Sep
22
2025
man on laptop at library

How to Invest as a College Student

By | Growing Wealth, invest, Investing | No Comments

As a college student, it’s not too early to start investing your money. In fact, the sooner you start, the more time your money may have to grow. That could help you meet your financial goals such as going to graduate school, buying a house, or saving for retirement.

There are different types of accounts college students can use to invest, including brokerage accounts and retirement accounts like individual retirement accounts (IRAs) and 401(k)s. But there are some important steps college students should take before they start investing. Here’s what to know about investing as a college student.

Key Points

•   Investing early may give college students the opportunity to benefit from compound returns over time.

•   IRAs, brokerage accounts, and 401(k) plans are investment accounts to consider.

•   Setting clear financial goals, understanding different types of investments, and choosing the appropriate investment account are steps college students can use to get started.

•   Balancing investing with academic responsibilities is important.

•   Maintaining a long-term perspective and avoiding emotional investing can help navigate market fluctuations.

Why You Should Start Investing Early

One key reason to start investing early is the potential return on your investment. The average annual return offered by the S&P 500 — a stock market index of the 500 largest companies in the U.S. — is around 7% when adjusted for inflation.

While investing does involve risk, it may help you outpace inflation and give you an extra boost toward your long term goals.

Investing as a college student can be a good time to get started.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

3 Ways to Invest While in College

There are several ways for college students to invest their money, including using tax-advantaged retirement accounts and brokerage accounts.

IRA

An IRA, whether it’s a traditional or Roth IRA, is a type of retirement account that almost anyone with an earned income can open up and start contributing to. There are rules regarding how much you can contribute to an IRA every year — up to $7,000 for those under age 50 in 2025 — and when you can take withdrawals (depending on the type of IRA you open). However, these accounts can be relatively easy ways to kick-start a college students’ investment portfolio.

Two of the most common types of IRAs are traditional IRAs and Roth IRAs. With a Roth IRA, you contribute after-tax dollars and you can withdraw the money tax-free in retirement. With a traditional IRA, you contribute pre-tax dollars (those contributions may be tax deductible), and you pay taxes on the money when you withdraw it in retirement.

IRAs do have withdrawal rules and penalties. Early withdrawals may incur taxes and penalties, with some exceptions. The rules for making withdrawals from a Roth IRA are different from those for a traditional IRA, so it’s wise to understand what they each involve.

Brokerage Account

A brokerage account allows investors to make investments by depositing funds in the account. Your financial institution may have brokerage options, or you may consider using an outside financial brokerage firm or an online brokerage. You can shop around and research different brokerage accounts to compare their minimum deposit required (if they have one), the fees they charge, the investments they offer, and the responsiveness of their customer service department.

With a brokerage account, a college student can buy and sell stocks, bonds, mutual funds, index funds, and other assets. Once an investor opens an account they can transfer money into it from a checking or savings account to fund their investments. Unlike IRAs, brokerage accounts have no contribution limits.

However, selling assets in a brokerage account can trigger capital gains taxes. Short-term capital gains (from assets you’ve held for less than a year) are charged at a higher rate than long-term capital gains (assets you’ve held a year or more).

401(k)

A 401(k) is a type of retirement account offered through an employer (though there are different types of 401(k)s, such as solo 401(k)s, that you can open yourself if you are self-employed). Like IRAs, 401(k)s have annual contribution limits — up to $23,500 for those under age 50 in 2025.

The money you put in a 401(k) account is pre-tax dollars and it reduces your taxable income. The money grows tax-deferred while it’s invested. Your contributions are typically deducted automatically from your paycheck and you have a choice of investments to pick from, depending on your employer’s plan. Your employer may offer a 401(k) match — essentially matching your contribution up to a certain amount and/or percentage.

Aside from certain specific exceptions, you can’t withdraw money from the account until you reach age 59 ½, or you’ll be subject to a 10% early withdrawal penalty.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of individual retirement accounts (IRAs).

