GenMed Archives | Page 5 of 13

Aug

2023

Understanding How Income Based Repayment Works

All You Need to Know About Income-Based Student Loan Repayment

By Jody McMaster | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

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

If you’re on the standard 10-year repayment plan and your federal student loan payments are high relative to your income, a student loan income-based repayment plan may be an option for you.

New changes to the plans, including a new plan called SAVE that was introduced by the Biden Administration, will reduce many borrowers’ payments. Read on to learn whether income-based student loan repayment might be right for your situation.

What Is Income-Based Student Loan Repayment?

Income-based student loan repayment plans were conceived to ease the financial hardship of government student loan borrowers and help them avoid default when struggling to pay off student loans.

Those who enroll in the plans tend to have large loan balances and/or low earnings. Graduate students, who usually have bigger loan balances than undergrads, are more likely to enroll in a plan.

The idea is straightforward: Pay a percentage of your monthly income above a certain threshold for 20 or 25 years and you are eligible to get any remaining balance forgiven. (The SAVE plan would forgive balances after 10 years for borrowers with original loans of $12,000 or less.)

By the end of 2022, 45% of Direct Loan borrowers were enrolled in an income-based repayment plan, according to Federal Student Aid, an office of the U.S. Department of Education. But borrowers have often failed to recertify their income each year, as required, and are returned to the standard 10-year plan.

💡 Quick Tip: Often, the main goal of refinancing is to lower the interest rate on your student loans — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.

4 Income-Driven Student Loan Repayment Plans

While people often use the term “income-based repayment” generically, the Department of Education calls them income-driven repayment (IDR) plans. There are four.

• Income-Contingent Repayment (ICR)

• Income-Based Repayment (IBR)

• Pay As You Earn (PAYE)

• Saving on a Valuable Education (SAVE), which replaces the previous Revised Pay As You Earn (REPAYE) plan

Your payment amount is a percentage of your discretionary income, defined for IBR and PAYE as the difference between your annual income and 150% of the poverty guideline for your family size.

For the SAVE plan, discretionary income is the difference between your annual income and 225% of the poverty line for your family size. This new plan could substantially reduce borrowers’ monthly payment amounts compared to other IDR plans.

For the ICR plan, discretionary income is the difference between your annual income and 100% of the poverty guideline for your family size.

For IBR, PAYE, and SAVE the payment is generally 10% of your discretionary income. Changes to SAVE that are scheduled to go into effect in July 2024 would lower payments to 5% of discretionary income for undergrads, and expand the pool of borrowers making $0 monthly payments.

For ICR, the payment is the lesser of these: 20% percent of discretionary income or what you would pay on a repayment plan with a fixed payment over 12 years, adjusted using a formula that takes income into account.

Parent PLUS borrowers may access ICR if they consolidate into a Direct Consolidation Loan.

Got it? But wait; there’s more. Note the number of years in which consistent, on-time payments must be made and after which a balance may be forgiven, as well as who qualifies.

Plan	Monthly Payment	Term (Undergrad)	Term (Graduate)	Who Qualifies
ICR	20% of discretionary income (or income-adjusted payment on 12-year plan)	25 years	25 years	Any borrower (this is the only plan that includes parent PLUS Loan holders if they consolidate)
IBR	15% of discretionary income (but never more than 10-year plan)	25 years	25 years	Borrowers who took out loans before July 1, 2014
Newer IBR	10% of discretionary income (but never more than 10-year plan)	20 years	20 years	Borrowers who took out their first loans after July 1, 2014
PAYE	10% of discretionary income (but never more than 10-year plan)	20 years	20 years	Borrowers who took out first loan after Sept. 30, 2007, and took out a new loan or consolidated existing loans after Sept. 30, 2011
SAVE	Currently 10% of discretionary income, with no cap (will be lowered to 5% in July 2024)	Currently 20 years (starting in July 2024, it will be 10 years for borrowers with original loan balances of $12,000 or less)	25 years (starting in July 2024, it will be 10 years for borrowers with original loan balances of $12,000 or less.)	Any borrower

How Income-Based Student Loan Repayment Works

In general, borrowers qualify for lower monthly loan payments if their total student loan debt at graduation exceeds their annual income.

To figure out if you qualify for a plan, you must apply at StudentAid.gov and submit information to have your income certified. Your monthly payment will then be calculated. If you qualify, you’ll make your monthly payments to your loan servicer under your new income-based repayment plan.

You’ll generally have to recertify your income and family size every year. Your calculated payment may change as your income or family size changes.

💡 Quick Tip: When rates are low, refinancing student loans could make a lot of sense. How much could you save? Find out using our student loan refi calculator.

What Might My Student Loan Repayment Plan Look Like?

Here’s an example:

You are single and your family size is one. You live in one of the 48 contiguous states or the District of Columbia. Your adjusted gross income is $40,000 and you have $45,000 in eligible federal student loan debt.

The 2023 government poverty guideline amount for a family of one in the 48 contiguous states and the District of Columbia is $14,580, and 150% of that is $21,870. The difference between $40,000 and $20,385 is $18,130. That is your discretionary income.

If you’re repaying under the PAYE plan or if you’re a newer borrower with the IBR plan, 10% of your discretionary income is about $1,813. Dividing that amount by 12 results in a monthly payment of $151.08.

Under the SAVE Plan, however, your discretionary income is the difference between your gross income and 225% of the poverty line, which comes out to $32,805. The difference between $40,000 and $32,805 is $7,195, which is your discretionary income; 10% of your discretionary income is about $720. That amount divided by 12 results in a monthly payment of $60.

Under the ICR plan, if your income is $40,000 and 100% of the poverty guideline is $13,590, your discretionary income is $26,410. If you qualify to pay 20% of your discretionary income, your monthly payment would be about $440.

The Federal Student Aid office recommends using its loan simulator to compare estimated monthly payment amounts for all the repayment plans.

Which Loans Are Eligible for Income-Based Repayment Plans?

Most federal student loans are eligible for at least one of the plans.

Federal Student Aid lays out the long list of eligible loans, ineligible loans, and eligible if consolidated loans under each plan.

Of course, private student loans are not eligible for any federal income-driven repayment plan, though some private loan lenders will negotiate new payment schedules if needed.

