Compound Finance (COMP), Explained

Compound Finance (COMP) in DeFi, Explained

What Is Compound Finance?

Compound Finance is a marketplace used by crypto investors to lend and borrow their digital assets. Compound crypto is a decentralized protocol, or dApp, built on a blockchain.

Users can also vote on the governance structure of the Compound protocol using the COMP token.

Compound is part of a new system of decentralized finance enabled with the invention of blockchain technology. It’s built by the open-source software development company Compound Labs.

Before diving into the details of Compound Finance, let’s explore the topic of decentralized finance. This will help with understanding how Compound fits into the picture.

» Looking for more guides? Check out our crypto glossary.

Compound Crypto and Decentralized Finance (DeFi)

DeFi is an important term in the crypto ecosystem. The philosophy behind DeFi is to decentralize the full suite of financial services available to individuals and businesses. These include insurance, taxes, lending, borrowing, credit, and more. In decentralized finance, there is no need for a centralized body or intermediary such as a bank to hold money, facilitate, or validate transactions. Decentralization can also apply to the way cryptocurrencies are created and governed.

Many DeFi services are built on the Ethereum blockchain. The blockchain allows anyone to build decentralized applications (dApps) with their own unique cryptocurrencies. These applications can utilize smart contracts which allow for complicated transactions, lending, borrowing, and other functionality.

Despite the growth in DeFi and cryptocurrency there are still many financial services left to be decentralized, such as lending and borrowing. Compound is a liquidity pool that allows cryptocurrency owners to lend and borrow their digital assets.

Recommended: A Guide to Decentralized Finance (DeFi)

How Does Compound Finance Work?

Compound is a dApp that gives users the ability to crypto stake their digital assets and lend or borrow certain cryptocurrencies. Supported assets on Compound include:

•  Ether (ETH)

•  Dai (DAI)

•  Ox (ZRX)

•  Tether (USDT)

•  USD Coin (USDC)

•  Wrapped BTC (WBTC)

•  Sai (SAI)

•  Augur (REP)

•  Basic Attention Token (BAT)

Anyone who owns those assets can engage in crypto lending or borrowing using Compound without dealing with traditional financial institutions. Compound has gained significant popularity in recent years, there are more than $12.4 billion in assets on the platform.

cTokens

When a user locks in funds on the lending side of the Compound protocol, they receive cTokens, or digital assets representing the amount that they have deposited. cTokens are an ERC-20 token built using the Ethereum blockchain protocol. There are different cTokens for each crypto on the Compound platform, including cETH, cBAT, and cDAI. Users receive the token associated with the crypto they deposited.

Owners of the tokens can transfer, trade, or use them on other dApps. The tokens will continue to earn interest on the Compound protocol while they are being used throughout the DeFi ecosystem. cToken holders control their public and private keys just as they would with Bitcoin or another cryptocurrency. Ultimately the cToken can only be redeemed for the particular crypto that it represents.

Interest Rates

The Compound protocol automatically calculates and issues interest rates based on the liquidity available for each cryptocurrency offered on the platform. The rates fluctuate based on supply and demand in the market and change constantly. If there is a lot of money held in the Compound wallet, the interest rates are low. This is because there is a lot of money available for borrowers, so lenders don’t earn very much in exchange for adding more to the pool.

However, if the pool of money for a particular cryptocurrency is small, the interest rates are higher. This creates an ongoing incentive for users to lock funds into pools that contain less funds, so that they will earn a higher rate. It also incentivizes borrowers to borrow from large pools and to repay borrowed funds into smaller pools so that they will pay lower interest rates.

The Compound dashboard shows an annual interest rate which is what users get quoted. Every 15 seconds, any cTokens held by a user increase by 1/2102400 of the quoted annual interest rate for that particular moment. That fraction is the number of 15 second blocks there are in a year.

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Compound Finance Transactions

Lending and borrowing transactions occur instantly using the protocol. There are no intermediary requirements or costs involved, it’s only required that borrowers have deposited funds on the lending side. The decentralization and automatically executionable smart contracts make the process easier, faster, and less expensive than going through a traditional financial institution.

Lending

Those who own these cryptocurrencies can lend any amount of them, also referred to as locking, sending, or depositing. This is similar to depositing fiat currency into a savings account that starts earning interest immediately. However, unlike depositing into a bank account, the Compound dApp is decentralized, and the money goes into a large pool along with other investor’s deposits of any particular cryptocurrency. Whichever crypto the lender deposits is the currency in which they’ll receive payments.