Steps to Start Investing as a College Student

If you’re a college student who is new to investing, there are several actions that could help you get started.

Set Clear Financial Goals

Before you make your first investment as a college student, it’s important to give some serious thought and consideration to your financial goals. Do you want to try to hit a total net worth or dollar amount by a certain age, for instance? Or do you want to save up enough to buy a home or start a family?

Having clear financial goals in mind before you start investing can help guide your decision-making about what types of investments you make.

Determine How Much Money You Can Set Aside

With your goals in mind, think about how much money you realistically can set aside to invest. Even if you have a part-time job, odds are, you won’t be able to invest your entire paycheck. But if you can free up some additional money in your budget for investing, that could help you get started. Even a small amount can help.

Choose the Right Investment Account

Next, knowing how much you have to invest and with some end-goals in mind, you’ll need to decide what type of investment account will best help you build your portfolio and reach your objectives. As discussed, this might be a retirement account like an IRA, a 401(k), or a brokerage account.

Understand Types of Investments

You’ll also want to review and understand the different investments available. That can include a variety of asset types such as stocks, bonds, cash, mutual funds, exchanged-traded funds (ETFs), and more. Study up on each one to help determine which makes the most sense for your situation and your goals.

Also, consider your risk tolerance. Remember, investing involves risk, and some assets are riskier than others, so you’ll want to make sure you are comfortable with your choices.

Fund Your Investments

The final step is to go ahead and fund your investment account and make your initial investments. You may want to start small and increase your contributions over time if your financial situation allows.

Tips for Investing as a College Student

Investing as a college student may feel intimidating at first, but these tips and guidelines can help.

Consider Diversification

A good rule of thumb for all investors is to invest in different types of assets and asset classes. The basic idea behind portfolio diversification is that by diversifying the assets you have, you may offset a certain amount of investment risk. Conversely, the fewer types of assets you have, the more risk you may take on should they perform poorly.

For example, imagine you invest in only one stock and that company folds — if that happens, you’ve lost your entire investment. However, if you’ve invested in a number of different stocks in different sectors, one company failing would affect you far less. However, it’s important to note that diversification does not eliminate risks.

One way to potentially stay diversified is by investing in mutual funds or exchange-traded funds, which bundle different groups of stocks together.

Avoid Emotional Investing

The market experiences natural ups and downs. As market fluctuations occur, it’s critical to try to avoid letting your emotions impact your investing.

When the market makes a big dip, you may feel the urge to quickly sell investments. However, by doing so, you may be locking in your losses. Letting reason prevail over emotions is generally wise — that way you don’t miss out on any future potential upturn that may take place.

Think of investing as a long-term proposition. The longer you allow your investments to stay in the market, the more opportunity they may have to ride out downturns — and the greater the potential you may have to take advantage of an upswing.

Timing the Market vs Time in the Market

When the market is doing well, you may find yourself tempted to get in on the action and end up buying investments that are too expensive or selling investments too soon. This type of buying and selling is known as timing the market. You may want to avoid checking the market frequently to help keep your emotions in check.

Rather than trying to time the market, think about investing over the long term.

Balancing Investing With Academic Responsibilities

As a college student working on earning your degree, your school work comes first. That means your academic responsibilities should take precedence over your investing activity. Remember, your education is an investment, too — one that is likely vital to your future.

That said, you may want to keep an eye on your portfolio and review your investments and allocations from time to time, whether that’s monthly or quarterly, and make any changes as necessary. But don’t get so caught up in investing that you neglect your classwork.

The Takeaway

Investing as a college student is possible, and there are many ways to get started. College students can explore various types of retirement accounts, like IRAs or 401(k)s, or brokerage accounts to get started. Investing when you’re young may help you build wealth over time. But investing involves risk, so make sure to choose investment accounts and asset types that you’re comfortable with.

