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An income share agreement (ISA) is a type of college financing in which you repay the funds you receive using a fixed percentage of your future income. While ISAs can be useful for some students who lack other funding options, it’s important to fully understand how these agreements work, since you can potentially end up owing significantly more than you borrow.

Read on for a closer look at income share agreements, including their pros and cons, who might consider them, and how they compare to other types of college financing.

What Is an Income Share Agreement?

With an income share agreement (ISA), you receive money to pay for college and contractually agree to pay it back using a fixed percentage of your post-graduation income for a set period of time. ISAs are offered by some colleges and through several private lenders.

The income percentage and terms of an ISA will vary depending on the lender. Typically, the repayment percentage will range between 2% and 10% of the student’s future salary, and terms can be anywhere from two to 10 years.

Unlike other types of student loans, ISAs do not accrue interest. However, students commonly end up paying back more than the original amount that they borrowed.

How Income Share Agreements Work

Typically, you start repaying an ISA after you leave school and pass a specific income threshold, often $30,000 to $40,000 per year. If you earn less than the threshold in any month, you can waive your requirement payment that month. Some ISAs will count months in which you earn less than the minimum salary toward your repayment term, while others will extend the length of your loan.

You can typically exit your ISA at any time, provided you’re willing to pay the maximum repayment cap for your plan upfront.

With an ISA, your payment rises when your salary rises. However, the repayment term and total repayment amount are usually capped. The cap is the most you’ll have to repay under your ISA. With many plans, though, the cap can be as high as two (or more) times what you borrowed.

Income Share Agreement Example

To illustrate how an income share agreement might work, let’s say you sign an ISA agreement for $10,000 with the maximum number of monthly payments of 88, an income percentage of 4%, an income threshold of $30,000 (or $2,500 per month), and a payment cap of $23,000.

In this case, you would pay 4% of your income for any month you earn at least $2,500 and continue to do so until you make 88 payments or pay a total of $23,000 — whichever comes first. If you only earn the minimum, you will end up paying back $100 a month for 88 months for a total repayment of $8,800 (which is less than what you borrowed). However, if you make $55,000, you’ll pay $183 per month for 88 months, for a total repayment of $16,133, which is $6,000 more than you borrowed.

Keep in mind that the income percentages, terms, and repayment caps can vary considerably from one ISA provider to the next.

Recommended: How to Pay for College With No Money Saved

The Advantages of Income Share Agreements

Some of the pros of income share agreements include:

•   ISAs typically do not require a cosigner or good credit, so they can be easier to qualify for than other types of financing.

•   Payments won’t exceed a certain percentage of your monthly income.

•   Your ISA contract could expire years earlier than a traditional student loan.

•   Schools that offer ISA programs are incentivized to help you earn the highest paying jobs.

•   Depending on your future income, you may end up paying less than you would pay with a traditional student loan.

Potential Pitfalls of Income Share Agreements

There are also some significant cons to ISA loans that you’ll want to keep in mind:

•   In some cases, the ISA provider will cap payment more than twice the amount you receive.

•   Unlike other types of student loans, there’s uncertainty regarding how much your loan will cost.

•   In many cases, an ISA could cost more over the long run when compared to federal or private student loans.

•   Income-driven repayment plans are already an option with federal student loans, and federal loans also offer the potential for student loan forgiveness.

•   ISAs are not widely available and may be restricted to certain majors or programs.

Who Should Consider An ISA?

Income share agreements can end up being costly, especially if you enter a high-earning field and the ISA has a high payment cap. However, you might consider looking at ISA if:

•   You’ve maxed out federal loan options but are unable to qualify for private student loans.

•   You have a poor credit score and would receive high rates on private student loans.

•   Your school offers an ISA with reasonable terms and a low payment cap.

•   You’re planning to earn a degree in a field that doesn’t have steep salary growth potential.

If these scenarios don’t apply to you, you’re likely better off using federal student loans to pay for higher education, or even private student loans if you have good credit. Before signing up, you’ll want to compare your options side by side and run the numbers to see which is the better deal.

Recommended: Private Student Loans vs Federal Student Loans

Considering Private Loans

You generally want to exhaust all your federal financial aid options before considering other types of debt, but if you’re looking to fill gaps in your educational funding, it may be worth considering private student loans before signing an ISA.