Serious savings. Save thousands of dollars
thanks to flexible terms and low fixed or variable rates.

Pros and Cons of Income-Based Student Loan Repayment

Pros

• Borrowers gain more affordable student loan payments.

• Any remaining student loan balance is forgiven after 20 or 25 years of repayment; and, as of July 2024, after 10 years of repayment for those in the SAVE plan with original loan balances of $12,000 or less.

• An economic hardship deferment period counts toward the 20 or 25 years.

• The plans provide forgiveness of any balance after 10 years for borrowers who meet all the qualifications of the Public Service Loan Forgiveness (PSLF) program.

• The government pays all or part of the accrued interest on some loans in some of the income-driven plans.

• Low-income borrowers may qualify for payments of zero dollars, and payments of zero still count toward loan forgiveness.

• New federal regulations will curtail instances of interest capitalization and suspend excess interest accrual when monthly payments do not cover all accruing interest.

Cons

• Stretching payments over a longer period means paying more interest over time.

• With some IDR plans negative amortization may occur when your loan payment is less than the new interest that accrues that month, causing the total balance to grow. However, with the SAVE, PAYE, or IBR plans, if your monthly payment amount doesn’t cover all of the interest that accrues on your loans, the government will pay all or a portion (the amount depends on the plan) of the remaining accrued interest due each month. With SAVE, for instance, the government will pay all of the interest that isn’t covered by your payment.

• Forgiven amounts of student loans are free from federal taxation through 2025, but usually the IRS treats forgiven balances as taxable income (except for the PSLF program).

• Borrowers in most income-based repayment plans need to recertify income and family size every year.

• On some plans, if a borrower gets married and files taxes jointly, the combined income could increase loan payments. (This is not the case with the SAVE Plan.)

• The system can be confusing to navigate.

Student Loan Refinancing Tips From SoFi

Income-driven repayment plans were put in place to tame the monthly payments on federal student loans for struggling borrowers. For instance, the new SAVE Plan offers the lowest monthly payments of all IDR plans. (Those who have private student loans don’t qualify for IDR plans.)

If your income is stable and your credit is good, and you don’t need federal programs like income-driven repayment plans or deferment, refinancing your student loans is an option. (To be clear, refinancing federal student loans makes them ineligible for federal protections and programs like income-driven repayment and loan forgiveness for public service.) With refinancing, the goal is to pay off your existing loans with one new private student loan that ideally has a lower interest rate.

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

Is income-based repayment a good idea?

For borrowers of federal student loans with high monthly payments relative to their income, income-based repayment can be a good idea. Borrowers may want to check out the new SAVE Plan, which provides the lowest monthly payments of all the income-driven repayment options.

What is the income limit for income-based student loan repayment?

There is no limit. If your loan payments under the 10-year standard repayment plan are high for your income level, you may qualify for income-based student loan repayment.

What are the advantages and disadvantages of income-based student loan repayment?

The main advantage is lowering your monthly payments, with the promise of eventual loan forgiveness if all the rules are followed. A disadvantage is that you have to wait for 10, 20, or 25 years depending on the plan you’re on and how much you owe.

How does income-based repayment differ from standard repayment?

With the standard repayment plan, your monthly payments are a fixed amount that ensures your student loans will be repaid within 10 years. Under this plan, you’ll generally save money over time because your monthly payments will be higher. With income-based repayment, your monthly loan payments are based on your income and family size. These plans are designed to make your payments more affordable. After a certain amount of time ranging from 10 to 25 years, depending on the plan, any remaining balance you owe is forgiven.

Who is eligible for income-based repayment plans?

Under the new SAVE plan, any student loan borrower with eligible student loans can participate in the plan. With the PAYE and IBR plans, in order to be eligible, your calculated monthly payments, based on your income and family size, must be less than what you would pay under the standard repayment plan. Under the ICR plan, any borrower with eligible student loans may qualify. Parent PLUS loan borrowers are also eligible for this plan.

How is the monthly payment amount calculated in income-based repayment plans?

With income-based repayment, your monthly payment is calculated using your income and family size. Your payment is based on your discretionary income, which is the difference between your gross income and an income level based on the poverty line. The income level is different depending on the plan. With the SAVE Plan, for instance, your discretionary income is the difference between your gross annual income and 225% of the poverty line for your family size.

For IBR, PAYE, and SAVE your monthly payment is generally 10% of your discretionary income. Changes to SAVE that are scheduled to take place in July 2024 would reduce your payments to 5% of your discretionary income.

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

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

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

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.

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.

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Aug

2023

Refinancing Student Debt With a Cosigner

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

If you’re interested in possibly refinancing your student loans, but you don’t think your credit history is strong enough, there are options that might help. One is to refinance student loans with a cosigner.

A cosigner could potentially help you qualify for a refinanced loan. But is taking out a new loan with a cosigner the right choice for you? There are pros and cons to carefully consider in order to decide if student loan refinance with a cosigner makes sense for your personal situation.

What Is a Cosigner on a Loan?

A cosigner is someone who legally agrees to pay your debt, such as your student loan debt, in the event that you can’t make payments yourself. The exact terms will vary based on the loan type and lender, but in general, this person signs your loan with you and accepts responsibility for your loan if you don’t make payments.

A cosigner can potentially be used for several different types of loans, from taking out a mortgage to borrowing for a car.

💡 Quick Tip: Some student loan refinance lenders offer no fees, saving borrowers money.

Can a Cosigner Refinance a Student Loan?

If you have private student loans, you might have needed a cosigner to qualify if your credit history was too new or not robust enough to qualify on your own.

Creditors review a variety of factors to determine whether or not they will give someone a loan. Things like a lot of existing debt or a low credit score can sometimes serve as an indicator to lenders that an individual could be a credit risk. Adding a cosigner could make a potential borrower appear less risky, since there’s another person (ideally one with a strong financial background) to help guarantee repayment of the loan.

Finding a Cosigner

If you can’t qualify for a loan based on your own credit history or current income, sometimes student loan refinancing with a cosigner who has a strong credit history could help improve your prospects.

You could ask a friend or relative to be a cosigner for refinancing student loans. Being a cosigner can be a hefty responsibility, so treat the request with respect, and perhaps plan to be open and honest about why you need to refinance student loans with a cosigner.