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).


¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

How should I invest as a college student?

How you invest as a college student depends on your financial situation and your goals. For example, if you’re saving for a long-term goal such as retirement, you may want to open a retirement account, such as an IRA or, if you’re eligible, a 401(k). However, if your goal is more of a short-term one such as going to grad school or buying a car, you may want to open a brokerage account that gives you more flexibility for making withdrawals.

Carefully consider your objectives, the amount of money you have to invest, your risk tolerance, and the types of investments you’d like to make, whether it’s mutual funds or a mix of stocks and bonds.

How much will $100 a month be worth in 30 years?

How much $100 a month will be worth in 30 years depends on an investment’s rate of return. For example, if the annual average return is 5%, you could have about $83,673 after 30 years. With a 10% rate of return on the investment, you could end up with approximately $228,003 in 30 years.

Which investment is best for students?

The type of investment that’s best for students depends on the student’s specific financial situation, investing timeframe, financial goals, and appetite for risk. Generally speaking, low-cost assets that offer some diversification such as exchange-traded funds, mutual funds, and index funds may be investment options for students to explore. Do your research on the different investment options to help determine which may be best for you.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

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

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

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Sep
22
2025

How to Rebalance Your 401(k)

By | invest, Investing, Preparing for Retirement | Comments Off on How to Rebalance Your 401(k)

Rebalancing is the process of buying and selling assets in a portfolio to bring your allocations back into line with your investment goals. If you’re new to rebalancing 401(k) savings, it helps to know how it works and how often you might want to do it.

Making 401(k) contributions can help you build retirement wealth while enjoying some tax advantages. Periodic 401(k) rebalancing can help ensure that your asset allocation aligns with your risk tolerance and financial goals.

Key Points

•   Determine the current asset allocation in your 401(k) to understand the distribution of investments.

•   Establish a target allocation that aligns with personal financial goals, age, and risk tolerance.

•   Sell assets that exceed the target allocation to reduce overconcentration in certain investments.

•   Purchase assets that are below the target allocation to achieve a balanced portfolio.

•   Automatic rebalancing or target date funds could simplify the process and maintain the desired asset mix.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

money management guide for beginners

What Is Rebalancing Your 401(k)?

A 401(k) rebalance refers to buying or selling investments in your workplace retirement plan to bring them back into alignment with the original percentages you started with.

Example

If you started with 50% in equities (stocks) and 50% in bonds, over time that portfolio balance will change as the value of those securities rises or falls. You can then rebalance your portfolio to restore the original 50-50 ratio. (Or you can adjust your allocation according to a new ratio that reflects what you’re comfortable with today.)

Rebalancing isn’t the same as changing your 401(k) contributions. That usually refers to increasing — or decreasing — the amount of your salary you contribute to your plan. If you’re wondering if you change your 401(k) contribution at any time, you typically can, though it might depend on your plan administrator’s rules.

When you rebalance 401(k) assets, you’re changing how the money in your account is allocated. How you determine your retirement goals and your risk tolerance can shape your ideal asset allocation.

When to Rebalance Your 401(k)

There’s not one specific answer for how often to balance your 401(k). Every investor’s needs and goals are different. As a general rule of thumb, you might revisit your 401(k) allocation at least once a year. But rebalancing 401(k) savings could make sense at any time when your allocation no longer matches up with your investment goals or risk tolerance.

Life changes might also affect your decision of how often to rebalance 401(k) assets. For example, you might need to take a second look at your assets if you get married, have a child, or get divorced. Any of those situations can influence the way you approach investing, including how much risk you’re comfortable taking and how much you might need your 401(k) to grow to hit your retirement target.

Age is also a consideration for deciding when to rebalance a portfolio. When you’re younger with years ahead of you to ride out periodic ups and downs in the market, you might not be as concerned with rebalancing your 401(k) assets. You can generally afford to take greater risks at this stage to earn greater rewards with your investments.