Private student loans are only offered through private lenders, and come with either fixed or variable rates. For borrowers with excellent credit, rates may be relatively low. Unlike federal loans, however, undergraduate private student loans often require a cosigner. The cosigner is an adult who agrees to take full responsibility for your student loans if you default. Cosigners are almost always required by private lenders since undergraduates have not had much time to develop a credit history.

If you expect to have a high salary after graduation and/or can qualify for a low rate on a private student loan, you could end up paying less than you would for an ISA.

Recommended: A Complete Guide to Private Student Loans

The Takeaway

An income share agreement, or ISA, is an agreement between the borrower and the school or a lender that states the borrower will receive funds to pay for college and then repay those funds based on a certain percentage of their future salary for a set amount of time.

While ISAs may sound like a different type of college funding, they are, essentially, loans. And in many cases, you will end up paying back significantly more than what you borrow.

Generally, you would only want to consider ISAs after exhausting any undergraduate federal student loans and aid available to you. It’s also a good idea to compare ISA offers with traditional private student loans before deciding on the best funding option for your situation.

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

FAQ

What is an income share agreement?

An income share agreement (ISA) is a financial contract where a student receives funding for education in exchange for a percentage of their future income for a set period. It’s an alternative to traditional student loans, offering flexible repayment based on earnings.

Are income share agreements worth it?

Income share agreements (ISAs) can be worth it for students who need funding and prefer flexible repayment terms based on future income. However, they may be more costly in the long run compared to traditional loans, so it’s important to compare options and understand the terms.

Are income share agreements tax deductible?

Income share agreements (ISAs) are generally not tax deductible. Unlike student loans, payments made under an ISA are considered a share of income rather than debt repayment, so they do not qualify for the same tax benefits. Always consult a tax professional for personalized advice.

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

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

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

SOISL-Q325-004

If you’re like most Americans, your paycheck turns up in your bank account automatically, without any check to sign and then make a trip to the bank to deposit.

With direct deposit, funds are electronically transferred out of one bank account and deposited into another. It’s a convenient way to automate one’s finances, and it’s not limited to paychecks. It can streamline other financial transactions as well.

Here, you’ll learn more about this process, the pros and cons of direct deposit, and ways you might want to put it to work for you.

What Is Direct Deposit?

As mentioned above, direct deposit is a way of electronically transferring funds between bank accounts.

It was pioneered more than 50 years ago. In 1972, the first automated clearing house (ACH) network formed to manage electronic payments, with other networks quickly following. In 1975, the Social Security Administration (SSA) decided to test the system of direct deposit for payments they issued. Today, nearly 99% of SSA’s payments are directly deposited.

According to a 2024 survey, approximately 92% of employed people in the United States receive their salaries or wages this way.

What’s more, these automatic bank transfers are used today in ways beyond having paychecks directly deposited, including bill pay, retirement account contributions, and more.

💡 Quick Tip: Did you know online banking can help you get paid sooner? Feel the magic of payday up to two days earlier when you set up direct deposit with SoFi.^

How Does Direct Deposit Work?

You’ve now learned a bit about what direct deposit is and how the ACH system facilitates direct deposit, allowing funds to flow seamlessly and quickly from one account to another.

Here, a bit more intel on how this process can be put to work for you and how to set up direct deposit.

Direct Deposit for Payroll

Let’s say that an individual is ready to start a new job. The human resources department explains how the company either requires direct deposit or offers the option.

•  If that employee wants to set up direct deposit, they would need to share bank information with their new employer, including the bank’s name, the routing number that identifies the financial institution, and the employee’s bank account number. Sometimes, a voided check is requested.

•  This information would then be entered into the company’s payroll system and, whenever payroll rolls around, the company would send an electronic file to this employee’s financial institute. The file would share how much money should be transferred from the company’s (the “originator’s”) bank account to accounts for each of the employees whose direct deposit accounts are located at that particular financial institution.

•  If, for example, three employees of a company all share Bank A, then let’s say this bank receives an electronic transfer of $4,345. Bank A would then distribute the money appropriately into the proper bank accounts, such as:

◦  $2,000 in Person A’s checking account and $500 into their savings account

◦  $1,350 in Person B’s account

◦  $445 in Person C’s checking account and $50 into their savings account.

•  Then, if the employees (known as “receivers”) check their bank balances, they’ll see the deposits made through this direct deposit process. As noted in this example, money may be directly deposited to a checking account or into a savings account. Or some money can be put into a savings account with the rest in a checking account.