Borrowing

The other main feature of the Compound protocol is the ability to borrow against deposited and locked funds. Any user who puts part of the cryptocurrency portfolio into the Compound pool can immediately borrow against those funds without any credit check or additional requirements. The amount a user can borrow depends on how much they deposit, and each cryptocurrency has different rates.

Borrowers must deposit more than they intend to borrow to ensure that their funds are collateralized. This means there are funds available to pay off the loan if the user doesn’t pay back the installments and interest. Cryptos also fluctuate in value, so if the collateralized amount decreases in value, the borrower cToken smart contract automatically closes when the value gets close to the borrowed amount. If this occurs, the borrower keeps the cTokens they borrowed but they lose the collateral they deposited.

Just like if they borrowed from a bank or other financial institution, borrowers must pay interest on the amount of funds they borrow. The Compound protocol automatically determines and implements the interest rates, which varies with each cryptocurrency on the platform.

How Does Compound’s Governance Work?

The Compound protocol also has a decentralized governance system in which users can participate, depending on the amount of COMP tokens they hold. COMP tokens are governance tokens, and all lenders and borrowers receive a particular amount of them every 15 seconds when an Ethereum block is mined. The amount users receive is related to the interest rates of each crypto asset and the number of transactions that they partake in using the protocol.

When a user owns 1% or more of the total supply of COMP tokens, they can participate in the governance system by submitting and voting on any proposals to make changes to the Compound blockchain system. Every COMP token counts for one vote.

The Takeaway

The DeFi ecosystem is constantly expanding to include more options for decentralized financial services, including Compound Finance. DeFi is a complicated system of decentralized exchanges that provide an opportunity for some crypto investors to lend or borrow their digital assets.

If you’re interested in starting to invest in cryptocurrencies, one simple way to get started is using the SoFi Invest® crypto trading platform. The investing platform lets you research, track, buy, and sell popular cryptocurrencies right from your phone. You can see your portfolio information in one simple dashboard. In addition to crypto, SoFi allows you to also invest in stocks and other assets all in one place. If you need help getting started, SoFi has a team of professional financial advisors available to answer your questions and help you create a personalized investing plan.

Photo credit: iStock/ijeab


Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount Bonus Payout
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$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

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What is the Bitcoin Lightning Network? How Does it Work?

What Is the Bitcoin Lightning Network? How Does It Work?

The Lightning Network, or “Lightning” for short, provides a way for Bitcoin users to make small transactions without hefty fees or long confirmation times. While it’s not yet available to the average Bitcoin user, this innovation could one day solve Bitcoin’s biggest problems—high transaction fees and long confirmation times—both of which make smaller everyday payments unfeasible.

On the list of things to know before investing in crypto, Lightning doesn’t even crack the top five. But it may be an interesting topic for those interested in the technical side of blockchain technology, and for those who want to use Bitcoin as a means of payment.

What Is the Lightning Network?

Lightning is a decentralized network that uses smart contract functionality in the Bitcoin blockchain to facilitate instant payments across a network of users. It’s considered an off-chain or layer-2 solution because it involves activity that doesn’t occur directly on the blockchain.

Why Does Bitcoin Need Lightning?

Due to its decentralized nature, which requires consensus across a broad range of different computers, the Bitcoin network can only process about 7 transactions per second on average. Compare this to 24,000 transactions per second on average for a traditional credit card company like Visa.

Transaction fees, while still relatively low for larger transactions, are too high for micropayments. Sending $5 worth of Bitcoin on-chain isn’t often worth it because the fees would be so large. At times of high network congestion, the fees could even exceed the cost of such a small transaction, making it impossible.

It also tends to take several minutes, if not longer, for a Bitcoin transaction to be confirmed by the network.

Imagine buying a cup of coffee with a direct transaction on the Bitcoin blockchain. After payment, the merchant would have to wait at least a few minutes to receive the funds. The basics of Bitcoin don’t make everyday use easy. The debate over the problem of how to make Bitcoin scale has led to a number of Bitcoin forks since 2017.

Lightning provides a creative solution for these problems.

How Does the Bitcoin Lightning Network Work?

First, users must establish their own multi-signature Lightning wallet, and the two parties involved exchange a single key to validate their spending transactions. In this way, the transactions are kept from being broadcast on the main Bitcoin blockchain while also being verifiably accurate and real.

