Apr
07
2025

Guide to Trade School Debt Forgiveness

By | Debt Payoff, Financial Topics, Student Loans | Comments Off on Guide to Trade School Debt Forgiveness

Trade schools (also known as vocational schools or technical or career colleges) offer hands-on training and education to prepare students for a specialized career in fields like carpentry, computer information systems, cosmetology, and welding. Most trade school programs range from less than one year to two years, and students graduate with a diploma or certificate.

While trade schools are typically more affordable than four-year colleges and universities, the cost can still add up. The average annual cost of trade school is approximately $15,000, according to the latest data. Many trade school graduates take out student loans to help cover the expense.

Fortunately, there are ways to help reduce trade school student loan debt, including payment plans and trade school debt forgiveness options.

Key Points

•   Trade schools offer specialized career training, with annual costs averaging around $15,000.

•   Federal Direct Loans taken out for trade school may be eligible for Public Service Loan Forgiveness and Income-Driven Repayment forgiveness as long as a borrower meets other qualifying criteria.

•   Private loans for trade schools typically do not qualify for forgiveness programs.

•   Employer-sponsored repayment assistance and state-based programs provide alternative debt relief options for private and federal trade school student loan borrowers.

•   Borrowers may qualify for a closed school discharge if a trade school closes while they are attending it.

Understanding Trade School Debt

If you went to trade school for the chance to get a high-paying vocational job, you may have student loan debt to repay.

The average debt for students who attend trade school is approximately $10,000, according to one estimate. By comparison, the average federal student loan debt is $38,375 per borrower, according to the Education Data Initiative.

Borrowers can use private and federal student loans to help pay for trade school. If your trade school program is accredited, you may be eligible for federal loans. To apply, complete the Free Application for Federal Student Aid (FAFSA).

You can also take out private student loans for trade school. You’ll need to undergo a credit check in order to be approved. Unless you have strong credit, you may need a cosigner for the loan.

Are Trade School Loans Eligible for Forgiveness?

Students who take out qualifying federal loans may qualify for student loan forgiveness. Typically, you must make a certain number of payments under a qualifying repayment plan for a specific period of time, and then the remainder of your student loan balance is canceled.

Most private student loans don’t offer forgiveness.

Federal Loan Forgiveness Programs for Trade Schools

There are several federal student loan forgiveness programs borrowers may qualify for, depending on their situation.

Public Service Loan Forgiveness (PSLF)

Trade school graduates who are employed by a government agency or a qualifying nonprofit organization may be eligible for Public Service Loan Forgiveness. To qualify, borrowers must be employed full-time and have qualifying federal Direct loans.

While working for an eligible employer, borrowers must also enroll in an income-driven repayment (IDR) plan or the Standard Repayment Plan. After completing 120 qualifying payments, any remaining Direct loan balance they have is forgiven.

In March 2025, President Trump signed an executive order to limit eligibility for PSLF and requested an update to the program’s regulations. The executive order is being reviewed, and the PSLF program remains unchanged for now, according to the Federal Student Aid website.

Income-Driven Repayment (IDR) Forgiveness

March 26, 2025: The SAVE Plan is no longer available after a federal court blocked its implementation in February 2025. However, applications for other income-driven repayment plans and for loan consolidation are available again. We will update this page as more information becomes available.

Income-driven repayment plans base a borrower’s monthly payments on their discretionary income and family size, typically resulting in lower monthly payments. Borrowers must update their income and family size yearly (a process called recertification). By the end of the repayment period, which is 20 or 25 years, the remaining loan balance is forgiven. However, forgiveness under most of these plans is paused as of the end of March 2025.

Applications for income-driven repayment plans were temporarily on hold earlier this year due to a federal court injunction. But online applications for three of the four IDR plans are now available.

The IDR plans are:

•  Pay As You Earn (PAYE). Payments are set at 10% of a borrower’s discretionary income over 20 years.

•  Income-Contingent Repayment (ICR) Plan. ICR calculates payments at 20% of a borrower’s discretionary income divided by 12, or the amount they would pay on a repayment plan with a fixed payment over 12 years, whichever is less. The repayment term is 25 years.

•  Income-Based Repayment (IBR). Payments for loans borrowed after July 1, 2014 are 10% of discretionary income over 20 years. For older loans, payments are 15% of discretionary income for 25 years. On the IBR plan, forgiveness is still proceeding at this time since this plan was separately enacted by Congress.

•  Saving on a Valuable Education (SAVE): As of March 2025, the SAVE plan is no longer available after being blocked by a federal court. Forgiveness has been paused for borrowers who were already enrolled in the plan, and they have been placed in interest-free forbearance.