•  How long does direct deposit take? Typically, the funds go through like clockwork and are there waiting on payday. Some banks may offer the ability to access your direct deposit up to two days sooner.

What Are the Uses of Direct Deposit?

There are several uses for direct deposit:

•  Payroll. As noted, the vast majority of Americans get paid this way.

•  Tax refund. This can be among the quickest ways to get your tax refund. The IRS can process a direct deposit refund for an electronically filed return in as little as seven to 10 days of receipt; however, most refunds are issued in less than 21 days.

•  Government benefits. Social Security and Supplemental Security Income benefits, VA, unemployment, and other benefits can be paid via direct deposit.

•  Commissions, rental income, vendor payments and other earnings can be automated with direct deposit.

•  Dividends. Shareholders may receive dividends by direct deposit.

•  Child support. This may also be automated.

Benefits of Payroll Direct Deposits

Direct deposit of paychecks has many benefits. Here’s a closer look:

•  Convenience: With a direct deposit of their paycheck, employees can skip the step of physically depositing a paycheck into their accounts, which can be a timesaver.

This can be especially true if the employee telecommutes from home, is on vacation, or is otherwise out of the office when payday comes, because that employee doesn’t have to go into the office to retrieve the paper check.

•  Speed: With direct deposit, the money is typically in an employee’s bank account at the start of the designated payment date, which gives them access to the funds that day. No waiting for checks to clear.

•  Security: With paper checks, there’s always the possibility that they will get lost or stolen. Payroll direct deposit can add a layer of security to the process.

Many times banks will waive fees for customers who have direct deposits set up.

•  Savings: Many banks will waive fees for customers who have direct deposits set up, although there may be a minimum deposit amount required for this to happen.

•  Better money management: If an employee puts a percentage of each paycheck automatically into a savings account, this can help get them into a regular savings habit.

Downsides of Payroll Direct Deposit

Now, for the other side of the coin, these are the cons of direct deposit:

•  Inconvenience: When people receiving direct deposits decide to change banks, it may be a hassle. It may take workplaces a period of time to change where paychecks are sent, which means that the old account might need to be kept open longer to make sure all paychecks are received.

How long that period of time may be can vary. But, before you close your old account, ensure that all direct deposits are being put into the new account. Also make sure that all withdrawals and checks have cleared at your old bank and that any automated payments are coming out of the new bank.

•  Scheduling: With direct deposit, it’s important to make sure the correct deposit dates and amounts are recorded. Otherwise, account holders could write checks beyond what’s available, which could trigger overdraft or non-sufficient fund (NSF) fees — which can be costly, especially when they add up.

•  Lack of access: Not everyone in the U.S. has a bank account (this is often referred to as being “unbanked”). If an employee doesn’t but their employer requires direct deposit (more about that next), then employees without a bank account would likely receive their paychecks through a prepaid debit card. These can come with fees and, like paper checks, can be lost or stolen.

Here are the pros and cons in chart form for easy comparison:

Employers Requiring Direct Deposit

Just as there are benefits to payroll direct deposit for employees, there are also benefits for employers. For instance, it’s cheaper to manage payroll payments this way, versus physical checks.

Plus, employers have a record of accounts, which makes it easier for companies when they’re reviewing expenses — and they don’t have to reissue a check if an employee loses one.

And, after a person’s payroll information has been entered into the system, paying employees can be faster and easier with direct deposit.

Laws governing payroll direct deposit vary by state and, if a state has no specific laws on this subject, it defaults to federal regulations. Federal law states that employers must give each employee using direct deposit a summary of rights and liabilities and must get their signature on an authorization form along with relevant banking information.

Some states allow employers to actually require direct deposit for payroll, as long as the program is administered in a way that’s consistent with federal regulations. (In some cases, the rule only applies to public sector workers.) Most states, however, still give employees the choice between direct deposit and receiving a physical check.

A handful of states have laws that are unique to them, ones that don’t fit into any of the broad categories already described.

Automating Your Finances

The concept of electronic funds transfers is at the heart of payroll direct deposits, but goes beyond that. Here are additional ways to benefit from automating your finances.

•  Automation is a tool that can also help people to build an emergency savings fund. In general, traditional wisdom says this account should contain three to six months’ worth of living expenses.

That way, if an emergency arises (whether that’s a job loss, an unanticipated repair, or unexpected medical expenses), a financial cushion exists. By setting up a regular funds transfer to a savings account, this can make it easier to build up that emergency fund.

