InvestSLR Archives | Page 16 of 81

Oct

2023

A Look Into the Public Service Loan Forgiveness Program

By Maureen Shelly | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

If you are employed by a government or a nonprofit, you might be able to get forgiveness for the remaining balance on your federal student loan through the Public Service Loan Forgiveness Program (PSLF).

Created by the Department of Education (DOE) in 2007, PSLF is intended to help public-service professionals who may not earn large salaries and must struggle to repay their federal student loans. In this context, many teachers, firefighters, and social workers qualify.

The program has drawn frequent criticism for being hard to navigate and difficult to qualify for, charges that the DOE says it is addressing to make sure as many people as possible can access PSLF. To that end, the DOE is conducting a payment count adjustment that will update borrowers’ progress toward PSLF. To become eligible for the adjustment, borrowers with privately held Perkins or FFEL Program loans must first submit a Direct Consolidation Loan application. The deadline for submission is April 30, 2024.

Below is the latest information on PSLF eligibility and student debt forgiveness.

What is Public Service Loan Forgiveness?

The PSLF program provides professionals a way out of their federal student loan debt by working full-time in public service. The remaining balance on your Direct Loans will be forgiven—meaning you will not have to pay it back–after you’ve made the equivalent of 120 qualifying monthly payments under an accepted repayment plan and while working full-time for an eligible employer.

What Are Public Service Loan Forgiveness Jobs?

The question for many people is who qualifies for PSLF? The jobs include teachers, firefighters, first-responders, nurses, military members, and doctors. But with this program, it is not only the type of job you have that determines if you can get forgiveness but also the type of employer. That is crucial. Qualifying employers include federal, state, local, tribal government and non-profit organizations.

To find out if your employer qualifies for PSLF, you can search through the Federal Student Aid search tool.

💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

Who Is Eligible for the Public Service Loan Forgiveness Program?

How does PSLF work? To qualify, borrowers must meet certain eligibility criteria. They include:

Work for a Qualified Employer

Part of PSLF eligibility requires working for a qualified government organization (municipal, state, federal, military, or tribal) or a qualified 501(c)(3) non-profit organization. Full-time AmeriCorps or Peace Corps volunteers are also eligible for PSLF. (Learn more about military student loan forgiveness.)

Some other types of non-profits also qualify, but not labor unions, political organizations, and most other non-profits that don’t qualify for 501(c)(3) status. Working for a government contractor doesn’t count; you have to work directly for the qualifying organization.

Only full-time workers are eligible — that is, workers who meet their employer’s definition of full-time or work a minimum of 30 hours per week. People employed at multiple qualifying organizations in a part-time capacity can be considered full-time as long as they’re working a combined 30 hours per week.

Note that time spent working in religious instruction or worship does not count toward meeting the full-time requirement.

Recommended: How To Get Out of Student Loan Debt

Having Eligible Loans

Eligible loans include Direct loans such as Stafford loans, PLUS loans (but not Parent PLUS loans), and Federal Direct Consolidation loans.

If you want to have your Federal Family Education Loan (FFEL) or Perkins loans forgiven, you’ll have to consolidate them into a Direct Consolidation Loan first. Any payments you made on the FFEL Program loans or Perkins Loans before you consolidated won’t count toward the necessary payments.

Private student loans are not eligible for Federal forgiveness programs.

Recommended: Student Loan Forgiveness Guide

Applying for Public Service Loan Forgiveness

There are a few hoops to jump through in order to pursue PSLF. To apply for the program, you’ll need to take the following steps:

1. Consolidate FFEL Program and Perkins Loans

Borrowers with FFEL Program and Perkins Loans must consolidate them with a Direct Consolidation Loan. Consolidation applications must be submitted no later than April 30, 2024. This is necessary because if you consolidate your loans afterward, you won’t get credit for any qualifying payments you made on those loans. Already consolidated your Direct loans? Consider consolidating your Perkins Loans separately and start making new qualifying payments.

2. Sign Up for an Income-Driven Repayment Plan

There are several income-driven repayment plans to choose from.They are designed to make your student loan debt more manageable by giving you a monthly payment based on your income and family size.

The latest IDR program is called the Saving on a Valuable Education (SAVE) Plan. It lowers payments for almost all people compared to other IDR plans because your payments are based on a smaller portion of your adjusted gross income (AGI). Also, if you make your full monthly payment, but it is not enough to cover the accrued monthly interest, the government covers the rest of the interest that accrued that month.

Note: As a result of the CARES Act, months that you were in repayment while the requirement to make a payment was paused still count as qualifying payments if you also certify your employment for the same period of time.

3. Certify Your Employment

To do this, print out an Employment Certification form and get your employer to fill it out and send it in for approval. The Federal Student Aid website suggests filling this form out annually or at least every time you switch jobs.

You can also use the Public Service Loan Forgiveness Help Tool at StudentAid.gov/pslf/ to find qualifying employers and get the forms that you need.

4. Make 120 Qualifying Monthly Payments

You must make these payments while you’re employed by a qualified public service employer. Switching employers isn’t a problem, so long as you are still working for a qualifying organization.