As you get older, however, and closer to retirement, you might naturally begin to gravitate toward more conservative investments. If you find yourself growing less tolerant of risk, that’s a sign that it might be time for some 401(k) rebalancing.

Recommended: Average Retirement Savings by Age

Example of Rebalancing a 401(k)

Rebalancing 401(k) assets is a fairly straightforward process. First, you need to decide what you want your target asset allocation to look like. From there, you’d either buy or sell assets until your portfolio achieves the right balance.

Let’s say that you’re 35 years old and your target 401(k) portfolio allocation is 85% stocks and 15% bonds. Upon checking your latest statement, realize that your asset makeup has become 75% stocks and 25% bonds. You could rebalance 401(k) investments by selling 10% of your bond holdings, then reinvesting the proceeds into stocks.

You can do that without tax consequences as long as you’re not withdrawing money from your plan. Should you decide later that it makes more sense to move back to a 75%/25% split, you could sell off some of your stocks and purchase bonds instead.

Benefits of Rebalancing Your 401(k)

What is rebalancing meant to do for you? A few things, actually, and there are good reasons to consider regular 401(k) rebalancing.

Here are some of the main advantages of paying attention to your 401(k) allocation.

•   Manage risk. Rebalancing your retirement savings can help ensure that you’re not taking more risk with your investments than you’re comfortable with. At the same time, it allows you to see if you’re taking enough risk in order to reach your goals.

In the example above, rebalancing the portfolio so it has a higher percentage invested in stocks will increase the portfolio’s risk/reward ratio. Stocks tend to be higher-risk investments, with a higher risk of loss and a higher potential for rewards.

•   Maximize returns. If your 401(k) allocation becomes too conservative, you could miss out on potential opportunities to earn greater returns. Rebalancing can prevent that from happening so that you have a better chance of achieving the level of returns you’re looking for.

•   Keep pace with changing goals. As mentioned, life changes and age can influence your asset allocation preferences. Should your goals or needs change, rebalancing can help you adjust your financial plan both for the short- and long-term.

Is there a downside to 401(k) rebalancing? There can be if the investments you’re buying underperform and don’t deliver the level of returns you’re expecting. Another unintended consequence centers on cost. If you’re swapping out lower-cost investments in your 401(k) for ones with higher fees, that could potentially offset benefits you might realize in the form of better returns.

Get a 1% IRA match on rollovers and contributions.

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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Steps for Rebalancing Your 401(k)

Ready to rebalance your 401(k)? The process itself isn’t difficult, though you may want to spend some time researching the different investment options offered through your plan.

Calculate Current Asset Allocations

The first step in 401(k) rebalancing is figuring out what kind of asset split you currently have. In other words, what percentage of your account is dedicated to stocks, bonds, or other assets.

You may be able to do that by logging in to your 401(k) plan and checking your asset allocation. Many plan administrators offer online investment portfolio tracking so you can see at a glance how much you have invested in stocks, bonds, or other securities.

If your plan doesn’t automatically calculate your allocation, you can figure it out yourself by identifying the amount of money assigned to each investment, dividing it by the total value of your account, then multiplying by 100.

For example, say that you have $120,000 in your 401(k) and $72,000 of that is in stocks. If you divide $72,000 by $120,000, then multiply by 100, you get 60%. That means 60% of your 401(k) portfolio is stocks. You can perform the same calculation for each type of investment in your plan.

Compare to Target Asset Allocations

Once you know how your 401(k) assets break down, you can compare those percentages to your target percentages. For example, if you’ve got 60% of your 401(k) in stocks and your goal is 80% stocks, then you know you’ve got a 20% gap to close.

How you set your target allocations is entirely up to you and, again, it can depend on things like:

•   Your age

•   Risk tolerance

•   Investment goals

•   Timeframe for investing

You might try using a basic rule of thumb like the rule of 100 or rule of 120 to find a starting point for allocating assets. These rules suggest subtracting your age from 100 or 120, then using that number as a guide for allocating your portfolio to stocks.