•  Another way to streamline your financial life: paying bills through autopay. In some instances, lenders may offer a discounted interest rate for borrowers who use automated payments to pay their bills. Autopay can help borrowers make their payments on time, rather than forgetting them when life gets hectic. This can mean fewer or no late fees.

•  Because payment history plays a key role (35%) in a person’s FICO® Score, autopay can help you establish and maintain your credit score. By automating payments (as long as enough money is in your checking or savings account when the payment is due) you can optimize this aspect of your cash management.

•  Autopay helps to reduce the number of paper bills that need to be sent out and the number of paper checks that may be written to pay those bills. This means that automated funds transfers can therefore be an eco-friendly choice to make.

•  Whenever funds are electronically transferred, either in or out of a bank account, a digital record is automatically created. This can be helpful when balancing accounts, creating a budget, looking for tax deductible items, searching for ways to trim discretionary spending, and more.

•  Autopay might also be a good strategy to use to contribute to a retirement account. Employers may automatically deduct an amount from employee paychecks to transfer it into a retirement account that’s set up by the company, such as a 401(k). That can make saving easy.

Types of Accounts for Direct Deposits

For people who decide to use automated funds transfers, here are some options to consider for receiving direct deposit:

•  Checking accounts

•  Savings accounts

•  Money market account

•  Investment accounts

•  Some prepaid debit cards

•  Some payment apps, such as PayPal or Cash App.

Getting Direct Deposit With SoFi

If you’re interested in opening a bank account to receive direct deposits, take a look at what SoFI offers and see if SoFi direct deposit is a good fit for you.

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

FAQ

What is the meaning of direct deposit?

Direct deposit refers to the automated transfer of funds from one bank account to another. This means cash doesn’t need to change hands, nor does a check need to be written and then deposited.

How do you get direct deposit?

Typically, signing up for direct deposit involves sharing your bank account and routing number with, say, your employer or the government so they can direct deposit funds in your account. In some cases, you may be asked to share a voided check.

Is direct deposit only for paychecks?

Direct deposit is not only for paychecks. It can also be used for government benefits (such as Social Security), commissions, tax refunds, investment dividends, and other forms of payment.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

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

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.

¹SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at SoFi.com/banking/fdic/sidpterms. See list of participating banks at SoFi.com/banking/fdic/participatingbanks.

^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

SOBNK-Q325-051

If you recently graduated from college or are about to, congratulations. Those closest to you will typically celebrate your achievement, and some gifts may come rolling in, often in the form of cash.

As you get ready to start the next chapter of your life, you may wonder what to do with any money you receive. Should you pay down debt, invest the funds, go shopping?

The answer will depend upon your personal finances and your goals, but here are 25 ideas to inspire you.

1. Jump-Starting an Emergency Fund

Establishing an emergency fund can be a great first step toward financial stability. Having this cushion can help you to handle a financial setback, such as a costly car repair, trip to the ER, or loss of income, without having to rely on high interest credit cards.

A good target is to have enough money set aside to cover three to six months of living expenses. It’s fine to start small, however, and build this fund up over time.

2. Paying Off Credit Card Debt

It’s not uncommon to accumulate credit card debt in college. Laptops and textbooks can be costly, and it can be hard to have time to work a significant number of hours. The sooner you pay off any balances you are carrying, however, the less you’ll pay in the long run and the easier it will be to handle new expenses, like rent and car payments.

3. Buying Interview Clothes

Whether you graduated from college early or just completed grad school, you may be job hunting. While the knowledge, skills and attitude you can bring to a company may be what’s most important, how you dress for the interview can also form a lasting impression on potential employers. Depending on your industry, that might mean a suit for men and a suit or dress for women.

4. Reducing Your Student Loan Debt

If you took out a student loan for college or graduate school, you may want to use some of your graduation money to start paying down your loan balance. The more you can knock down your loans, the less interest you’ll owe and the less you’ll pay overall.

If you make an extra payment, however, it can be a good idea to make sure that your loan officer applies the extra amount to the balance, rather than next month’s payment.

5. Saving up for an Apartment

If you’ll be moving into your own place after graduation, you’ll likely need to come up with your first and last month’s rent, plus a security deposit, in one fell swoop. You may also want to save up for furniture and household items, like dishes, cookware, and linens, to set up your new place.