5. Apply for Forgiveness

After you make the final payment, submit your application for forgiveness.

Current State of the Program

Because the program was created in 2007, the first borrowers to qualify for loan forgiveness applied in 2017. However, early estimates by the Government Accountability Office (GAO) reported the denial rate as more than 99%. At the same time, many borrowers weren’t even aware that the forgiveness program exists.

In 2022, the Biden Administration addressed these issues by introducing a “limited PSLF waiver,” which allowed student loan holders to receive credit for payments that previously didn’t qualify for PSLF. The waiver deadline expired on Oct. 31, 2022.

However, post-deadline, the effort to make it easier to qualify for PSLF is continuing. The DOE extended elements of the waiver through the IDR account adjustment program. To be eligible for the adjustment, Perkins and FFEL Program loan holders must submit a Direct Consolidation Loan application no later than April 30, 2024.

President Biden announced in October 2023 that during his administration the DOE had secured relief for “almost $51 billion for 715,000 public servants through Public Service Loan Forgiveness (PSLF) programs, including the limited PSLF waiver and Temporary Expanded PSLF (TEPSLF).”

Beware of false communications from scammers posing as the DOE or your loan servicer. Read up on the latest student loan forgiveness scams.

Pros and Cons of the Public Service Loan Forgiveness Program

The advantages of the program are pretty straightforward. The disadvantages have more to do with how the program is executed in the real world.

Pros of PSLF

1. The balance of your student loans is forgiven after a set time. This works as a kind of bonus to make up for the low pay earned by people working in the public sector.

2. The amount forgiven usually isn’t considered income, so you aren’t taxed on it (and you don’t have to save additional money to account for the IRS bill). With other loan forgiveness programs, you might see a big tax bill.

3. Professionals in qualifying jobs are making a difference, and your government appreciates it enough to give you a break on your federal student loans.

4. You may pay less monthly because you’re on an income-driven plan. This means paying out less of your hard-earned cash every month.

Cons of PSLF

1. The program is only open to those with certain types of employers. And it’s contingent on staying with a qualifying public service employer for 10 years. With the SAVE program, qualifying loan holders may be able to pay off their federal student loans no matter who their employer is.

2. Some borrowers aren’t aware of the program, partly due to a lack of education by employers, loan servicers, and schools.

3. There are a lot of hoops to jump through to get your loans forgiven. Plus, if you don’t jump through a hoop properly, you can jeopardize your forgiveness.

4. The extra money that can potentially be earned from working for a corporate employer may help you pay off your loans sooner than through PSLF.

5. You might end up paying more in interest by making 120 payments than if you budgeted to aggressively repay your loans in less than 10 years.

Alternatives to the Public Service Loan Forgiveness Program

Another program available to some individuals is the Teacher Loan Forgiveness program. This program is available to full-time teachers who have completed five consecutive years of teaching in a low-income school. This program has strict eligibility requirements that must be met in order to receive forgiveness.

If you receive Teacher Loan Forgiveness, the five-year period of service that supported your eligibility will NOT count toward PSLF. However, the limited PSLF waiver discussed above temporarily waived this restriction for individuals who previously received Teacher Loan Forgiveness.

These federal forgiveness programs do not apply to private student loans. If you are looking for ways to reduce your interest rate or monthly payments on private student loans, refinancing with a private lender can be an option. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

It is important to mention that refinancing your federal student loans with a private lender may make you ineligible for the Public Service Loan Forgiveness program, should you choose that route.

The Takeaway

The Public Service Loan Forgiveness program is one way for eligible borrowers to have their federal student loans forgiven. Recent changes to the program by the Biden Administration promises to make qualifying for PSLF easier. However, if you have student loans that aren’t eligible for PSLF, consider taking advantage of either refinancing or income-driven repayment.

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.

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.

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.

SOSL0923006

Oct

2023

How Are IPO Prices Set?

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Before listing a stock for sale on a public exchange, companies undergo a rigorous process of preparation and compliance — which includes a suggested starting price for the shares they plan to sell in their initial public offering (IPO).

This price then creates an IPO valuation for the company.

Companies and their bankers use a variety of factors and steps to determine the IPO price. Here’s a closer look at the IPO valuation process.

What Is IPO Price?

An IPO price is the price at which a company’s stock is sold to accredited and institutional investors right before the stock trades on a public exchange. The purpose of the public offering price is to attract investors to buy the shares.

IPO stocks are considered high-risk investments, and while some companies may present an opportunity for growth, there are no guarantees. Like investing in any other type of stock, it’s essential for investors to do their due diligence.

The investment banks that underwrite a company’s public offering set the IPO price, using several variables including an analysis of the company’s growth potential, a comparison to related firms, and a determination of market demand conditions.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

[ipo_launch]

Initial Public Offerings 101

When privately owned companies, such as unicorn companies, begin to sell shares of stock to the public, they hold an initial public offering, or IPO. Before an IPO, companies are usually owned by the founders, employees, and early investors, such as venture capital firms and angel investors. The process of selling shares to investors is called going public. Typically the initial offering is limited, and there are a number of people eligible for those shares first.