For example, if you’re 35, then based on the rule of 120, stocks should account for 85% of your portfolio. You could also look at how much you have saved versus what you need to save. This kind of retirement gap analysis can tell you how close or how far away you are to your goals and where you might need to adjust your savings strategy.

Sell Overweight Assets

Now that you know what your target allocation should be, you can take the next step and sell off overweight assets. These are the ones that are causing your asset allocation to skew away from your ideal alignment.

If you need more stocks, for example, then you’d sell off bonds. And if you want a more conservative allocation, you’d sell some of your stocks so you can use the money to buy more bonds.

Buy Underweight Assets

The last step is to buy underweight assets in order to bring your 401(k) portfolio back in line with where you want it to be. There are a couple of ways you can do this.

First, you could make a large, one-time purchase using the proceeds from the overweight assets that you sold. That might be easiest if you don’t want to make any changes to future allocations of your 401(k) contributions.

The other option is to change your allocations to direct future 401(k) contributions to underweight assets. What you have to keep in mind here is that once you reach your target allocation, you may need to change your future allocation preferences again so that you don’t accidentally end up overweight in one asset class.

One more possibility when considering how to manage 401(k) asset allocation is to check with your plan administrator to see if automatic rebalancing is an option. An automatic rebalance 401(k) feature could make keeping your allocation easier so you don’t have to spend as much time worrying about your assets.

Consider a Target Date Fund

If you want to skip rebalancing altogether, you might consider investing in a target date fund in your 401(k). Target date funds have an asset allocation that shifts automatically over time as you get closer to retirement.

You choose a target date fund based on your expected retirement date and the fund does the rest. Target date funds offer convenience since you don’t have to actively rebalance, but they might not be right for everyone. If the fund’s allocation doesn’t adjust in a way that’s consistent with your goals, you might be overexposed or underexposed to risk.

The Takeaway

If you’re contributing to a 401(k) for your retirement, it helps to know how to make the most of it. Rebalancing your 401(k) can help you stick to an asset allocation that makes the most sense for you. You also have the option of changing your allocation if your risk tolerance changes or your goals shift.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of Individual Retirement Accounts (IRAs).

FAQ

Is it good to rebalance your 401(k)?

It’s a good idea to rebalance your 401(k) if you’re concerned about taking too much risk — or not enough — with your investments. Rebalancing 401(k) assets is usually recommended when you experience life changes that affect your retirement goals and as you get older.

Should I rebalance my 401(k) before a recession?

Whether it makes sense to rebalance a 401(k) before a recession can depend on your specific financial situation, investment timeline, and current asset allocation. If you’re heavily invested in securities that are typically recession-proof or tend to fare well in economic downturns, then rebalancing might not be necessary. On the other hand, you might want to consider the idea of making some shifts in your 401(k) assets if you think a recession could expose you to more risk than you’re comfortable with. You may also want to consult with a financial professional.

Does it cost money to rebalance 401(k)?

In general, it shouldn’t cost money to rebalance a 401(k), since you’re buying and selling assets in the same plan. However, you may want to ask your plan administrator whether any transaction fees will apply before you move ahead with 401(k) rebalancing. Keep in mind that taking money out of your plan to buy investments could cost you, since early withdrawals are subject to tax penalties.

Should I rebalance my 401(k) in a bear market?

Whether you should rebalance your 401(k) in a bear market can depend on the type of assets you’re holding, your investment timeline, and how much risk you’re willing to take. Bear markets can be opportunities for investors who are comfortable taking more risk, as they might be able to find investments at bargain prices when the market is down. Once the market recovers, those discounted investments might experience gains as prices rise again. But then again, they might not, since there is no guarantee. Carefully consider the pros and cons.