Pros and Cons of Having a Cosigner

Taking out a loan with a cosigner is a significant commitment, so it’s worth considering some pros and cons. What’s right for you will depend on your personal and financial situation.

One of the most notable benefits of refinancing with a cosigner is the potential to qualify for a loan that may not have been an option otherwise. A cosigner could also possibly help you qualify for a lower student loan interest rate than you otherwise may have received. If you have little to no credit history or bad credit, it could help to refinance student loans with a cosigner by giving you an opportunity to begin strengthening your credit.

On the flip side, there can be some cons to refinancing with a cosigner. If you fail to make payments on your loan, your cosigner will be responsible for repaying your debt. As a result, missed payments will likely reflect on both of your credit histories. This could also negatively impact your personal relationship with your cosigner.

In addition, there are pros and cons to the process of student loan refinancing. For instance, if you have federal student loans, refinancing makes them ineligible for federal benefits and protections such as income-driven repayment plans, loan forgiveness for public service, and deferment options. If you want or need access to these programs and benefits, refinancing won’t make sense for you.

Using a Cosigner when Refinancing Your Student Loans

When you’re refinancing your student loans, enlisting a friend or family member to cosign your refinanced loan could help strengthen your loan application.

If you’re trying to find a cosigner, you can start with the people you trust the most. Keep in mind that acting as a cosigner has risks — if you don’t pay back your loans, your cosigner is on the hook. It’s a big request, so take some time to think about how you’ll make it. Here are some tips that may help inform your conversation:

1. Asking respectfully. You’ll want to broach the subject thoughtfully and respectfully. You’re asking the person for a serious commitment, so asking with tact to show you understand the gravity of your request is crucial.

2. Showing your dedication. It’s also important to make it clear to your cosigner that you’re going to be making timely payments on the loan. One simple way to do so is by providing them with regular updates.

3. Illustrating to your cosigner that you understand the intricacies of your loan. They’ll be responsible for the loan if you fail to make payments, so they’ll likely want to make sure you understand the responsibility you’re taking on — and asking them to take on.

💡 Quick Tip: It might be beneficial to look for a refinancing lender that offers extras. SoFi members, for instance, can qualify for rate discounts and have access to career services, financial advisors, networking events, and more — at no extra cost.

Things to Consider if You’re Asked to Cosign a Loan

If you’ve been asked to cosign a loan, be aware that serving as a cosigner can come with consequences for your finances if the primary borrower fails to make payments. If you’re a family member or friend with excellent credit and a well-paying job, you could be a candidate as a cosigner. If you have some hesitation, here are a few steps you can take:

1. Talking it out with the borrower. The borrower is going to use your name and credit history to take out a loan. It can be helpful to understand why they feel they need a cosigner while making sure they have the means to repay the loan.

2. Following up often. Keeping the lines of communication open so you are aware of any issues can be helpful for both parties. If need be, you could discuss making payments on their behalf to avoid the effect of a late or missed payment on your own credit score.

3. Accepting negative outcomes. Even if you’ve done everything you can to ensure the borrower is trustworthy, something might come up where they let you down. Your credit score might take a hit and you might be responsible for making payments yourself. Remember that this could happen, so accepting it as a possibility may be helpful.

Cosigning a loan is a big responsibility that can have implications on your financial future, so take some time to consider if there’s anything you’re not comfortable with.

If you decide not to cosign, you can let the requester down gently by trying to help them think of some alternative options to secure the loan or money they need.

Refinancing Student Loans With SoFi

If you’re interested in refinancing student loans but your credit isn’t strong enough, enlisting a trusted person with a strong financial background as a cosigner may help you qualify for a loan.

But remember: Refinancing federal student loans makes them ineligible for federal programs or borrower protections. If you think you may need these federal benefits, refinancing may not be right for you.

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

FAQ

Do I need a cosigner for student loan refinance?

The specific requirements for refinancing a loan with a cosigner will depend on your credit history and income (among other factors) and the eligibility requirements of the lender. Borrowers who have a less than stellar credit history may find adding a cosigner to their application allows them to qualify for a more competitive interest rate.

Can I consolidate my student loans with a cosigner?

If you are consolidating federal loans through the Direct Consolidation Loan program, you don’t need a cosigner.

Can a cosigner become the primary borrower?

In order for the cosigner to become a primary borrower, the loan would generally need to be refinanced.

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.

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

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

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Aug

2023

Examining How Student Loan Deferment Works

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

With mass student loan forgiveness blocked by the Supreme Court, you may be curious about what other forgiveness or deferment options are available for students with federal — or private — student loans.

Federal loans do allow you to stop or reduce your payments in some circumstances, such as financial hardship, for up to three years — which is known as deferment. Deferment on private student loans varies by lender, and not all lenders offer it.

One thing you generally don’t want to do — simply stop making payments on your student loan. Whether your loans are federal or private, this puts you at risk of default, which can have a number of negative consequences.

Read on to learn more about student loan deferment, including what it is, how it works, its pros and cons, plus some alternative ways to get student debt relief.

Table of Contents

What Is Student Loan Deferment?
How Does Student Loan Deferment Work?
Why Defer Student Loans
Why Not Defer Student Loans
Types of Student Loan Deferment
Consequences of Defaulting on Federal Student Loans
Consequences of Defaulting on Private Student Loans
Who Is Eligible for Student Loan Deferment?
What If You Have Private Student Loans?
The Limits of Student Loan Deferment
Other Options for Reducing Federal Student Loan Payments
The Takeaway
Deferment FAQ

What Is Student Loan Deferment?

Student loan deferment allows qualified applicants to reduce or stop making payments on their loans for up to three years. If you have a subsidized federal loan, no interest accrues during the deferment period. If you have an unsubsidized federal loan, interest will accrue and will be added to the loan amount (or capitalized) at the end of the deferment period.

Deferments are available on federal loans including Direct Loans, FFEL Program loans, and Perkins Loans.

Private student loans may or may not offer deferment options to borrowers. If you have questions about your private student loan, you’ll want to check in with your lender directly.

How Does Student Loan Deferment Work?

If you have a federal student loan and are no longer in school at least half-time, you will need to apply to defer payments on your student loan. This usually involves submitting a request to your student loan servicer. You will also likely need to provide documentation to show that you meet the eligibility requirements for the deferment (more on eligibility requirements below).

