be insured by the Securities Investor Protection Corporation (SIPC).

4. Index Funds

•   Structure: Open-end

•   Risk Level: Moderate

•   Goal: To replicate the performance of an underlying market index

•   Asset Class: Stocks, bonds, or both

Index funds are designed to match the performance of an underlying market index. For example, an index fund may attempt to mirror the returns of the S&P 500 Index or the Russell 2000 Index. The fund does this by investing in some or all of the securities included in that particular index, a process that’s typically automated. Because of this, index funds are considered passively managed, unlike actively managed funds where a manager actively trades to try to exceed a benchmark.

Because index funds need much less hands-on management and don’t require specialized research analysts, they’re generally lower cost than actively managed funds. They’re also considered to be more tax-efficient due to their potentially longer holding periods and less frequent trading, which may result in fewer taxable events. However, an index fund may include both high- and low-performing stocks and bonds. As a result, any returns you earn would be an average of them all.

5. Balanced Funds

•   Structure: Open-end

•   Risk Level: Moderate

•   Goal: Provide both growth and income

•   Asset Class: Stocks and bonds

Balanced funds, sometimes referred to as hybrid funds, typically contain a fixed allocation of stocks and bonds for investors interested in both income and capital appreciation. One common example of a balanced fund is a fund that invests 60% of its portfolio in stocks and 40% of its portfolio in bonds.

By holding both growth-oriented equities (stocks) and stability-focused, fixed-income securities (bonds) in one portfolio, these funds aim to provide a middle ground between the high-risk/high-return profile of equity funds and the low-risk/low-return profile of bond funds. Balanced funds automatically maintain their asset allocation and may make sense for moderately conservative, hands-off investors seeking long-term growth potential.

6. Income Funds

•   Structure: Open-end

•   Risk Level: Low to moderate

•   Goal: Provide steady income

•   Asset Class: Bonds, income-generating assets

Income funds are designed with the goal of providing investors with regular income through interest or dividends, rather than focusing mainly on long-term growth. Some income funds focus on bonds, such as government, municipal, or corporate bonds, while others mix equities with bonds to offer a diversified approach to income generation.

Though not risk-free, income funds are generally lower risk than funds that prioritize capital gains. This type of mutual fund can be appealing to investors who value stability and regular cash flow, such as retirees. Income funds may also help balance risk in any investor’s portfolio, especially in uncertain markets.

7. International Funds

•   Structure: Mostly open-end

•   Risk Level: High

•   Goal: Growth or income outside the U.S.

•   Asset Class: Global equities and bonds (excluding U.S. securities)

International mutual funds invest in securities and companies outside of the U.S. This sets them apart from global funds, which can hold a mix of both U.S. and international securities. Some international funds focus on developed economies, while others target emerging markets, which may offer higher growth but come with higher risk.

Adding international funds to a portfolio can increase diversification and access to global opportunities if you’ve primarily invested in U.S. companies or bonds so far. But keep in mind that international funds can carry unique risks, including the risk of currency volatility and changing economic or political environments, especially in emerging markets.

8. Specialty Funds

•   Structure: Open or closed-end

•   Risk Level: Varies

•   Goal: Thematic or sector-specific investing

•   Asset Class: Equities, bonds, alternatives

A specialty fund concentrates on a specific sector, industry, or investment theme, such as technology, health care, or clean energy. They allow investors to target specific opportunities and expand their portfolios beyond traditional stocks or bonds. Specialty funds can offer exposure to assets like real estate, commodities, or even precious metals. You could also use specialty funds to pursue specific investing goals, such as investing with environmental, social, and governance (ESG) principles in mind.

Because of their narrower focus, specialty funds frequently offer less diversification, which means they may come with higher potential risks. This type of mutual fund is generally best suited for investors with a deep understanding of the target market.

💡 Quick Tip: Spreading investments across various securities may help ensure your portfolio is not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

9. Target Date Funds

•   Structure: Typically open-end

•   Risk Level: Declines over time

•   Goal: Retirement planning

•   Asset Class: Mix of stocks, bonds, and short-term investments

Target date funds are mutual funds that adjust their asset allocation automatically so the fund becomes more conservative as the target (typically retirement) date approaches. For example, if you were born in 2000 and plan to retire at 65, you would invest in a 2065 fund. As you get closer to retirement age, your target date fund will gradually become more conservative, increasing its allocations to bonds, cash, or cash equivalents.

Like mutual funds, target date funds are offered by nearly every investment company. In most cases, they’re recognizable by the year in the fund name. If you have a 401(k) at work, you may have access to various target date funds for your portfolio.

While target date funds offer a “set it and forget it” option for retirement planning, they are a one-size-fits-all solution that does not account for an individual’s unique financial situation, risk tolerance, or outside assets. Some investors may prefer a more aggressive or conservative allocation than the one the fund provides.

What’s the Difference Between Mutual Funds and ETFs?

It can be easy to confuse exchange-traded funds (ETFs) with mutual funds, since they have a number of similarities. Both are baskets of securities designed to provide diversification. And both can hold stocks, bonds, or a mix, or follow specific themes or strategies.

However, ETFs and mutual funds differ in several key ways:

•   Trading: ETFs trade throughout the day like stocks, while mutual funds are priced only once daily after the market closes.

•   Liquidity: Because they trade on exchanges throughout the day, ETFs are generally more liquid than traditional mutual funds.

•   Management: Most EFTs are passively managed, while mutual funds are typically actively managed.

•   Cost: Because they are largely passively managed, EFTs often carry lower expenses ratios.

The Takeaway

Mutual funds are among the most accessible and flexible investment options available. With choices ranging from conservative money market funds to aggressive equity and specialty funds, there’s a fund for nearly every type of investor.

The best mutual fund for you depends on your goals, time horizon, and tolerance for risk. Whether you’re seeking steady income, long-term growth, international exposure, or a hand-off retirement plan, understanding the different types of mutual funds can help you build a portfolio that supports your financial future.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

What are the four main types of mutual funds?

The four main types of mutual funds are equity funds, debt funds, money market funds, and hybrid funds.

Equity funds invest primarily in stocks and aim for long-term capital growth. Debt funds focus on fixed-income securities like bonds, offering relatively stable returns. Money market funds invest in short-term, low-risk instruments such as Treasury bills. Hybrid funds combine equity and debt securities in varying proportions to balance risk and reward. Each type suits different investor goals, risk tolerances, and time horizons.

What is the 7-5-3-1 rule in SIP?

The 7-5-3-1 rule in SIP (systematic investment plan) is a guideline for disciplined investing. The 7 suggests staying invested for at least seven years to reap the benefits of compounding and market growth. The 5 suggests diversifying your investments across at least five different mutual fund categories to help reduce risk. The 3 is about overcoming three common mental hurdles investors face (disappointment, frustration, and panic). The 1 suggests increasing your SIP amount every year to improve your return potential in the long term.

Which type of mutual fund is best?

The “best” type of mutual fund depends on your goals, risk tolerance, and time horizon. For long-term wealth creation, equity funds often provide the highest growth potential but come with more risk. For those prioritizing stable returns, debt funds or money market funds may be a favorable choice. Investors seeking balance may prefer hybrid funds. The best fund is one that is aligned with your unique financial objectives.

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