These off-chain (layer 2) transactions occur independently of on-chain (layer 1) transactions and don’t have to be updated on the main blockchain unless the two parties open or close a channel. Many Lightning Network transactions can occur before their record is broadcast to the blockchain. In this way, fees and confirmation times are greatly reduced.

Lightning uses multi-signature scripts and smart contracts to achieve its goals. When two parties initially fund a channel, this is called a “funding transaction.”

In effect, people are creating their own mini lightning networks when they open a Lightning wallet. Sometimes these multi-signature lightning wallets are referred to as “payment channels” or simply “channels.”

Example of How Bitcoin Lightning Network Works

As more and more people connect to Lightning, they don’t always have to create their own multi-signature wallet for each and every person they want to transact with. As the network grows, so do connections between wallets, and so long as there is a wallet with sufficient funds that the transaction can be routed through, then new users may be able to make use of existing wallets.

For example, imagine that James opens a channel with his local hardware store and deposits $50 of Bitcoin. His transactions with the hardware store can now be facilitated using the Lightning Network instantly.

Heather, who has a different channel open with her local smoothie shop, buys hardware from the same store as James. The connection between James, the grocery store, and Heather makes it possible for James to buy smoothies from the smoothie shop using the Lightning balance he has with the hardware store. Heather can also use her smoothie shop balance to facilitate transactions with other businesses within James’ network.

If Heather were to close her channel with the smoothie shop, then James would have to open a new channel with the smoothie shop to make Lightning purchases there, assuming there are no other available channels open. But as the Lightning Network grows, the idea is that in time, many different customers will have channels with many different merchants, and there will eventually be enough channels for everyone.

Lightning Network Developers

Who is developing the lightning network? There are a number of startups working on different implementations of lightning Bitcoin. The three main developers are listed below, each of them using a different programming language. Input is given from other members of the bitcoin community as well.

Lightning Labs

Lightning Labs focuses its efforts on creating a working model of the Lightning Network. The company is currently developing a Lightning Network Daemon written in the Golang programming language.

Blockstream

Blockstream is known for the creation of satellites that serve as backups for the Bitcoin blockchain in the event of anything catastrophic happening to miners or the electrical grid on Earth.

When it comes to Lightning, the company is working on a version written in the C programming language.

ACINQ

The company is developing Lightning using the Scala programming language.

It’s worth noting that while these versions are written in different languages, tests have shown that the three primary implementations could be interoperable, meaning they could all work together.

Pros and Cons of the Lightning Network

Perhaps the most important benefit of the Lightning Network is that it will allow Bitcoin to scale. Users will be able to make instant micropayments using Bitcoin without paying high fees. The famous example is buying a cup of coffee with Bitcoin, which is all but impossible at present due to high network fees and slow confirmation times.

One con includes the fact that as of the time of this writing, Lightning is not quite available for practical use. Because the project is still under development, it hasn’t yet been universally applied to real-world applications.

The average user will have difficulty making transactions using the Lightning network. Unless someone runs their own Lightning Bitcoin node, they won’t be able to receive payments while offline, and may or may not be able to open a channel with another person or merchant (who must also be using Lightning).

Can You Make Money Running a Lightning Node?

Running a Lightning node doesn’t involve anywhere near the kind of rewards that mining bitcoin does. There are several reasons someone might want to run a Lightning node, such as helping the Bitcoin network scale, increased privacy for personal transactions, and bypassing censorship in areas where governments have heavily regulated crypto and crypto exchanges.

Making money is not an incentive for running a Lightning node, however, as it typically doesn’t pay more than a few pennies per month at most. The hardware required to run a node will cost about $200-400 on average.

The simplest of tips for investing in Bitcoin might be to not run a full node unless you have a good reason or want to support the growth of the technology.

The Takeaway

The Lightning Network is a layer-2 solution that provides a way for Bitcoin to scale. It is still in the early experimental development phase, but once it becomes fully developed and widely adopted, it could help make Bitcoin more widely used as a digital medium of exchange.

While the Lightning Network will primarily benefit users interested in Bitcoin as a form of payment, there are other users who consider Bitcoin to be more of an investment. For those interested in investing in cryptocurrency like Bitcoin, Ethereum, and others, SoFi Invest® offers a secure platform that keeps assets protected from fraud, and the convenience of 24-hour trading through the SoFi app.

Find out how to get started with SoFi Invest.