If you have an unsubsidized federal student loan and are granted deferment, interest will continue to accrue during the deferral period. You will have the option to either pay the interest as it accrues or allow it to accrue and be capitalized (added to your loan principal balance) at the end of the deferment period.

Deferments are available on federal loans including Direct Loans, FFEL Program loans, and Perkins Loans.

If a private lender offers deferment, they will likely have their own forms and requirements.

Why Defer Student Loans

Applying for deferment may make sense if you are facing short-term difficulty paying your student loans, since a deferment can provide you with the opportunity you need to stay afloat financially. And, if you have a subsidized loan, deferment won’t make your loan any more expensive in the long run.

Deferring student loans also won’t directly impact your credit score.

Why Not Defer Student Loans

If you’re able to stay on top of your loan payments, then deferment likely doesn’t make sense. If you think that you may have long-term difficulty making your monthly loan payments, deferment may not be the best option either.

If you have an unsubsidized federal loan, interest will continue to accrue during deferment. At the end of the deferment period, this interest will be capitalized on the existing loan amount (or the principal loan value). Moving forward, interest will be calculated based on this new total. So essentially, you are accruing interest on top of interest, which can significantly increase the amount of interest owed over the life of the loan.

Pros and Cons of Student Loan Deferment

Student loan deferment can help borrowers who are struggling financially, but it may not be the right choice for everyone. Here are some pros and cons to consider when evaluating deferment options for federal student loans.

Pros	Cons
Borrowers are able to temporarily suspend or lower the monthly payments on their student loans.	On most federal student loans, interest continues to accrue. This may significantly increase the total cost of borrowing over the life of the loan.
Borrowers may qualify for deferment for periods of up to three years.	Because interest may continue to accrue during deferment, other options like income-driven repayment plans, may be more cost- effective in the long term.

Types of Student Loan Deferment

For federal student loans, there are a few different deferment options . Here are the details on some of the most common reasons borrowers apply for deferment.

In-School Deferment

Students who are enrolled at least half-time in an eligible college or career program may qualify for an in-school deferment. If you are enrolled in a qualifying program at an eligible school, this type of deferment is generally automatic. If you find the automatic in-school deferment doesn’t kick in when you are enrolled at least half-time in an eligible school, you can file an in-school deferment request form .

Unemployment Deferment

Those currently receiving unemployment benefits, or who are actively seeking and unable to find full-time work, may be able to qualify for unemployment deferment. Borrowers can receive this deferment for up to three years.

Economic Hardship Deferment

This type of deferment may be an option for those borrowers who are receiving merit-tested benefits like welfare, who work full time but earn less than 150% of the poverty guidelines for your state of residence and family size, or who are serving in the Peace Corps.

Economic hardship deferments may be awarded for a period of up to three years.

Military Deferment

Members of the U.S. military who are serving active duty may qualify for a military service deferment. After a period of active duty service, there is a grace period in which borrowers may also qualify for federal student loan deferment.

Cancer Treatment Deferment

Individuals who are undergoing treatment for cancer may qualify for deferment. There is also a grace period of six months following the end of treatment.

Other Types of Deferment

There are other situations and circumstances in which borrowers might be able to apply for deferment. Some of these include starting a graduate fellowship program, entering a rehabilitation program, or being a parent borrower with a Parent PLUS Loan whose child is enrolled in school at least half-time.

Consequences of Defaulting on Federal Student Loans

If you simply stop making payments as outlined in your loan’s contract, you risk defaulting on your student loan. Default timelines vary for different types of student loans.

Most federal student loans enter default when payments are roughly nine months, or 270 days, past due. Federal Perkins loans can default immediately if you don’t make any scheduled payment by its due date.

• Immediately owing the entire balance of the loan

• Losing eligibility for forbearance, deferment, or federal repayment plans

• Losing eligibility for federal student aid

• Damage to your credit score, inhibiting your ability to qualify for a car or home loan or credit cards in the future

• Withholding of federal benefits and tax refunds

• Garnishing of wages

• The loan holder taking you to court

• Inability to sell or purchase assets such as real estate

• Withholding of your academic transcript until loans are repaid

Consequences of Defaulting on Private Student Loans

The consequences for defaulting on private student loans will vary by lender but could include repercussions similar to federal student loans, and more, including:

• Seeking repayment from the cosigners of the loan (if there are any cosigners)

• Calls, letters, and notifications from debt collectors

• Additional collection charges on the balance of the loan

• Legal action from the lender, such as suing the borrower or their cosigner

To avoid these negative consequences, one option for borrowers struggling to pay federal student loans is deferment.

Who Is Eligible for Student Loan Deferment?

To be granted a deferment on federal loans, borrowers need to meet certain criteria.

You may be eligible if you’re:

• Enrolled at least part-time in college, graduate school, or a professional school

• Unable to find a full-time job or are experiencing economic hardship

• On active military duty serving in relation to war, military operation, or response to a national emergency

• In the 13-month period following active duty

• Enrolled in the Peace Corps

• Taking part in a graduate fellowship program

• Experiencing a medical hardship

• Enrolled in an approved rehabilitation program for the disabled

Borrowers who re-enroll in college or career school part-time may find that their federal student loans automatically go into in-school deferment with a notification from their student loan provider.

Loans may also keep accruing interest during deferment — depending on what kind of federal student loans the borrower holds. Borrowers are still responsible for paying interest if they have a:

• Direct Unsubsidized (Stafford) Loan

• Direct PLUS Loan

If you don’t pay the interest during the deferment period, the accrued amount is added to your loan principal, which increases what you owe in the end.

Recommended: Student Loan Deferment in Grad School

What if You Have Private Student Loans?

Private lenders aren’t required to offer deferment options, but some do. For example, some might allow you to temporarily stop making payments if you:

• Lose your job

• Experience financial hardship

• Go back to school

• Have been accepted into an internship, clerkship, fellowship, or residency program

• Face high medical expenses

Typically, even while a private student loan is in deferment, the balance will still accrue interest. This means that in the long term, the borrower will pay a larger balance overall, even after the respite of deferment.