For this reason, it can be difficult for individual investors to buy IPO stock when it’s first issued. In most cases, individuals can trade IPO shares on the secondary market through their brokerage. In some cases, a brokerage may set certain requirements in order for individual investors to buy shares.

An IPO can help a company raise significant capital. It can also be a source of publicity. However, the IPO process is also time-consuming and expensive. Once a company has gone public, it faces new challenges such as regulatory scrutiny and an increased need to please shareholders.

Recommended: What Is an IPO and How Does it Work?

Why Do Companies Go Public?

The main reason companies choose to go public is to raise money. Holding an IPO can create significant value for a company and its management. In some cases, IPOs raise millions and even billions of dollars for the company, but some companies also face losses after an IPO.

Bringing in public investment benefits the business, but it also benefits early investors. These initial investors, who have invested time and money in a company, can sell their shares following an IPO, unlocking shareholder value.

An IPO can also benefit employees of the company. That’s because when an individual joins a company, sometimes they are granted employee stock options. Companies will often give early employees the options over several months or years — a process called vesting. Usually, employees must wait to sell their vested stock until the end of a lock-up period — a period after an IPO during which employees have to wait before selling their shares.

Other reasons companies go public are to gain media attention, grow a broad base of financial supporters, and create a windfall for venture capital firms that helped fund the company in its early stages.

The number of publicly traded, exchange-listed companies in the U.S. has decreased from the peak in the mid-to-late 1990s when it reached about 8,000. In 2021, the figure was closer to 6,000 companies that traded on different stock exchanges, such as the New York Stock Exchange (NYSE) and Nasdaq.

Steps in IPO Valuation

When a company decides to hold an IPO, they work with an investment bank to determine the company’s IPO valuation. The process of investment bankers handling an IPO is called underwriting.

How Underwriting Works in IPOs

Each underwriting process can be slightly different, but investment bankers’ factors in determining IPO prices and valuations are essentially the same. Some questions include:

• Why has the company decided to go public?

• What is the current status of the market?

• Who are the company’s competitors?

• What are the company’s assets?

• How much has been invested in the company and by whom?

• What is the history of the company and its team?

• What are the company’s prospects for growth?

Recommended: What Is IPO Due Diligence?

Process of Determining IPO Prices

The rules of supply and demand apply to how the company and its underwriters will set an IPO price. Essentially, the underwriters must determine the demand for the shares based on the supply of shares that will be offered and sold to investors. These underwriters try to figure out what investors are willing to pay for each share of a company when it decides to go public.

To create a balance in this tradeoff that makes both existing and new investors happy, the company must decide how many new shares to issue and the estimated IPO price they plan to sell each share. The company’s executives and their investment bank determine the number of new shares by deciding how much money they hope to raise and how much ownership they are willing to give up.

Institutional Investors in IPO Process

Once executives and bankers decide on the number of new shares to issue, they reach out to institutional investors to start asking them how many shares they are interested in buying. Institutional investors include hedge funds, mutual funds, high net worth individuals, and pension funds in good standing with the investment bank.

Days before the IPO, the institutional investors place requests for how many shares they actually want to purchase. The company and its investment bankers then set the price for the IPO, and they know how much money they will raise.

The underwriting investment bank goes through the complex process of selling and allocating all the newly public shares to the institutional investors. They want to create a balance of different types of investors.

Retail Investors in IPO Process

Unfortunately for the at-home retail investor, it can be difficult to buy a stock at its IPO price. However, some brokerage platforms, like SoFi, have started to offer IPO Investing services that allow individuals to buy closer to the IPO price.

Determining Opening Price Point

Before the first day of trading, the stock exchanges on which the company decides to list look at all the incoming orders for the newly issued stock, which may be either buy or sell orders, and report the predominant price.

They then go through a process of price discovery to determine what the opening price will be. The goal is to have the maximum number of trades be executed from all the placed orders. At Nasdaq, this is done electronically, while human traders are involved at the NYSE.

Following this price discovery period, the opening price point is set, and the trading day continues. The stock is open for public trading.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Post-IPO Trading

In an ideal situation for the company and the underwriters, the stock’s closing price is relatively close to the opening price on opening day. This means the shares were priced accurately for what investors are willing to pay and the company had an appropriate valuation.

However, the IPO price isn’t necessarily a good indicator of the value of a stock. Broader market interest in the stock is impossible to plan for, and IPO conditions differ from the company’s long-term presence in the market.

IPO Price vs Opening Price: Similarities & Differences

Many analysts use the terms IPO price and opening price interchangeably when discussing a newly public company. However, there is a distinction between the two price points.

The IPO price is the price at which a company’s shares are first offered to institutional and accredited investors. The underwriters of the IPO sell the newly issued public share to these investors and clients at the initial public offering price.

In contrast, the opening price is the price at which the stock trades when it first begins trading on the stock market. The two prices are usually very close, but the opening price may be higher or lower than the IPO price.

Do IPO Stocks Always Rise?