6. Investing in Mutual Funds

While investing can sound intimidating, one easy way to get started is to invest in one of the different types of mutual funds. While these funds typically charge an annual fee and involve some risk, they are managed by professional investors who typically spread your money over a mix of securities, such as stocks and bonds. You can choose a mutual fund based on its past performance, how aggressive (or stock-heavy) it is, and the type of fees they charge.

7. Opening a High-Interest Savings Account

Traditional savings accounts typically offer very low interest. If you are saving your graduation money for a short-term goal, like buying a car or building an emergency fund, you may want to put it in an account that offers higher interest than a traditional savings account, but is still insured and allows easy access to your money. Some good options include: a high-yield savings account, money market account, online savings account, or checking and savings account.

8. Getting a Start on Retirement Saving

It’s never too early to start saving for retirement. Thanks to compounding returns (which is when the money you earn on your money also earns money), the earlier you start putting money aside for retirement, the easier it will be to meet your goal. If your employer offers a matching program for your 401(k), you may want to consider taking full advantage of it and contributing at least up to their match.

Recommended: The Average 401(K) Balance by Age

9. Going on a Trip

Before you jump into the working world, you may want to take some time off and explore some new destinations. Traveling is not only fun, it can also be a way to learn more about the world, gain insights into different cultures, and potentially even make some new connections.

The experience of traveling may also energize you and help you gain clarity about what you want your future to look like.

10. Saving up for Grad School

If you’re planning to pursue a higher degree, you may want to use your graduation money to jump start your grad school fund. In general, it can be better to pay for your education out of pocket rather than taking out student loans which, thanks to interest, make the cost of higher education even higher.

11. Putting Money Into Real Estate

You may not have enough money to purchase a home yet, but you could try investing money into a REIT (real estate investment trust). Modeled after mutual funds, REITs offer a lower-cost way to invest in the real estate market.

These trusts are also liquid, which means you can sell at any time. Like stocks, you can buy and sell REIT shares on an exchange. As with any investment, investing in a REIT involves some risk.

12. Buying a Car

If you’ll be needing a car to get around, it can be a good idea to start saving for a down payment or, even better, paying for the car in cash. Whether you buy a used or new vehicle, the more cash you can put down initially, the less you’ll have to finance, and the less you’ll end up paying for that car.

13. Joining AAA

Whether you already have a car or you’re planning to buy one, you may want to use a bit of your graduation money to join AAA. Having a AAA membership can provide peace of mind when you’re out on the road, and can end up paying for itself should you get a flat tire or two, or need a tow in the wee hours of the morning. AAA membership also gets you discounts on many hotels, rental cars, and other products and services.

14. Starting a Business

If you are planning to launch your own business straight out of college, you may want to funnel your graduation money right into your new venture. If you need additional cash for your start-up, you might also consider taking out a small business loan or crowdfunding your idea on a site like GoFundMe and Kickstarter.

15. Joining a Wholesale Club

As you transition from dining hall or parent-supported dining, you may want to look into joining a wholesale club like Costco, BJ’s, or Sam’s Club. These member-only stores can save you a lot of money when you buy in bulk, and could especially come in handy if you’re splitting costs with your roommates.

16. Donating to Charity

Donating some money to charity can be a solid option when you’re deciding what to do with graduation money. If you have a particular cause you’re passionate about, you can look for relevant charities on Charity Navigator.

If you give to a tax-exempt 501(c)(3) organization, you may be able to write the charity donation off on your taxes.

17. Taking Your Parents to Dinner

If your parents helped pay for your college education, you might want to show your gratitude by taking them out to dinner. It doesn’t have to be anything fancy; the idea is to let them know that you truly appreciate their love and support. This could apply to a grandparent, family member, or a friend who funded your education as well.

18. Saving for a Home

While owning a home might not be in your immediate future, you may want to use your graduation money to start saving up for a down payment.

To get a sense of how much you might need, you can start looking at real estate prices in the area where you would like to live. Ideally, you would want to put 20 percent of the purchase price down and avoid private mortgage insurance.

19. Saving for Your Wedding

Weddings can cost on average more than $35,000 for the ceremony and reception. Of course, there are ways to have a cheaper wedding, such as keeping it small or having it in your backyard, but wedding costs can still add up quickly. If you’re engaged or planning to be soon, you might want to use some of your graduation money to start a wedding fund.

20. Paying for Additional Classes or Certifications

Even though you graduated with a degree, you may find that you need some additional training to stand out in your field.

To be more competitive when it comes to the job market, you might want to use your graduation money to pay for additional classes or certifications. This could possibly lead to an increase in your salary as well.