Photo credit: iStock/MicroStockHub


Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Bitcoin Soft Fork vs Hard Fork: Key Differences

Bitcoin Soft Fork vs Hard Fork: Key Differences

Cryptocurrencies evolve over time, adopting new network rules voted on by miners. This is known as forking. Since its invention in 2009, Bitcoin has forked many times—sometimes with a soft fork and sometimes with a hard fork.

Here’s a look at how each works, how they differ, and what they mean for investors.

Why Does Bitcoin Fork?

Developers, investors and miners will often call for a bitcoin fork because of disagreements on how best to manage the growth of Bitcoin. And while this has fueled innovation, none of the forks have come near to exceeding the usage and value of the original bitcoin blockchain, also called Bitcoin Core.

Recommended: What is Bitcoin and How Exactly Does it Work?

What Is A Hard Fork?

Hard forks happen when miners vote for a significant change to the Bitcoin blockchain protocol. A hard fork creates a new blockchain. And after a hard fork, both the old and new versions of the blockchains persist, separate and side by side.

What Is A Soft Fork?

Soft forks are more subtle software alterations of the blockchain. After a soft fork, the original blockchain remains valid, and users simply adopt the update.

Other Bitcoin Alterations

There are also other kinds of software alterations that create clone or copycat “altcoins.” In the history of Bitcoin, some of these created entirely new forms of crypto, such as Litecoin or Vertcoin.

The main difference is that while these “altcoins” used Bitcoin code as a jumping-off point, they didn’t add on to the existing Bitcoin blockchain. Instead, they created their own trading networks. These coins employ different mining algorithms, which means the computers that mine the coins operate on different software.

Main Differences Between Soft Forks and Hard Forks

Soft Fork

Hard Fork

Backward Compatible? Yes No
Block Size Smaller Larger
Speed Slower Faster
Security Lower Higher

Backward Compatibility

One major difference between hard forks and soft forks comes down to something called “backward compatibility.” The term refers to the ability of a software system to use interfaces and data from earlier versions of the system.

The change of software protocol in a soft fork offers backward compatibility. While the new software may speak a new dialect, it still understands data in the old dialect. A hard fork is more like changing the language that the software speaks. It no longer understands what’s being said in the old language.

This is why a hard fork splits the network into two parts—the one before the fork and the one after. Because there is no backward compatibility, once forked the two parts of the network can never interact again. Transaction blocks that are valid in one network are no longer considered valid in the other one.

Block Size

One reason for a fork on a cryptocurrency like Bitcoin is to adjust the size of the blocks used in their blockchain. Those blocks hold transaction data, and the more data in each block, the faster the transaction.

Block size was one of the major reasons behind the first hard fork for Bitcoin, when a hard fork created Bitcoin Cash (BCH) in 2017. Because of its larger block size, one block in the BCH blockchain can record a larger number of transactions than a block in the original Bitcoin blockchain. That allows the currency to process more money faster.

Some forms of crypto may want to limit the size of the blocks to increase the payout to miners. This is where a soft fork can work, by adding a new set of rules to the existing blockchain to reduce block size from, say, 1MB to 500KB. With a soft fork, the 1MB block will still be considered valid by existing nodes, but as more nodes update to the soft fork, they may reject any blocks larger than 500KB.

A soft fork can only restrict the size of the blocks. It can only add new rules—it can’t change existing rules.

Speed and Security

Another famous use of a hard fork was done for the sake of blockchain security after a major hack. The Ethereum blockchain voted unanimously to hard fork as part of a strategy to reverse a hack that stole tens of millions of dollars’ worth of its coins. As a result, the original blockchain is now referred to as Ethereum Classic, and the fork became known as Ethereum.

That’s an extreme scenario. And there are many situations involving speed or volume or security that arise on a crypto network where a soft fork would get the job done.

But when a network needs to solve a problem quickly, hard forks have a major advantage. With both hard and soft forks, there’s a period when the old and new versions of the cryptocurrency’s code both live on the network. But with a hard fork, the old and new versions are divided clearly and forever on two separate networks.

With a soft fork, however, both versions will remain in place for however long it takes for all the users on the network to update the software. And there’s always the risk that the legacy version could win out. That’s why, when a hack or another major security issue is at play, the predominance of users and developers tend to prefer a hard fork.