IPO stocks don’t always rise in price once they are available for public trading. Many highly talked-about IPOs have disappointed in their opening weeks. This may be because investors feel these companies are overvalued and don’t want to risk putting money into them when they haven’t yet shown a profit.

It can take time for a stock to increase following an IPO, so the initial sale isn’t necessarily an indicator of long-term success or failure. The initial stock offering doesn’t always result in an immediate rise, but the influx of new capital can allow the company to grow.

Many stocks experienced tumultuous action for months before seeing a steadier climb. As an investor, looking for companies with a solid team and business plan, rather than just hype and a high valuation, can result in long-term portfolio growth.

How to Invest in IPOs

You can expose yourself to IPO stocks through an exchange-traded fund (ETF). Certain ETFs offer a weighted balance of newly public stocks and are adjusted over time. By diversifying your portfolio, you benefit from any gains while avoiding steep losses.

Also, some online brokerages, like SoFi, offer IPO investing for retail investors.

But, as mentioned above, IPOs can be very volatile. Although there is potential for significant returns, investors can also see severe losses in the weeks and months after a company goes public.

Rather than investing immediately, you can wait a quarter or six months to see how a company’s stock fluctuates following the IPO and then decide whether to invest. Stocks can often fall to form a base price before beginning to rise again.

The Takeaway

It’s exciting when a company opens up to public investment. Although the IPO price is set as part of the lengthy IPO process, once the stock goes public all bets are off. Now the market determines the stock price, and the valuation of the company itself.

That’s one reason it can be challenging for most investors to know when and how to add new IPO stocks to their portfolios. Ultimately, investing in newly public stocks can be risky; the decision should be based on financial goals, time horizon, and risk tolerance.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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

FAQ

Is it good to buy at IPO price?

Like all investments, there is risk in buying a stock when it goes public. IPOs can be suitable investments if the stock price increases after the IPO, but there is also a risk that the stock price could decrease. When buying a stock at an IPO price, investors don’t have the benefit of history to help analyze the stock.

How is an IPO price determined?

The IPO price is the initial public offering price of a stock. The IPO price is the price the underwriters will sell stock to institutional and accredited investors. The investment bank that works with the company going public determines the IPO price.

Can you lose money on an IPO?

Yes. An investor can lose money on an IPO if the company’s stock price falls below the price at which the investor bought the shares.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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.

SOIN0623083

Oct

2023

Are Refinanced Student Loans Tax Deductible?

By Melissa Brock | Fresh Out of School, Student Loans, student_loan | Comments Off

While the principal of a student loan isn’t tax deductible, the interest you pay on it can be — and that includes refinanced student loans. If you’re eligible, you may be able to deduct up to $2,500 from your taxable income.

The amount you can deduct is dependent on your income; as you earn more, the amount you can deduct is decreased and eventually eliminated. You also must have paid interest on a qualified student loan – that is, one taken out to pay for qualified higher education expenses, such as tuition, books, or room and board.

Here’s what to know about refinanced student loans and tax returns, including when interest on student loans is tax deductible, how tax deductions differ from tax credits, and how refinancing can affect taxes.

What Is a Tax Deduction?

For starters, it’s helpful to review what a tax deduction is: A tax deduction lowers your taxable income by reducing the amount of your income before you or a tax professional calculates the tax you owe.

For example, a $100 exemption or deduction reduces your taxable income by $100. So it would reduce the taxes you owe by a maximum of $100 multiplied by your tax rate, which can range from 0% to 37%. So your deduction could reduce your taxes between $0 to $37.

And before considering how refinancing affects your taxes, it’s helpful to review what happens when you refinance a student loan: Your lender “swaps out” (or “pays off”) your existing loans and gives you a new loan with new terms. A student loan refinance may be beneficial if you get a lower interest rate and/or a lower monthly payment, which can save you money in the long run. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

If you’re considering refinancing federal student loans, however, it’s important to understand that you would lose access to certain federal benefits and protections, such as Public Service Loan Forgiveness, federal deferment and forbearance as well as income-driven repayment options.

💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

The Difference Between a Tax Deduction and a Tax Credit

Keep in mind that a tax deduction is not the same as a tax credit. While a tax deduction reduces your taxable income, a tax credit directly reduces your taxes.

Tax credits give you a dollar-for-dollar reduction on your taxes. In other words, if you qualify for a $2,000 tax credit, the tax credit lowers your tax bill by that exact amount — $2,000.

How Does Paying Student Loans Affect Taxes?

If you paid qualified student loans during the year, you may be eligible for the student loan interest tax deduction. This deduction can reduce your taxable income by the amount of student loan interest you paid during the year — up to $2,500.

Note that the interest on student loans is tax deductible, not your total payment amount (which includes the principal). You can claim it without having to itemize deductions on your tax return because it’s taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040.

Who Is Eligible for the Student Loan Interest Deduction?

The student loan interest deduction is an “above the line” deduction, which means that it is deducted to calculate your adjusted gross income (AGI).

As mentioned earlier, the interest paid must be for a qualified student loan that you take out for yourself, your spouse, or a dependent for qualified undergraduate or graduate education expenses, such as tuition, books, or room and board. In addition, the expenses must have been incurred within “a reasonable period of time” prior to or after taking out the loan, according to the IRS.