In most cases, even with accrual of interest, deferment is preferable to defaulting. Borrowers with private loans could contact the lender to ask what options are available.

The Limits of Student Loan Deferment

Keep in mind that deferment is not a panacea. By definition, it’s temporary. Federal student loan borrowers will ultimately need to go back to making payments once they are no longer deferment-eligible. For example, a borrower’s deferral might end if they leave school, even if their ability to pay has not improved.

Federal loans can only be deferred due to unemployment or financial hardship for up to three years. With private loans, there may not be an option to defer at all, and if it is an option, the limit may be no more than a year.

Other Options for Reducing Federal Student Loan Payments

Besides student loan deferment, you have other choices if you can’t afford the total cost of your monthly payments. Here’s a look at some alternatives to deferment.

Income-Driven Repayments

For a longer-term solution, you may want to consider signing up for an income-driven repayment plan.

If you qualify, you may be able to reduce your monthly payment based on your income. Enrolling in an income-driven repayment plan won’t have a negative impact on your credit score or history. On certain income-driven repayment plans, student loan balances can be forgiven after 20 or 25 years, depending on the payment plan that the borrower is eligible for.

With an income-driven repayment plan, your monthly payment is based on your total discretionary income. That means if you change jobs, or see a significant increase in your paycheck, you’ll be expected to pay a higher monthly bill on your student loan payment.

Forbearance

Student loan forbearance is another way to suspend or lower your student loan payments temporarily during times of financial stress, typically for up to 12 months. Generally, forbearance is not as desirable as deferment, since you will be responsible for accrued interest when the forbearance period is over no matter what type of federal loan you have.

When comparing deferment vs. forbearance, you’ll want to keep in mind that there are two types of forbearance for federal student loan holders: general and mandatory.

General student loan forbearance is sometimes called discretionary forbearance. That means the servicer decides whether or not to grant your request. People can apply for general forbearance if they’re experiencing:

• Financial problems

• Medical expenses

• Employment changes

General forbearance is only available for certain student loan programs, and is only granted for up to 12 months at a time. At that point, you are able to reapply for forbearance if you’re still experiencing difficulty. General forbearance is available for:

• Direct Loans

• Federal Family Education Loan (FFEL) Program loans

• Perkins Loans

Mandatory forbearance means your servicer is required to grant it under certain circumstances. Reasons for mandatory forbearance include:

• Serving in a medical residency or dental internship

• The total you owe each month on your student loan is 20% or more of your gross income

• You’re working in a position for AmeriCorps

• You’re a teacher that qualifies for teacher student loan forgiveness

• You’re a National Guard member but don’t qualify for deferment

Similar to general forbearance, mandatory forbearance is granted for up to 12 month periods, and you can reapply after that time.

Another Option to Consider: Refinancing

Depending on your personal financial circumstances, another long-term solution could be student loan refinancing. This involves applying for a new loan with a private lender and using it to pay off your current student loans. Qualifying borrowers may be able to secure a lower interest rate or the option to lengthen their loan’s term and reduce monthly payments. Note that lengthening the repayment period may lower monthly payments but will generally result in paying more interest over the life of the loan.

Refinancing could be a good option for borrowers with strong credit and a solid income, among other factors. Unlike an income-driven repayment plan, your monthly payment wouldn’t change based on your income. If you aren’t able to qualify for student loan refinancing on your own, you may be able to apply for refinancing with a cosigner.

Either way, you’ll want to keep in mind that refinancing federal student loans with a private lender means you no longer have access to any federal borrower protections or payment plans. So, if you are taking advantage of things like income-driven payment plans or deferment, you likely don’t want to refinance. But for other borrowers, student loan refinancing might be a useful solution.

If you have more than one student loan, refinancing could also simplify your repayment process.

The Takeaway

If you take out a federal student loan and at some point need to pause or reduce your payments, you may be able to qualify for deferment, forbearance, or an income-driven repayment plan. Each option has its pros and cons.

If you’re considering a private student loan (or refinancing your federal loans), keep in mind that private loans don’t come with government-sponsored protections like forbearance and deferment don’t apply. However, private lenders may offer hardship and deferment programs of their own.

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

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

Deferment FAQ

How long can you defer student loans for?

Depending on the type of deferment you are enrolled in, federal loans can be deferred for up to three years. Private student loans may not offer an option to defer payments, and if they do, the limit will be set by the individual lender.

Why would you defer student loans?

Deferment can be helpful if you are facing a temporary financial hurdle, because they allow you to pause or reduce your payments for a period of time.

Are there any reasons not to defer student loans?

Most loans will continue to accrue interest during periods of deferment. When the deferment is over, this accrued interest is then capitalized on the loan. This means it’s added to the existing value of the loan. Moving forward, interest is charged based on this new total. This can significantly impact the total amount of interest that a borrower has to pay over the life of a loan.

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

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

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.

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Aug

2023

Financial Assistance Options for the Disabled

Financial Assistance for People With Disabilities

By Ashley Kilroy | Family Finances, Life & Career, money | Comments Off

Approximately 26% of Americans live with a disability that can impact cognition and mobility skills, according to the National Center for Birth Defects and Developmental Disabilities. These disabilities can make it challenging to manage daily tasks or full-time employment, putting a significant strain on finances and possibly making it challenging to make ends meet.

On top of that, according to research from Stony Brook University, the University of Tennessee, the National Disability Institute, and the Oxford Institute of Population Ageing, a household containing an adult with a disability (with limited ability to work) requires 28% more income (or an extra $17,690 annually) to meet the same standard of living as a household without someone with a disability.

Fortunately, various programs are available that provide financial assistance to disabled adults. So, whether you need help with housing costs or healthcare, understanding your options can help you get the assistance you need.

Read on for the details.

How Many People Have Disabilities in the U.S.?

As briefly noted above, about 26% of Americans live with a disability; that means more than one in four people are facing issues with mobility or cognition.

That is a significant number. If you or someone you care about is living with a disability, it’s important to know about the programs that can help access aid.

Types of Help Available for People With Disabilities

When it comes to financial help for the disabled, there are many options. Here are some programs that can assist in this situation.