Notable Bitcoin Forks in the Past

Bitcoin has forked on more than one occasion. In addition to Bitcoin Cash, these are some of the other notable forks:

•  Litecoin: Litecoin (LTC) was created to enable faster transactions, using the Scrypt algorithm rather than Bitcoin’s SHA-256 algorithm. LTC transactions are thought to confirm faster and have lower fees than BTC in general.

•  Vertcoin: Vertcoin (VTC) uses a different consensus algorithm for mining. The goal of VTC was to be ASIC-resistant, meaning that the market for mining couldn’t be taken over by people with access to resources for purchasing large and expensive ASIC (application-specific integrated circuit) computer hardware.

•  BSV: BSV is a hard fork from the Bitcoin Cash network, initiated by Craig Wright, who claims that he is in fact Satoshi Nakamoto, the creator of Bitcoin. (That remains unproven; Satoshi Nakamoto may in fact be a pseudonym for a group of people.)

•  Bitcoin Gold: This fork utilizes an ASIC-resistant proof-of-work mining algorithm, to create a coin that anyone can mine at home without the need for expensive specialized computer hardware.

Many of these cryptocurrencies forked from Bitcoin have undergone forks of their own. For instance Litecoin has had its own hard fork, which gave birth to Litecoin Cash.

But for all the improvements those forks have offered, Bitcoin is still the predominant cryptocurrency in the world today, with a market capitalization of $734,951,021,330 as of June 16, 2021, according to Coinmarketcap.com. Not that some of the forks are doing so badly. Bitcoin Cash and Litecoin boast market caps of $$11,339,133,478 and $11,303,929,705, respectively.

The Takeaway

As the original crypto, Bitcoin was the first to fork, and has forked a few times since—with both hard forks and soft forks. The hard forks, like Bitcoin Cash and Bitcoin Gold, created entirely new blockchains. Soft forks, on the other hand, are backwards compatible, meaning they work with the existing blockchain.

Some Bitcoin forks created entirely new altcoins, and thus additional investing opportunities for investors interested in crypto. SoFi Invest® offers members the opportunity to buy Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Ethereum Classic, and 17 more coins—all from the convenience of the mobile app.

Find out how to get started with SoFi Invest.

Photo credit: iStock/I am 3D animator artist


Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Where Do You Pay off Student Loans?

Looking for the right place to pay back loans? Unfortunately, there’s no blinking neon sign for borrowers to “Repay Loans Here.”

Instead, borrowers may have to go old school and make a phone call to meet their new best friend—the student loan servicer. It all starts with contacting the Federal Student Aid Information Center to learn next steps.

Contact Your Student Loan Servicer

Before paying back student loans, graduates will have to figure out who their student loan servicer is. A student loan servicer is the company assigned by the US Department of Education (federal student loan creator) to take care of the day to day servicing of a federal student loan. If a person needs to talk to someone about their federal student loan, they can reach out to the servicers instead of to a government office.

Students don’t have to do anything for their loan to be transferred to a loan servicer. The federal student loan will be transferred to a servicer after its first disbursement. Once that happens, students should expect to be contacted by the servicer.

But, unexpected moves or outdated contact information could mean the servicer doesn’t reach you. If a student needs help figuring out who their servicer is, one option is to call the Federal Student Aid Information Center (FSAIC): 1-800-433-3243.

However, FSAIC can only help students figure out their servicer if they hold federal student loans, not private student loans.

Another option for borrowers with federal student loans is to log into their Federal Student Aid account. From this portal, borrowers can access information on their student loan servicer.

Federal student loan borrowers can also check the National Student Loan Data System to find information about their loan servicer.

Once a student figures out their loan student servicer and contacts them, they can begin sorting through the repayment process. A loan servicer should help a student figure out how to repay loans free of charge.

Be warned, any federal loan servicer that asks for payment may be a scam, warns the US Department of Education.

Recommended: How to Find Out Who Your Student Loan Lender Is

Grace Periods

A loan servicer can help students and graduates figure out when their loan repayment will begin. Most, but not all, federal student loans have a six-month grace period , or an allotted amount of time before a student has to start paying back the loan.

The student loan grace period generally begins once a student graduates, leaves school, or enrolls in class less than part-time. This time is meant for students to get in contact with their loan servicer and begin setting up a repayment plan, so they don’t have to scramble post-graduation when so many other changes are happening.

Students should be aware that interest on their loan may be accruing during their grace period. For that reason, some students may decide to begin repayment before the grace period is up, in order to keep the interest capitalization down.