21. Paying for Personal Care

When you go in for job interviews, you’ll want to look your best. Along with buying professional clothes for your interviews, you may also want to invest in other aspects of your personal appearance, such as getting your hair cut or styled, getting your nails done, or having your teeth whitened. Putting your best foot forward can help you feel more confident.

22. Moving to an Area with a Stronger Job Market

If your home town doesn’t have the best job market for your field, you may want to consider moving somewhere that offers more opportunities. You could put your graduation money towards moving expenses, such as renting a truck or professional movers.

23. Hiring a Career Coach

If you’re having trouble finding the job you want, you might consider using your graduation money to hire a professional career coach. These pros can help you revise your resume, improve your LinkedIn profile, build your network, and help you plan out your career. Typically, the best career coaches will have extensive experience in human resources and/or recruiting.

24. Getting Health Insurance

If you graduated from college later than your peers or you’re finishing up grad school, then you may no longer be on your parents’ health Insurance. You may want to start by looking for a health insurance policy on the government marketplace. As you compare policies, it can be a good idea to keep your medical needs, such as prescriptions and specialty doctors’ visits, in mind.

25. Paying Back Anyone You Owe

If you borrowed any money from family or friends during college, you may want to use graduation money to settle up. This shows that you are responsible and true to your word. If you end up in a bind again in the future and need to borrow, your family and friends will know that you can be trusted to pay them back.

The Takeaway

If you’re not sure whether to spend or save your graduation money, it can be helpful to look at both your short-term needs, such as paying off credit cards and buying a car. as well as your long-term goals, like creating a comfortable retirement nest egg.

The answer to how to use graduation money is different for everyone, but it can be a good idea to weigh all of the options before you make any major spending decisions.

Whether you’re saving for something specific or storing cash until you’re ready to invest, finding a bank account with low or no fees and a good interest rate can be a smart move.

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FAQ

What are you supposed to use graduation money for?

What you opt to do with your graduation money depends on your personal finances and goals. Some things you might choose to do with the money include using it to build an emergency fund, saving up for a car, using it to rent an apartment, or putting it toward your student loans.

What is the smartest thing to do with your graduation money?

One smart thing you could do with your graduation money is use it to pay off high-interest debt, such as credit card debt. You could also choose to save for your future, such as for retirement or a down payment on a house. Ultimately, however, what you choose to do with the money is up to you. Be sure to weigh all your options before making a decision.

Is $1,000 a good graduation gift?

Yes, $1,000 is typically considered a good graduation gift. The amount is generous and can be helpful in getting you started on your life after college. For example, you could use it to pay down debt, such as credit cards or your student loans, or put it toward creating an emergency fund.

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SOBNK-Q325-007

A divestiture, also known as a divestment, involves the liquidation of a company’s assets, such as building or intellectual property, or a part of its business, such as a subsidiary. This can occur through several different means, including bankruptcy, exchange, sale, or foreclosure.

Divestitures can be partial or total, meaning some or all of the company could be spun off or otherwise divested, depending on the reason for the company getting rid of its assets. Corporate mergers and acquisitions are a common example of one type of divestiture.

What Are Reasons a Company Would Divest Itself?

Often a divestiture reflects a decision by management that one part of the business no longer helps it meet its operational goals. A divestiture can be an intelligent financial decision for a business in certain situations.

If one aspect of a business (e.g., a product line or a subsidiary) isn’t working, has become unprofitable, or is likely to soon consume more capital than it can create, then instead of letting that be a continued drain on resources, a company can divest.

This not only does away with the troublesome aspect of the company, but also frees up some money the company can put toward more productive endeavors, such as new research and development, marketing, or new product lines.

There are many other potential reasons for a company to divest itself of a particular aspect of its business as well. The growth of a rival may prove overwhelming and insurmountable, in which case divesting might make more sense than continuing to compete.

A company may choose to undergo a divestment of some sort, such as closing some store locations, in order to avoid bankruptcy, to take advantage of new opportunities, or because new market developments might make it difficult for part of the company to survive.

Companies also sometimes must divest some of their business because of a court order aimed at breaking up monopolies. This can happen when a court determines that a company has completely cornered the marketplace for its goods or services, preventing fair competition.


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What Happens in a Divestiture?

When a divestiture involves the sale of part or all of a company, the process has four parts. The first two parts involve planning for the actual divestment transaction itself. Once management decides which part of the company to divest and who will be buying it, the divestment can begin.