Healthcare

There are healthcare programs that provide financial help for disabled adults, so medical bills don’t seem so overwhelming. Available programs include:

• Medicare. Usually, enrolling in Medicare is a program associated with seniors. However, Medicare also offers medical cost assistance for folks with disabilities under 65 years old. If you just began receiving Social Security Disability Insurance (SSDI) benefits, you usually have to wait 24 months before your Medicare coverage kicks in. However, eligible applicants can forgo the waiting period if they meet specific requirements.

• Medicaid. Medicaid is designed to offset the cost of medical bills for low-income and disabled individuals. To see if you qualify for this federal and state-funded program, you can check with your state’s Medicaid office. Usually, your eligibility depends on your age, income, the number of people in your family, and if you’re disabled.

• Marketplace health insurance coverage. If you don’t qualify for instant Medicare coverage, you can apply for a low-cost private insurance plan to fill in your coverage gap while you complete the waiting period. In addition, depending on your income and level of need, you may qualify for a “premium tax credit,” which can reduce your monthly premium payment.

Housing

Housing assistance can help you identify an affordable place to live, modify your home for your disability, or help you toward a path to live independently. Housing programs that provide financial help for people with disabilities include:

• State-run independent living centers. Living independently can be difficult for those with a disability. That’s why states and local municipalities offer independent living centers to help folks develop their skills to live without assistance.

You can also contact your state’s department of human services or disability office to discover programs that assist with home modifications, locating housing, and housing counseling for first-time home-buyers.

• Housing Choice Vouchers (HCV). Public Housing Agencies (PHA) offer this government-backed housing program to help people with disabilities buy homes and pay housing expenses. However, since every PHA jurisdiction is allowed to decide whether or not HCVs are offered within their jurisdiction, check with your local PHA to see if this program is available in your neck of the woods.

• Non-Elderly Disabled (NED) Voucher. If you’re not a senior but have a disability, you may qualify for a Non-Elderly Disabled (NED) Voucher. This voucher gives you access to housing communities usually explicitly reserved for seniors.

• Public housing. Local housing agencies (HA) offer affordable public housing to low-income families or individuals with disabilities. Each local HA determines eligibility based on your income and disability. Nationwide, close to a million families live in public housing units.

• Low-Income Home Energy Assistance Program (LIHEAP). This government-funded program offers financial help for people with disabilities who have difficulty paying their utility bills. Also, if your utilities are turned off due to unpaid bills, the LIHEAP can provide emergency assistance.

Income and Daily Expenses

If you have a disability, you may also need help paying for basic expenses, such as food and clothing. Here are some programs available that can provide monthly financial assistance for disabled individuals and their families.

• The Social Security Administration. Through the Social Security Administration (SSA), you may qualify for either Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), which both offer financial assistance for people with disabilities. SSDI offers financial support to disabled individuals who have worked and paid Social Security taxes long enough to qualify for assistance (you may be able to have a savings account while on SSDI incidentally). SSI also offers financial support to meet the basic needs (food, clothing, and shelter) of disabled people with limited (or no) income.

Recommended: 9 Common Social Security Myths

• Supplement Nutrition Assistance Program (SNAP). Also known as the food stamp program, SNAP helps low-income or disabled folks suffering financial hardship save on their grocery bill. This can include using food stamps online. As a disabled adult, you could qualify for increased assistance.

• Temporary Assistance for Needy Families (TANF). If your SSI benefits haven’t kicked in yet and you’re tight on cash, you may qualify for TANF. This is another government-backed program that offers grants to families in need of immediate financial support. It can be a source of financial assistance for the disabled in the short-term.

• Veteran disability compensation. If you have a disability that either resulted from or worsened due to service in the military, you could qualify for a government grant or other financial assistance through government disability programs.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and an online bank are more likely than brick-and-mortar banks to offer you the best rates.

Education

If you have a disability but want to achieve a degree, financial assistance for people with disabilities is available. Here are some programs worth exploring.

• Free Application for Federal Student Aid (FAFSA). To ease the financial burden of higher education costs, you can use the FAFSA to determine if you qualify for a variety of aid programs such as the Federal Supplemental Educational Opportunity, Grant Federal Pell Grant, and Federal Work-Study programs.

• State and independent education agencies. You can also seek financial support from your state’s department of education or independent agencies around where you live. Remember that eligibility requirements and guidelines will vary by state and organization.

• Total and Permanent Disability (TPD) Discharge. If you took out federal student loans to pay for higher education costs but can no longer work due to your disability, you could qualify for a TPD discharge. If you’re eligible, the TPD will serve as a disability discharge for student loans, wiping away your student debt.

What’s more, you won’t have to repay your federal loans or meet your TEACH Grant service obligations.

Other Financial Assistance for Disabled Adults

There are other programs that can offer financial assistance for disabled adults. Here are a few other options to consider.

• Achieving a Better Life Experience (ABLE) savings account. Individuals with disabilities may qualify for an ABLE account, a tax-advantaged saving vehicle. This means account holders are not taxed on the earnings if they use the money within the account to cover qualified disability expenses such as education, housing, or medical costs. You can contribute up to $17,000 per year as an account holder as of 2023.

• Disability loans. A disability loan is a personal loan that provides financial support for disabled adults while they wait for disability benefits to kick in. Applicants can use this type of loan to cover living costs, medical bills, or any other expense they have pertaining to their disability. Borrowers must meet the lender’s eligibility requirement to qualify. Remember, the disability loan must be repaid according to the lender’s terms and conditions.

• Disability insurance. Many employers offer disability insurance as part of their compensation package. So, if you become disabled, your disability insurance will pay a portion of your income. Usually, short-term disability insurance supplements your salary for three to six months, while long-term disability can supplement your income from two years until the time when you can retire, depending on the plan and your condition. Plans can pay between 40% and 70% of your salary.

Worth noting: You can buy private disability insurance if you don’t have a plan through your employer.

• Debt repayment plans.You can consider a debt management plan if your credit card debt is weighing you down. With a debt repayment plan, you work with a credit counseling agency that helps you create a solid repayment plan and can even negotiate with your creditors.

• Loan forbearance. Some lenders offer forbearance programs if you’re struggling to pay your mortgage, halting your payments for a provisional amount of time. Your lender may also be willing to revamp the terms of your loan to make payments more manageable.

Tips on Applying for Financial Assistance

Applying for disability benefits from the Social Security Administration (SSA) might be a great place to start sourcing financial assistance if you have recently become disabled from a medical disorder.