For taxable years beginning in 2023, your modified adjusted gross income (MAGI) must also amount to less than $80,000 ($160,000 if filing a joint return). Your amount will be phased out (reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

You cannot claim the deduction at all if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). You also will not qualify for the deduction if you are married and filing separately.

Recommended: How Income Tax Withholding Works

Are Refinanced Student Loans Tax Deductible?

Yes, you can get a tax deduction on the interest you’ve paid on refinanced or consolidated student loans as long as the new loan refinanced qualified student loans.

Refinancing affects your taxes only insofar as the refinancing might change how much interest you pay in a given year – and thus, how much you can deduct. For instance, if refinancing lowers the amount of interest you pay below the $2,500 deduction amount, then that would mean you can’t deduct as much on your taxes. Still, refinancing may save you more money in the long run than a student loan interest deduction because it’s a deduction, not a tax credit. It’s important to do the math or consult a tax professional before you make a final decision.

Recommended: Where Is My Tax Refund?

Refinance Qualifications

It’s also worth taking a look at common eligibility requirements for a refinance. For most borrowers, the soonest you can refinance is usually after graduating. In addition to a degree, you often need to have:

• A debt-to-income (DTI) ratio under 50%: Your DTI refers to how much of your income goes toward debt and how much goes toward your regular income. It’s best to keep your DTI under 50%, but being over doesn’t necessarily mean you won’t qualify for a student loan refinance.

• Minimum credit score of 650: Your credit score is a three-digit number that shows how well you pay back debt. It’s best to have a minimum credit score of at least 650 to be eligible for student loan financing. Again, your personal situation will be considered before determining whether you qualify for a refinance.

• A steady job and/or consistent income: You may need to prove that you have a steady job and have enough savings to be able to pay for at least two months’ worth of regular expenses.

• A certain balance amount: In most cases, lenders will require you to have a certain minimum balance on your student loans in order to qualify for a refinance.

Refinancing Your Student Loans With SoFi

If you’re thinking about refinancing your student loans, SoFi offers flexible terms with fixed or variable rates. You can apply online, and there aren’t any fees.

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

FAQ

What refinance costs are tax deductible?

When it comes to refinancing and taxes, lenders usually don’t charge any upfront fees to refinance your student loans, which means that there aren’t any refinance costs to deduct.

When you make payments on a qualified student loan — including refinanced student loans — you may be eligible for the student loan interest deduction.

Is it worth it to claim student loan interest?

Yes, when it comes to student loans and tax returns, you may be able to deduct up to $2,500 from your taxable income if you’re eligible.

To be able to claim the deduction, your modified adjusted gross income (MAGI) must be less than $80,000 ($160,000 if filing a joint return). You’ll also experience a phased-out deduction if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). It disappears entirely at MAGIs above $90,000 and $180,000 for joint filers.

Are student loan payments tax deductible?

Only the interest you pay on your student loans is tax deductible. Whole student loan payments (which include principal) are not tax deductible.

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.

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

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

Photo credit: iStock/Drazen Zigic
SOSL09230683

Oct

2023

Student Loans: Refinance vs. Income Driven Repayment

Refinancing Student Loans vs Income Driven Repayment Plans

By Melissa Brock | Debt Payoff, Fresh Out of School, Student Loans, student_loan | Comments Off

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

If you’re having trouble making your student loan payments or just want to know if you can make a change to your payments, it’s worth looking into the options, such as refinancing student loans or an income-driven repayment plan.

Student loan refinancing is available for both private and federal student loans, while income-driven repayment plans are an option only for federal student loans. Proposed changes to income-driven repayment would lower monthly payments and curtail interest accrual, making the plans a better deal for borrowers. Here’s what to know about both options as well as the pros and cons of each.

What Is Student Loan Refinancing?

When you refinance a student loan, a private lender pays off your student loans and gives you a new loan with new terms. For example, the interest rate and/or the loan term may change. You can’t refinance loans through the federal government, however. You can only refinance federal student loans (or private student loans) through a private lender.

If you’re a graduate with high-interest Direct Unsubsidized Loans, Graduate PLUS loans, and/or private loans, a refinance can change how quickly you pay off your loans and/or the amount you pay each month.

💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Pros of Student Loan Refinancing

When considering refinancing your student loans, there are several benefits. You can:

• Lower your monthly payments: Lowering your monthly payment means you can save money or spend more in other areas of your life instead of putting that cash toward paying student loans. (Depending on the length of the loan term, however, you may end up paying more in total interest.)

• Get a lower interest rate than your federal student loan interest rates: This can result in paying less interest over the life of the loan (as long as you don’t extend your loan to a longer term). A student loan refinance calculator can show you the interest rate you qualify for.

• Decrease your debt-to-income ratio (DTI): Your DTI compares your debt payments to your income. So if you lower your monthly payments, you could be lowering your DTI ratio — and a lower DTI can help when applying for a mortgage or other type of loan.