Borrowers with subsidized student loans will not accrue interest on their loans during their grace period.

There are some circumstances that can extend, or end a grace period early :

•  Being called into active military duty. This will restart the grace period, which will begin again once the student returns.
•  Going back to school before the end of the grace period. If a student goes back to school at least part-time, then they won’t have to repay their loans until they finish school, in which case they’ll have another six-month grace period.
•  Consolidating loans. If a student decides to consolidate or refinance a loan before the end of the grace period, they’ll start their repayment as soon as the paperwork is processed.

Recommended: How Long is a Student Loan Grace Period?

Selecting a Repayment Plan

During the grace period, students can work with their loan servicer, and other online tools to figure out the right repayment plan for them. The US Department of Education has a loan simulator tool where users can calculate interest rates to help them determine the best repayment scenario.

There are several repayment plans a student can choose from, depending on their finances and the type of federal student loans they have.

•  Standard Repayment Plan. All federal loan borrowers are eligible for this repayment plan, where payments are in a fixed amount each month, typically with the plan to pay off the loan within ten years.
•  Graduated Repayment Plan. This plan, which nearly all federal loan holders can enroll in, starts out with low monthly payments, then gradually increases every two years. Payments are made monthly for up to ten years for most loans.
•  Extended Repayment Plan. In this plan, which nearly all borrowers can adopt, payments standard or graduated payments are made monthly, but at a lower rate over a longer period of time, typically 25 years.
•  REPAYE. The Revised Pay As You Earn Repayment Plan is for any Direct Loan borrower. Payments are calculated as 10% of a person’s discretionary income, and monthly payments will be recalculated each year based on family and income.
•  IBR. The Income-Based Repayment Plan allows for monthly payments between ten to 15% of a person’s monthly income, but borrows must have a high debt to income ratio to qualify.
•  ICR. In the Income-Contingent Repayment Plan, eligible borrowers will make monthly payments based on the lesser value of either 20% of their income, or the “amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income,” according to the Department of Education.
•  Income-Sensitive Repayment Plan. This plan is only available under a few federal loan programs. Payments are based on annual income, and the loan will be paid off within 15 years.

Depending on a borrower’s income and the type of loan they took out, they can work with their servicer to determine which student loan repayment plan might be the best course of action. If a borrower doesn’t reach out to their servicer to coordinate a repayment plan before the end of the grace period, they will be on the standard repayment plan by default.

Recommended: Getting to Know Your Student Loan Repayment Options

Start Repaying Student Loans

Once a repayment plan is selected, and the grace period draws to a close, borrowers will begin making payments on their student loans.

Where a borrower will make their payment is dependent upon who their student loan servicer is. Most student loan servicers make it possible for borrowers to make monthly payments online, but it’s best to confirm that with the servicer before payments begin.

Most servicers also have an automatic payments set-up, where monthly payments are automatically debited out of borrowers’ accounts each month. Setting up an automatic payment can help borrowers avoid missing a payment, or rack up late fees.

Additionally, some federal student loans provide a discount when a borrower sets up automatic repayment online. For example, if a borrower has a Direct Loan, their interest rate is reduced by .25% when they choose automatic debit.

Recommended: Tips for Student Loans Payoff & Repayment

Repaying Private Student Loans

Private student loans are generally repaid directly to the bank or financial institution that issued them. Borrowers can check their statements to see who the loan servicer is. Generally, payments can be made online.

The Takeaway

To find out who their loan servicer is, borrowers with federal student loans can call the Federal Student Aid Information Center (FSAIC): 1-800-433-3243 or log into their Federal Student Aid account. Federal student loan borrowers can also check the National Student Loan Data System to find information about their loan servicer.

Borrowers with private student loans will generally make repayments to the financial institution from which they borrowed the loan.

Refinancing with SoFi

When a borrower works with their student loan servicer, they can take advantage of free tools that might help them pay back their student loans easier.

But, for some student loan borrowers, the existing interest rates and repayment plans offered by a servicer might not be the best fit.

In that case, borrowers may have the option of refinancing student loans. This can be helpful when there are multiple loans to pay off since refinancing allows borrowers to combine multiple loans into a new single loan and qualifying borrowers may be able to secure a lower interest rate.

Refinancing federal student loans eliminates them from all federal benefits and borrower protections, such as income-driven repayment plans and deferment.