To determine if your disability meets the eligibility requirements for benefits, you’ll want to complete the Social Security Disability (SSD) application online, via or at your local Social Security office. The application is detailed and requires documentation to support your case. Preparing carefully in advance may help you improve your chance of approval.

Here are some tips to streamline the process.

• Include detailed responses to all application questions. It’s best to provide as much information on your application as you can. Since the purpose of the application is to prove your disability doesn’t allow you to work, you’ll want to make your answers very detailed. Simply providing “yes” or “no” answers can result in an application denial.

• Submit ongoing medical records. Your doctor will provide your initial medical records for your application proving your disability. In addition, you should provide any other medical records when you receive them. Medical records can include lab tests, medication paperwork, treatment documents, and more. Whenever you receive a medical record from your medical professional’s office, you could forward it to the SSA. The more supporting documentation you have, the better your chances of qualifying.

• Partner with a disability lawyer. Disability lawyers are well-versed on SSD applications. Yes, it could be an additional expense, but their expertise could be advantageous when completing the application. It might even increase the odds of benefit approval.

You can expect the entire application process usually takes anywhere between three to six months. However, the SSA may grant you an expedited process if you have a rare condition or aggressive disease.

In addition to benefits from the SSA, other government and non-profit organizations provide financial assistance to disabled adults and their families. If you’re in need, explore all available options starting with the list above. Once you pinpoint several programs to apply for, gather all your documentation (i.e., income documents, medical records, etc.) in advance to streamline the application process. Keep in mind there might be a waiting period before benefits are approved. So, it’s best to apply as soon as you can.

The Takeaway

Having a disability can be emotionally, physically, and financially challenging. The same applies if you care for a person with disabilities, literally or figuratively. Fortunately, plenty of programs are available to help with medical bills, income, housing, education, and much more. These can be available to help with short-term and ongoing needs. By doing some research and outreach, you may be able to get financial assistance to help with your needs.

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

FAQ

Is there an income limit for these financial assistance options for the disabled?

Income limits vary by the program you’re applying for. For example, the monthly income limit is $1,470 for non-blind disabled SSDI or SSI applicants, and $2,460 for blind SSDI applicants in 2023.

Is there a chance that someone can get denied assistance?

Yes, but it depends on the program. For example, only about 20% to 30% of disability benefits applicants are awarded financial support. Denials can result from a variety of factors, including technical errors and issues with medical information.

What is the criteria for getting financial assistance as a disabled person?

Criteria and eligibility depend on the program. So, before you apply, make sure you understand the requirements of the aid you are hoping to qualify for.

Photo credit: iStock/Renata Hamuda

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

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

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

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

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

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

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

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.

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.

SOBK1122014

Aug

2023

What Happens to a Direct Deposit if It Goes to a Closed Account?

By Jacqueline DeMarco | Family Finances, Life & Career, money | Comments Off

Accidents happen; they’re simply a part of life. And one of the hiccups that can occur is a direct deposit going to a bank account that is closed. Maybe the account holder shut it or the financial institution did, but either way, the money may seem to be lost in the ether. Not a good feeling!

If you’re in this situation or worried about it occurring, relax. The money isn’t going to vanish into a black hole. The issue can usually be resolved, and there are several ways to track and reclaim the funds.

Key Points

• Direct deposits to closed accounts are usually returned to the sender.

• The bank may hold onto the funds and give the account holder time to reopen the closed account.

• Banks may issue a paper check to the individual who owns the closed account.

• To avoid a misdirected deposit, it’s important to double-check account numbers and cancel direct deposits before closing a bank account.

What Is a Closed Account?

A closed account refers to a deactivated or terminated account; in other words, it’s no longer open and available for deposits and withdrawals. The account holder, a custodian or the account, or the banking institution can usually close an account.

Why might a bank close an account? This can be what happens when your bank account is negative and you fail to replenish it and/or pay overdraft fees. Or perhaps the bank has seen activity they don’t think is legitimate, among other reasons.

Once this happens, it’s generally not possible to deposit funds by direct deposit or otherwise into the account.
(We’ll walk through exceptions to this rule shortly.) Often the term “closed account” refers to a checking or savings account, but it can also refer to a derivative trading, auto loan, brokerage, or credit card account.

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What Can Happen to a Direct Deposit if It Is Sent to a Closed Account?

Sometimes, you may have gone to the trouble of setting up direct deposit in the past, but then the account later winds up closed. You might wonder what happens if a direct deposit is sent to a closed account.

Most banks have a standard process they follow when misdirected money is received. Let’s look at a few different situations that can play out.

Direct Deposit Will Be Returned to the Sender

In many cases when someone tries to send money to a closed account, the bank will simply return the funds to the sender or decline the transaction. It can take about five to 10 days for funds to be returned to the sender. This timeline can speed up if the account holder to whom the deposit was intended is in good standing with the bank.

Bank Can Possibly Hold Funds

If a deposit is issued to a closed account, the bank may choose to hold onto the funds and may give the account holder time to reopen a closed bank account. Reopening a closed account, however, is only possible in a couple of scenarios. It’s not a sure thing.

Sometimes, a situation arises with what is known as a dormant account. This means there hasn’t been any activity over a period of time except for interest accruing. You may be able to get the account fully up and running again by contacting your financial institution.

In other cases, you might be able to reopen an account that is frozen. In the case of a frozen account, you may not be able to withdraw funds due to the financial institution’s decision (perhaps there is activity that doesn’t seem legitimate) or a court order (that is, a judgment against you). In some of these scenarios, you may be able to fix a frozen account by talking with your bank, or you may need legal assistance.

Banks may be more willing to work with customers if this is the first time a situation like this (meaning a dormant or frozen account) has happened. If a deposit was intended for you and you are able to reopen your account, this issue can resolve quickly—possibly within 24 hours.

Bank May Issue a Paper Check

Some banks choose to issue a paper check to the individual who owns the closed account. Other times, the company or individual with whom you set up direct deposit may get their funds back from the bank and then may make the payment via a paper check.

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When Does a Bank Return a Direct Deposit to the Sender?

If a bank receives a direct deposit for a closed account or for a faulty account number, they may choose to return the direct deposit to the sender or to simply decline the transaction.