1. Monitoring the Portfolio

When pursuing an active divestiture strategy, the company’s management team will review each business unit and try to evaluate its importance to the company’s overall business strategy. They’ll want to understand the performance of each part of the business, which part needs improvement, and if it might make sense to eliminate one part.

2. Identifying a Buyer

Once the business identifies some or all of the company as a potential divestment target, the team moves on to the next problem that logically follows: Who will buy it?

The goal is to find a buyer that will pay enough for the business to cover the estimated opportunity cost of not selling the business unit in question. If the buyer does not have the liquidity to make the purchase with cash, they might offer an equity deal or borrow money to cover the cost.

3. Executing the Divestiture

The divestiture involves many aspects of the business, including a change of management, company valuation, legal ownership, and deciding which employees will remain with the company and which ones will have to leave.

4. Managing the Financials

Once the sale closes, attention turns to managing the transition. The transaction appears on the company’s profit-and-loss statement. If the amount that the company receives for the asset it sells is higher than the book value, that difference appears as a gain. If it’s less the company will record it as a loss.

The company will typically share the net impact of the divestiture in its earnings report, following the transaction.

What Are The Different Types of Divestitures?

There are several different ways companies can define divest for themselves. Knowing the type of and reason for a divestiture can help investors determine whether the trajectory of a company is in line with their goals. A few types of divesting options include:

•   An equity carve-out, when a company can choose to sell a portion of its subsidiaries through initial public offerings (IPOs) but still retain full control of them.

•   A split-up demerger, when a company splits in two, and the original parent company ceases to be.

•   A partial sell-off, where a business sells one of its subsidiaries to another company. The funds from the sale then go toward newer, more productive activities.

•   A spin-off demerger, in which a company’s division becomes a separate business entity.

What Causes a Company to Divest?

A divestiture strategy can be part of an overall retrenchment strategy, when a company tries to reinvent itself by slimming down its activities and streamline its capital expenditures. When that happens, the company will divest those parts of the business that are not profitable, consuming too much time or energy, or no longer fit into the company’s big-picture goals.

Factors that could influence a company to adopt a divestiture strategy can be lumped into two broad groups:

External Developments

External developments include things outside the company, such as changing customer behavior, new competition, government policies and regulations, or the emergence of new disruptive technologies.

Internal Developments

Internal developments include situations arising from within the company, such as management problems, strategic errors, production inefficiencies, poor customer service, etc.

Divestiture Strategy Example

Imagine a fictitious company called ABC was the parent of a pharmaceutical company, a cosmetic company, and a clothing company. After some time and analysis, ABC’s management determines that the company’s financials have begun deteriorating and they need to make a change in the business.

Following the four-step process above, they begin by finding the weakest points of business. Eventually, they decide that the pharmaceutical branch of the company is under-performing and would also be the easiest for the company to divest. It makes more sense to stick to clothing and cosmetics.

After identifying a buyer (perhaps a larger pharmaceutical company or a promising startup looking to expand), the divestment transaction occurs. The employees who work in the pharmaceutical branch either lose their jobs, or they get roles working for the new owner of that part of the business. The cash infusion that ABC gets as a result of the sale of its pharmaceutical branch will go toward new marketing efforts and creating new product lines.


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The Takeaway

Divesting is essentially the opposite of investing. It involves a company selling off parts of its business. A divestiture can have some positive outcomes on the value of a company, and there are several business reasons that a company would choose to divest. Depending on the circumstances, this process could theoretically be either a positive or a negative for shareholders.

Investors could see news of a divestment as a sign that a company is struggling, leading them to sell the stock. While this initial reaction could be one likely outcome, the company could eventually wind up doing even better than before if it manages itself better as a leaner company. In either case, the divestiture is one factor that investors can use in their analysis of that company’s stock.

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FAQ

What does it mean when a company makes a divestiture?

Divestitures typically involve a company selling or otherwise liquidating portions or elements of their business to focus their efforts on more profitable areas.

What are the different types of divestitures?

There are several different types of divestitures, and they can include equity carve-outs, split-up demergers, partial sell-offs, or spin-offs.

What could cause a company to make a divestment?

Companies might make divestments due to external or internal developments (which can vary greatly in type and scope). Reasons for divestiture may include the need to focus on the more profitable facets of the business, shift following the emergence of new competitors, or avoid bankruptcy.

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