SoFi’s student loan refinancing offers flexible terms, and low or variable interest rates. With no hidden fees or pre-payment penalties, borrowers can apply for refinancing in an easy online process—no phone calls required.

The first step to figuring out student loan repayment is figuring out who holds the loan, but with the right help, borrowers can have a plan set up to conquer their loans before the grace period is even finished.

Learn more about student loan refinancing options available with SoFi.



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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) 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, such as the SAVE Plan, or extended repayment plans.



IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS, PLEASE BE AWARE THAT THE WHITE HOUSE HAS ANNOUNCED UP TO $20,000 OF STUDENT LOAN FORGIVENESS FOR PELL GRANT RECIPIENTS AND $10,000 FOR QUALIFYING BORROWERS WHOSE STUDENT LOANS ARE FEDERALLY HELD. ADDITIONALLY, THE FEDERAL STUDENT LOAN PAYMENT PAUSE AND INTEREST HOLIDAY HAS BEEN EXTENDED TO DEC. 31, 2022. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE THE AMOUNT OR PORTION OF YOUR FEDERAL STUDENT DEBT THAT YOU REFINANCE WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.

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Consequences for Late Student Loan Payments

If you fail to make a student loan payment by its due date, your loan becomes delinquent, and there are all sorts of consequences that can result, from late fees to having your loan sent to collections. These consequences will typically depend on how long your loan is delinquent and whether you have a federal student loan or a private loan.

If you miss a student loan payment, take action immediately so you can work to avoid these consequences.

Federal Student Loan Late Payment Penalties

If you fall behind on federal student loan payments, you can expect the following consequences:

Late Fees

Your loan becomes a delinquent payment the day after you miss a payment. During the first 30 days of your delinquency, your loan servicer may charge you a late fee penalty. Your loan servicer will determine when to charge you a penalty and how much to charge.

Damaged Credit

If your loan is delinquent for 90 days or more, your servicer will report the late payments to the three major national credit bureaus—Experian, TransUnion, and Equifax—which keep track of consumer credit scores.

A delinquent loan can potentially damage your credit score. A lower credit rating can make it more difficult to open a credit card, take out loans to buy a house or a car, and limit your ability to obtain other types of consumer credit.

A low credit rating means that lenders likely see you as a greater risk. As a result, borrowers with a less than stellar credit score may qualify for a high-interest rate or be subject to less favorable terms for lines of credit or loans than a borrower with a more competitive credit score.

Credit scores can impact other areas of life too. For example, someone with a low credit score may have trouble signing up for homeowner’s insurance options and utilities or even getting approved to rent an apartment.

Recommended: How Do Student Loans Affect Your Credit Score?

Default

If your loan is delinquent long enough, it can go into default. The timeline for this varies depending on the type of loan you have.

After 270 days of delinquency, loans made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan (FFEL) Program go into default.

For loans made in the Federal Perkins Loan Program, a default may be declared more quickly such as soon as a payment is late.

Borrowers with a Perkins Loan, which stopped being made by the federal government in 2017, can contact the school that made the loan or the school’s loan servicer to learn more about repayment requirements.

Once a federal loan goes into default, it can trigger the following consequences, among others:

•   The entire loan balance becomes due immediately, including any interest that you owe. This is a process known as acceleration.
•   Deferment or student loan forbearance, which allow borrowers to temporarily suspend loan payments, are no longer options. Borrowers may also lose the ability to choose a repayment plan.
•   You lose eligibility for additional federal student aid, so you won’t be able to take out federal student loans in the future should you decide to go back to school.
•   Your transcript is the property of the school you attend, and your school is allowed to withhold it until you are out of default.
•   Your tax refunds may be withheld to repay your defaulted loans. This process is known as a Treasury offset. The government will send a notice of intent to your last known address before these offsets begin, and they will continue until your loan is repaid or the default status of your loan changes.
•   Your employer may be forced to garnish your wages. This means that they will withhold up to 15% of your paycheck and send it to your loan holder to repay your loan. The government will send a notice that explains the intent to garnish your wages in the next 30 days. At this point you may have a chance to enter into a voluntary repayment agreement.
•   You may be taken to court by your loan holder, and you may be liable for court costs, collection fees, attorney fees, and other costs.
•   You are liable for the cost of collecting your defaulted loans. Your default loan may be placed with a private collections agency, which may charge 17.2% of your outstanding balance, including interest and fees. Before your loan is sent to collections, the Department of Education will send you a notice explaining how to avoid this outcome and how to avoid having it reported to the credit bureaus. Having a defaulted loan turned over to a private collections agency can significantly increase the total cost of the loan. That’s because when you make a payment after your loan has been sent to collections, the 17.2% collections cost is taken out first and the remainder is put toward paying off your loan.