About the author

Rebecca Lake

Rebecca Lake

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


Photo credit: iStock/miniseries

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

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

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

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

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Sep
22
2025
What Are High-Net Worth Individuals?

What Are High-Net-Worth Individuals?

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

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

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

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

Key Points

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

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

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

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

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

What Defines a High-Net-Worth Individual?

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

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

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

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

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



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Benefits Afforded to HNWIs

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

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

HNWI Examples & Statistics

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

•   Elon Musk with a net worth of $428.4 billion

•   Larry Ellison with a net worth of $272.8 billion

•   Mark Zuckerberg with a net worth of $252.4 billion

•   Jeff Bezos with a net worth of $238.2 billion

•   Larry Page with a net worth of $192.5 billion

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

How Is Net Worth Calculated?

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

1.    Add up assets. These can include:

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

◦   Retirement accounts

◦   Taxable investment accounts

◦   Property, such as real estate or vehicles

◦   Collectibles or antiques

◦   Businesses someone owns

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

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

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

Net Worth vs Liquid Net Worth

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

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

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

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

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

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


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How to Get a Higher Net Worth

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

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

•   Paying off student loans or other debts

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

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

•   Finding ways to increase income

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

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

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

The Takeaway

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

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

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).


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

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

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

Where are most of the HNWIs located?

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

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

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

About the author

Rebecca Lake

Rebecca Lake

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


Photo credit: iStock/Cecilie_Arcurs

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

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

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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eggs in a nest mobile

Building a Nest Egg in 5 Steps

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

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

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

Key Points

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

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

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

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

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

What Is a Nest Egg?

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

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

Understanding How a Nest Egg Works

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

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

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

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

How Much Money Should Be in Your Nest Egg?

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

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

What Are Nest Eggs Used for?

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

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

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5 Steps to Building a Nest Egg

1. Set a SMART Financial Goal

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

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

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

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

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

2. Create a Budget

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

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

3. Pay Off Debt

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

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

Debt Repayment Strategies

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

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

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

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

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

4. Make Saving Automatic

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

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

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

5. Start Investing in Your Nest Egg

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

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

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

The Power of Compounding Interest

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

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

Why Having a Nest Egg Is Important

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

The Takeaway

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

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


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FAQ

What is a financial nest egg?

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

How much money is a nest egg?

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

Why is it important to have a nest egg?

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

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

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Discretionary Income and Student Loans: Why It Matters

Discretionary Income and Student Loans: Why It Matters

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

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

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

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

Key Points

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

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

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

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

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

What Is Discretionary Income?

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

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

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

How Is Discretionary Income Calculated?

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

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

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

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

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

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What Income-Driven Repayment Plan Are You Eligible For?

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

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

Income-Driven Repayment Plans for Federal Student Loans

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

•   Income-Based Repayment (IBR) Plan

•   Pay As You Earn (PAYE) Plan

•   Income-Contingent Repayment (ICR) Plan

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

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

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

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

Pros and Cons of Income-Driven Repayment Plans

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

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

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

How to Apply for an IDR Plan

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

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

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

How Does Discretionary Income Affect Student Loan Payments?

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

Examples of Monthly Payment Calculations

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

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

Here’s an example:

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

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

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

Using that information, the calculation would look like this:

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

$100,000 – $39,975 = $60,025

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

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

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

Annual Recertification Requirements

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

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

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

How Else Can Borrowers Lower Their Student Loan Payment?

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

Student Loan Refinancing

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

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

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

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

Extended and Graduated Repayment Plans

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

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

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

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

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

Applying for Deferment or Forbearance

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

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

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

The Takeaway

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

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

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


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

FAQ

How does discretionary income impact income-driven repayment plans?

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

What percentage of discretionary income is used for student loans?

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

Can refinancing affect your discretionary income calculation?

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

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

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

Is discretionary income the same as disposable income?

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

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

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

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

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


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

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

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

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

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