• Remove a cosigner. Many borrowers who took out undergraduate loans did so with a parent or other cosigner. Refinancing without a cosigner allows you to regain some financial independence and privacy, provided you have a strong credit history.

Cons of Student Loan Refinancing

That said, refinancing federal loans can have some drawbacks as well. They include:

• No longer being able to take advantage of federal forbearance: When you refinance your student loans through a private lender, you no longer qualify for federal student loan forbearance, such as the Covid-19-related payment holiday. However, it’s worth noting that some private lenders offer their own benefits and protections after you refinance.

• No longer being able to tap into income-driven repayment plans, forgiveness programs, or other federal benefits: Refinancing federal student loans means replacing them with private loans — and forfeiting the protections and programs that come with them.

• Possibly seeing your credit score get dinged: Your lender may do a hard credit history inquiry (or pull), which can affect your credit score.

For a deeper dive into the topic, check out our Student Loan Refinancing Guide.

What Are Income Driven Repayment Plans?

Put simply, income-driven repayment plans are plans that base your monthly payment amount on what you can afford to pay. Under the Standard Repayment Plan, you’ll pay fixed monthly payments of at least $50 per month for up to 10 years. On the other hand, an income-driven repayment plan considers your income and family size and allows you to pay accordingly based on those factors — for longer than 10 years and with smaller loan payments. Income-driven repayment plans are based on a percentage of your discretionary income.

You can only use an income-driven repayment plan for federal student loans. If you qualify, you could take advantage of four types of income-driven repayment plans:

• Saving on a Valuable Education (SAVE) Plan: You typically pay 10% of your discretionary income over the course of 20 years (for loans for undergraduate study) or 25 years (for loans for graduate or professional school).

• Pay As You Earn Repayment Plan (PAYE Plan): You typically pay 10% of your discretionary income but not more than the 10-year Standard Repayment Plan amount over the course of 20 years.

• Income-Based Repayment Plan (IBR Plan): As a new borrower, you typically pay 10% of your discretionary but never more than the 10-year Standard Repayment Plan amount over the course of 20 years. If you’re not a new borrower, you’ll pay 15% of your discretionary income but never more than the 10-year Standard Repayment Plan amount over the course of 25 years.

• Income-Contingent Repayment Plan (ICR Plan): As a new borrower, you typically pay the lesser of the two: 20% of your discretionary income or a fixed payment over the course of 12 years, adjusted according to your income over the course of 25 years.

How do you know which option fits your needs? Your loan servicer can give you a rundown of the program that may fit your circumstances. You must apply for an income-driven repayment plan through a free application from the U.S. Department of Education.

Note: Every income-driven plan payment counts toward the Public Service Loan Forgiveness Program (PSLF). So if you qualify for this program, you may want to choose the plan that offers you the smallest payment.

Pros of Income Driven Repayment Plans

The benefits of income-driven repayment plans include the following:

• Affordable student loan payments: If you can’t make your loan payments under the Standard Repayment Plan, an income-driven repayment plan allows you to make a lower monthly loan payment.

• Potential for forgiveness: Making payments through an income-driven repayment plan and working through loan forgiveness under the PSLF program means you may qualify for forgiveness of your remaining loan balance after you’ve made 10 years of qualifying payments instead of 20 or 25 years.

• Won’t affect your credit score: This may be one question you’re wondering, whether income-based repayment affects your credit score? The answer is: no. Since you’re not changing your total loan balance or opening another credit account, lenders have no reason to check your credit score.

Cons of Income Driven Repayment Plans

Now, let’s take a look at the potential downsides to income-driven repayment plans:

• Payment could change later: The Department of Education asks you to recertify your annual income and family size for payment, which is recalculated every 12 months. If your income changes, your payments would also change.

• Balance may increase: Borrowers under the PAYE or IBR plan receive a three-year interest subsidy from the government. However, after the subsidy expires, borrowers are responsible for paying the interest that accrues on subsidized and unsubsidized loans.

• There are many eligibility factors: Your eligibility could be affected by several things, including when your loans were disbursed, your marital status, year-to-year changing income, and more.

Refinancing vs Income Driven Repayment Plans

Here are the factors related to refinancing and income-driven repayment plans in a side-by-side comparison.

	Refinancing	Income-Driven Repayment Plan
Lowers your monthly payments	Possibly	Possibly
Changes your loan term	Possibly	Yes
Increases your balance	Possibly	Possibly
Is eventually forgiven if you still haven’t paid off your loan after the repayment term	No	Yes
Requires an application	Yes	Yes
Requires yearly repayment calculations	No	Yes

Choosing What Is Right for You

When you’re considering whether to refinance or choose an income-driven repayment plan, it’s important to take into account the interest you’ll be paying over time. It could be that you will pay more interest because you lengthened your loan term. If that’s the case, just make sure you are comfortable with this before making any changes. Many people who refinance their student loans do so because they want to decrease the amount of interest they pay over time — and many want to pay off their loans sooner.

That said, if you’re wondering whether you should refinance your federal student loans, you’ll also want to make sure you are comfortable forfeiting your access to federal student loan benefits and protections.