Recommended: Types of Federal Student Loans

Private Student Loan Late Payment Penalties

When you miss payments on private student loans, you may face similar consequences as when you miss federal payments. However, private lenders can choose the actions they pursue, and they may operate on completely different timelines.

For example, they may report late payments to credit bureaus or declare that a loan is in default faster than with federal loans.

Private lenders do not have the option of accessing your tax refund to pay back your defaulted loan. However, they can take you to court to gain the ability to garnish your wages.

Lenders may have different policies when it comes to late or missed payments on student loans so check with your lender directly if you have questions about a private student loan.

What To Do If You Miss A Payment

First things first: When you miss a payment, contact your lender immediately and let them know. This is your chance to clue them into any financial hardships that you might be experiencing. For example, if you missed a payment due to job loss or a medical emergency, there may be things your lender can do to help.

If paying off your loans looks like it will be difficult for the foreseeable future, consider deferment or forbearance. Federal student loan deferment is a program offered by the government that allows you to pause student loan payments for up to three years.

The deferment can give you time to put your finances back in order so you can start making regular payments again. Those with direct subsidized loans won’t usually be responsible for paying the interest that accrues over the deferment period. On the other hand, those with unsubsidized loans, are on the hook for those interest payments.

Forbearance can allow you to stop making payments for specific periods. This program can help you if you’re facing short-term emergencies. Unfortunately, interest continues to accrue on your loans, adding to your total cost over time.

Private lenders may or may not have an option that allows borrowers facing financial difficulties to pause their payments.

SoFi, for example, offers Unemployment Protection which allows qualifying borrowers to temporarily suspend monthly payments. Check with your lender directly to see what options are available for your private student loans.

If you have a federal student loan in default, consider enrolling in a student loan rehabilitation program. To rehabilitate a defaulted Direct Loan or FFEL Program Loan you’ll enter into an agreement with your loan holder under which you’ll make nine affordable monthly payments, each within 20 days of its due date. And you’ll need to make all nine payments during a 10-month consecutive period.

To rehabilitate a Perkins loan, you’ll have to make full monthly payments each month (within 20 days of the due date) for nine consecutive months. Your loan holder will determine the monthly amount you’ll pay.

The Takeaway

Late student loan payments can have consequences for borrowers. For many federal loans, after 90 days of missed payments, the late payments will be reported to the three major credit bureaus. This has the potential to negatively impact an individual’s credit score.

After 270 days of missed payments, a borrower’s loan will be placed in default where additional consequences can kick in. These consequences can include the full total of the loan being due immediately, wage garnishment, and more.

The consequences for late payments on private student loans may vary by lender but can include things like late fees and the loan being sent to a collections agency.

Taking Action

Missing a student loan payment can lead to some serious consequences, especially if you let it go for too long. Understanding the consequences and taking action immediately can help you avoid some of the most serious effects and keep you on track to eliminate your debt.

If the cost of a student loan has become too much, one option borrowers may consider is refinancing to a loan with better terms and a lower interest rate.

Note that refinancing is not the right option for everyone, and borrowers who have struggled to make payments on an existing loan or have a low credit score may not qualify for more competitive terms on a refinanced loan.

Refinancing a federal loan also results in the elimination of federal benefits, such as deferment or forbearance which may be useful tools for borrowers who are struggling to make on-time payments on an existing student loan.

Check out SoFi to learn more about the refinancing student loan options available.



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.


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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) 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, such as the SAVE Plan, or extended repayment plans.



IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS, PLEASE BE AWARE THAT THE WHITE HOUSE HAS ANNOUNCED UP TO $20,000 OF STUDENT LOAN FORGIVENESS FOR PELL GRANT RECIPIENTS AND $10,000 FOR QUALIFYING BORROWERS WHOSE STUDENT LOANS ARE FEDERALLY HELD. ADDITIONALLY, THE FEDERAL STUDENT LOAN PAYMENT PAUSE AND INTEREST HOLIDAY HAS BEEN EXTENDED TO DEC. 31, 2022. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE THE AMOUNT OR PORTION OF YOUR FEDERAL STUDENT DEBT THAT YOU REFINANCE WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.

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