Can a Direct Deposit Reopen a Closed Account?

Occasionally, a direct deposit being sent to a closed account can trigger its reopening. A bank may choose to give a customer the chance to reopen their account. They might hold onto the funds until the account is reopened so they can complete the direct deposit.

This happens very much on a case-by-case, bank-by-bank decision. Communication with your financial institution can be very important in this situation. Next, you’ll learn more about how this works.

What Can I Do if My Direct Deposit Was Sent to a Closed Account?

If a direct deposit was sent into a closed account, the best thing to do is to contact the bank the funds were sent to. This can help you resolve the issue as quickly as possible. Every bank has its own processes for handling situations like this. Yours can help you understand what the best next steps may be.

The bank may or may not play a role in getting the funds to you. In some cases, you may need to deal directly with the payor. But in either case, your financial institution should be able to give you guidance.

Also, remember that while it can be stressful when a direct deposit goes to a closed account, the money won’t be lost. You should be able to get your funds back.

Avoiding a Misdirected Direct Deposit

To avoid having a direct deposit sent to a closed account, it’s best to get ahead of the issue. These are some steps you can take to help avoid a misdirected direct deposit.

• Double-check account numbers on direct deposit forms. Whenever filling out a new direct deposit form, it’s a good idea to double (if not triple) check the account numbers on the form. Likewise, if you are expecting a recurring direct deposit to a closed bank account, it’s important to get it redirected to a current open account and carefully check that the digits are correct.

• Cancel direct deposits before canceling a bank account. To help avoid any issues with direct deposits, it’s a good idea to cancel or alter any direct deposits before closing a bank account. Then, you can make sure payments are heading to a bank account that can receive the funds. That way, any issues can be resolved before the account closes so the money doesn’t get stuck in limbo.

Banking With SoFi

Not happy with your current bank? Why not open a bank account online with SoFi Checking and Savings? We’ll help you bank better. When you open an account with direct deposit, you’ll earn a competitive APY and you won’t pay any account fees. What’s more, qualifying accounts can have direct deposit paid up to two days earlier — among many more perks!

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

FAQ

Can a direct deposit go into a closed account?

What happens if a direct deposit goes to a closed account? There are several outcomes that vary bank to bank. In some cases, the financial institution may hold onto the funds and let the customer reopen their account to claim the money; it might send the funds back to the payer or decline the transaction; or it may choose to issue a paper check to the payee.

How long does it take for a payment to bounce back from a closed account?

If an individual or business issues a direct deposit to a closed account, the bank may choose to either decline the transaction or send the funds back to the payer. If they choose to send the funds back to the payer, it typically takes anywhere from five to 10 days for them to get their money back.

What happens to money refunded to a closed bank account?

A few different scenarios can happen if money is refunded to a closed bank account. The bank to simply decline the transaction or to send the funds back to the payer. Other options include issuing a paper check to the payee or possibly holding onto the funds and giving the payee the option to reopen their closed account.

Photo credit: iStock/MissTuni

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

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

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

SOBK0622012

All You Need to Know About Income-Based Student Loan Repayment

What Is Income-Based Student Loan Repayment?

4 Income-Driven Student Loan Repayment Plans

How Income-Based Student Loan Repayment Works

What Might My Student Loan Repayment Plan Look Like?

Which Loans Are Eligible for Income-Based Repayment Plans?

Serious savings. Save thousands of dollars thanks to flexible terms and low fixed or variable rates.

Pros and Cons of Income-Based Student Loan Repayment

Pros

Cons

Student Loan Refinancing Tips From SoFi

FAQ

Is income-based repayment a good idea?

What is the income limit for income-based student loan repayment?

What are the advantages and disadvantages of income-based student loan repayment?

How does income-based repayment differ from standard repayment?

Who is eligible for income-based repayment plans?

How is the monthly payment amount calculated in income-based repayment plans?

Refinancing Student Debt With a Cosigner

What Is a Cosigner on a Loan?

Can a Cosigner Refinance a Student Loan?

Finding a Cosigner

Pros and Cons of Having a Cosigner

Using a Cosigner when Refinancing Your Student Loans

Things to Consider if You’re Asked to Cosign a Loan

Refinancing Student Loans With SoFi

FAQ

Do I need a cosigner for student loan refinance?

Can I consolidate my student loans with a cosigner?

Can a cosigner become the primary borrower?

Examining How Student Loan Deferment Works

What Is Student Loan Deferment?

How Does Student Loan Deferment Work?

Why Defer Student Loans

Why Not Defer Student Loans

Pros and Cons of Student Loan Deferment

Types of Student Loan Deferment

In-School Deferment

Unemployment Deferment

Economic Hardship Deferment

Military Deferment

Cancer Treatment Deferment

Other Types of Deferment

Consequences of Defaulting on Federal Student Loans

Consequences of Defaulting on Private Student Loans

Who Is Eligible for Student Loan Deferment?

What if You Have Private Student Loans?

The Limits of Student Loan Deferment

Other Options for Reducing Federal Student Loan Payments

Income-Driven Repayments

Forbearance

Another Option to Consider: Refinancing

The Takeaway

Deferment FAQ

How long can you defer student loans for?

Why would you defer student loans?

Are there any reasons not to defer student loans?

Financial Assistance for People With Disabilities

How Many People Have Disabilities in the U.S.?

Types of Help Available for People With Disabilities

Healthcare

Housing

Income and Daily Expenses

Education

Other Financial Assistance for Disabled Adults

Tips on Applying for Financial Assistance

The Takeaway

FAQ

Is there an income limit for these financial assistance options for the disabled?

Is there a chance that someone can get denied assistance?

What is the criteria for getting financial assistance as a disabled person?

What Happens to a Direct Deposit if It Goes to a Closed Account?

What Is a Closed Account?

What Can Happen to a Direct Deposit if It Is Sent to a Closed Account?

Direct Deposit Will Be Returned to the Sender

Bank Can Possibly Hold Funds

Bank May Issue a Paper Check

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!

When Does a Bank Return a Direct Deposit to the Sender?

Serious savings. Save thousands of dollars
thanks to flexible terms and low fixed or variable rates.

Student Loan
Refinancing

Personal
Loans

Online
Investments