Refinancing Student Loans With SoFi

Refinancing your student loans with SoFi means getting a competitive interest rate. You can choose between a fixed or variable rate — and you won’t pay origination fees or prepayment penalties.

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

FAQ

Is income-contingent repayment a good idea?

This plan may be a good idea for some borrowers because the repayment terms are based on the lesser of these two: 20% of your discretionary income or a fixed payment over the course of 12 years, adjusted according to your income over the course of 25 years. Any remaining balance will be forgiven if you haven’t repaid your loan in full after 25 years. Because of the longer repayment timeline, the drawback is borrowers may pay more over time. It also won’t provide payments as low as the SAVE Plan.

What are the disadvantages of income based repayment?

The biggest disadvantage of income-based repayment is that you stretch out your loan term from the standard repayment plan of 10 years to longer — up to 25 years. This means that more interest will accrue on your loans and you could end up paying more on your loan before your loan term ends.

Does income based repayment get forgiven?

Yes! Through the Public Service Loan Forgiveness (PSLF) program, student loans can be forgiven after making 10 years of qualifying, consecutive payments. Additionally, borrowers with an income-driven repayment plan can have the remaining balances on their loans forgiven after 20 or 25 years.

Photo credit: iStock/m-imagephotography

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.

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.

SOSL09230682

Oct

2023

Who Qualifies for FAFSA? Find Out if You Do

By Jennifer Calonia | Going to College, Student Loans, student_loan | Comments Off

Editor’s Note: The new, simplified FAFSA form for the 2024-2025 academic year is available, although applicants are reporting a number of glitches. Try not to worry, take your time, and aim to submit your application as soon as possible.

Students who are enrolled at least half-time at an eligible school, are a U.S. citizen or eligible non-citizen, and meet other requirements can receive financial aid through the Free Application for Federal Student Aid (FAFSA®).

According to Education Data Initiative, the average cost for undergraduate students attending a four-year private nonprofit institution is $38,768 in tuition and fees per year. For students attending in-state public four year institutions, the average is $9,678 in tuition alone. Living on campus bumps these numbers up to $55,840 and $26,027 per year, respectively.

If you can’t afford to pay for this cost out-of pocket, understanding the FAFSA requirements can help you possibly fund this worthwhile expense.

What Is FAFSA?

The FAFSA is the official application form to request financial aid for higher education from the U.S. government. It determines whether undergraduate and graduate students are eligible to receive federal grants, work-study, and federal student loans. Federal aid can only be used toward qualifying college expenses.

It’s also often used by states and schools to see if you’re eligible for its student aid programs. Some private entities might also use it to determine your eligibility for their own financial aid programs.

Recommended: What Costs Does a Student Loan Cover?

How FAFSA Works

Students must complete the FAFSA before each college year. Applications must be received by the June 30 deadline. However, you can begin submitting your FAFSA for the following school year starting on October 1 (for the 2024-25 FAFSA, the FAFSA will be available in December 2023), and states and colleges often have earlier deadlines for state- and school-sponsored aid.

Some federal aid is granted on a first-come, first-served basis. Many of the aid programs are based on need, though some — like Direct Unsubsidized Student Loans and Direct PLUS Loans — are not.

To start, you’ll have to create a Federal Student Aid (FSA) ID online. If you’re a dependent student, one of your parents also needs to create their own FSA ID. While filling out the FAFSA, you may need to reference or submit supporting documentation, such as your Social Security number, bank account statements and tax return details, and possibly a parent’s financial paperwork, too.

After submitting the FAFSA, you’ll receive a Student Aid Report (SAR), which is an overview of the information you included on your FAFSA. Once your FAFSA is processed, you’ll receive a financial aid offer from your school. It will outline the types of federal student aid you’re eligible for, the amounts, and instructions on how to accept the award offer.

After you’ve selected the financial aid options you want to accept, the funds will be sent directly to your school. Then, your school will apply the funds to your unpaid account balance.

The FAFSA may also be used to apply for financial aid for summer classes.

Recommended: 2024-2025 FAFSA Changes, Explained

FAFSA Requirements

FAFSA qualifications include academic and financial criteria. Although some federal aid programs, like the federal Pell Grant, require you to demonstrate financial need, you might still qualify for other federal aid options if you meet the remaining FAFSA eligibility requirements.

Education Requirements

The level of education you’ve completed must meet the minimum requirements to qualify for a college or career school program. This includes a high school diploma or General Education Development certificate from a state-approved school or setting.

Citizenship or Residency and Social Security Number

Another of the FAFSA eligibility requirements is that students must be a U.S. citizen or U.S. National with an active Social Security number.

Eligible non-citizen students might still be eligible for federal aid if they have:

• A permanent resident Green Card (Form 1-551, I-151, or I-551C)

• An arrival-departure record (I-94)

• A T-VISA

• Battered Immigrant Status

Be Enrolled or Accepted

Students must also be enrolled as a regular student at a degree- or certificate-granting school. To meet FAFSA qualifications for a Direct student loan, you must be enrolled at least half-time.

Maintain Satisfactory Academic Performance

Returning students who are applying for federal financial aid must maintain Satisfactory Academic Progress (SAP).

Each school determines its own SAP criteria, which includes minimum GPA, minimum passing grades for courses, number of required course credits or hours, and the timeline it deems necessary to advance toward a degree or certificate.

Age and Dependency Status

Your dependency status determines whose information you’ll need to include on your FAFSA. Dependent students are required to provide their parents’ financial information on their FAFSA while independent students might not need to.

Generally, you’re considered an independent student if at least one of the following applies to you:

• For the school year you’re applying for aid, you’ll be 24 years old by January 1.

• You’re married or separated (but not divorced).

• You’re a graduate-level student.

• You have children and provide more than half of their support.

• You have other dependents in your household whom you provide more than half of their support.

• You’re in the U.S. armed forces and on active duty (non-training).

• You’re a U.S. armed forces veteran.

• Since turning age 13, your parents were deceased, you were in foster care or a ward or dependent of the court.

• You’re an emancipated minor or are in a legal guardianship.

• You’re an unaccompanied homeless or self-supporting youth at risk of homelessness.

Income Limits

A common misconception is that students or their parents must earn below a certain income to meet FAFSA eligibility requirements. However, there is not a FAFSA income limit for student applicants and their families.

Required Documents to Submit FAFSA

Although you won’t need to submit copies of additional documents with your FAFSA, you’ll need to refer to certain documents to complete your application. It may also be helpful to keep these documents on file in case your school requests to see them.

Social Security Number

You’ll need your Social Security number to include on your FAFSA form. If you’re a dependent, the form also asks for your parents’ Social Security number. If they don’t have one, enter all zeros without dashes.

W-2s and Untaxed Income Records

A main FAFSA requirement to successfully complete the application is reporting your income, and your parents’ income, if applicable. Make sure to reference all W-2s and untaxed income documentation, like interest income, child support, or other noneducation benefits.

If you are a dependent student, you’ll need to provide information from both yours and your parent’s W-2.

Tax Returns

You’ll need to reference your most current tax return information as well as your parents’ tax returns if you’re a dependent student. If you’ve already filed your tax return for the year, you might be eligible to use the IRS Data Retrieval Tool to transfer your tax information into the FAFSA.

Asset Records

You’ll also need to include your and your parents’ deposit account balances, like checking and savings, on your FAFSA. Similarly, investments, like stocks, bonds, and real estate that isn’t your primary home, must be included on your FAFSA form.

Alternatives to Federal Aid

Outside of the FAFSA application, there are other avenues to secure funds to pay for your higher education.

Savings

Consider tapping into existing savings, if your financial aid award comes up short. Doing so might help you avoid taking on more student loan debt.

There are certain accounts such as 529 savings plans that are designed to help parents and families save for their child’s education.

Grants

Research non-federal grants from your state, school, nonprofit, or other private organization. These funds don’t need to be repaid.

Scholarships

Scholarships are another aid source that doesn’t need to be repaid after leaving school. Find state-, school-, or private-sponsored scholarships to find more cash. There are online databases such as Scholarships.com that aggregate information on available scholarships. Take a look to review eligibility criteria and application requirements.

Part-Time Work

If you can manage balancing schoolwork with a part-time job, earning an income while enrolled in school can help you pay your way through your education.

Private Student Loans

Private student loans are available through private lenders, like banks, credit unions, and online institutions. These loans come with varying terms and interest rates, and can help cover the gap between your cost of attendance and existing financial aid.

When comparing private student loans and federal student loans, know that private lenders aren’t required to offer the same benefits or protections as federal student loans. As a result, private student loans are generally considered an option only after other sources of financing have been exhausted.

The Takeaway

Regardless of your or your family’s income, it’s generally worth submitting an application if you meet the FAFSA requirements. Since it’s a free application, there’s nothing to lose and much to gain if you’re eligible for aid, including scholarships and grants that don’t need to be repaid.

If you still need financial aid after submitting your FAFSA and searching for scholarships, consider a SoFi private student loan. It’s a zero fee loan option that offers competitive rates for qualifying borrowers.

Get pre-qualified in just a few minutes.

FAQ

How much or little income do you need to qualify for aid through FAFSA?

There are no income requirements for FAFSA applicants. Instead, a variety of factors determine whether a student is eligible for federal aid, including the school’s cost of attendance, the student’s year in school, their dependency status, family size, and more.

What is the maximum amount of money FAFSA gives?

The maximum amount of aid you can receive through the FAFSA depends on which federal aid programs you qualify for. Different programs have varying limits.

For example, the maximum Pell Grant award changes annually; for the 2022-23 award year the limit is $6,895. Direct Loans also have their own annual and aggregate borrowing limits.

How does parent income affect FAFSA aid?

Parent income that’s reported on a student’s FAFSA is used to calculate the applicant’s Expected Family Contribution (EFC). The EFC is a number on an index that helps schools determine your financial need if you attend its school. It also identifies your eligibility for certain financial aid programs like the Pell Grant or Direct Subsidized Loans.

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.

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.

Photo credit: iStock/Lipik1
SOIS1023008