Borrower Defense to Repayment

If you enrolled in a trade school based on misleading information from the school, or you were the victim of other types of misconduct by the institution, you can apply to have your federal loans forgiven under a process known as Borrower Defense Loan Discharge.

If your borrower defense application is approved, a discharge means you will no longer have to repay your federal student loans. In some cases, you may also see reimbursement for federal loans you’ve paid up to now, including interest on the loans.

You can submit a borrower defense loan discharge application on the Federal Student Aid website. It’s important to note that in 2023, a federal court delayed the effective date of the latest regulation for borrower defense. No applications can be processed under that regulation unless the injunction is lifted. However, you can still currently apply for borrower defense.

Closed School Discharge

If you were unable to complete your program or degree because the trade school you were attending closed, or if the school closed within 180 days after you withdrew, you may be eligible for a closed school discharge of your federal student loans. That means you will no longer be obligated to repay the loans. Contact your loan servicer for the application to get your loan discharged.

Alternative Ways to Reduce Trade School Debt

If you don’t qualify for trade school debt forgiveness or a loan discharge, there are a number of other ways to help lower your loan payments.

Refinancing and Loan Consolidation Options

Student loan refinancing involves paying off your existing loans with a new loan from a private lender. Ideally, the new loan will have a lower interest rate, which could lower your monthly payments, or better loan terms. You can refinance both private and federal student loans.

There are different types of refinancing borrowers might want to explore, including Parent PLUS refinance if you took out loans for your child’s education.

Just be aware that refinancing federal student loans makes them ineligible for federal benefits like income-driven repayment plans. Make sure you won’t need access to these federal programs before you move forward with refinancing.

Another option is loan consolidation. A Direct Consolidation Loan allows you to combine federal loans into one new loan to simplify your payments, potentially lower your monthly payment amount, and gain access to IDR plans and federal forgiveness programs.

However, with consolidation you may have a longer repayment period, pay more in interest, and lose access to some loan cancellation options.

Employer-Sponsored Loan Repayment Assistance

Some employers offer a benefit called loan repayment assistance, in which they help employees repay their student loans. The terms of these programs vary depending on the employer, but in general, an employer might establish a maximum amount they will contribute, and the employee may have to work for the company for a specific period of time to be eligible. Check with your benefits or HR department to find out if your employer offers loan repayment assistance.

Grants and Scholarships for Loan Repayment

There are private grants and scholarships that can help you pay off your student loans. These programs may be based on need or merit — or a combination of both. You can search for private grants and scholarships on online platforms like Fastweb and FinAid.

You can also reach out to professional organizations you are affiliated with and companies you have a connection to, to find out if they offer grants or scholarships for loan repayment.

State-Based Loan Forgiveness Programs

Most states offer student loan forgiveness programs for residents. Many of these programs are aimed at borrowers working in public service fields, such as health care, teaching, and law, and require specific service commitments. Borrowers must typically meet a set of criteria to have student loan debt forgiven.

To find loan forgiveness programs in your state, search your state government website.

How to Apply for Trade School Loan Forgiveness

The rules and criteria for applying for trade school loan forgiveness vary by program. In general, you can go to the relevant website and fill out and submit an application online.

But first, read about the program and make sure you meet the eligibility criteria. If you do, gather the appropriate documentation. Typically, you’ll need to provide proof of employment, loan statements, and payment history. Then fill out the application as directed and upload any required documentation. Be sure to continue making payments on your student loans in the meantime as your application is being reviewed.

The Takeaway

If you’re dealing with trade school student loan debt, it is possible to get loan forgiveness. You may be eligible for options like Public Service Loan Forgiveness, state-based forgiveness programs, and employer-sponsored loan assistance, among others.

You can also explore private grants and scholarships to help pay off your student loans, as well as loan consolidation and student loan refinancing. Consider different options to see which one is the best choice for your situation.

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


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

FAQ

What types of loans can be forgiven for trade schools?

Most federal Direct Loans qualify for both Public Service Loan Forgiveness and forgiveness under income-driven repayment (IDR) plans. (However, as of March 2025, forgiveness under all but one of the IDR plans is paused.) In order to be eligible for forgiveness on either the PSLF or IDR programs, trade school borrowers need to meet certain other qualifying criteria.

In addition, most states have state-based loan forgiveness programs that may forgive both private and federal loans. And some employers also offer loan repayment assistance as an employee benefit.

Do trade school graduates qualify for PSLF?

Trade school graduates may qualify for PSLF if they work full-time in public service for the government or a qualifying nonprofit organization and have qualifying federal Direct loans. They must also make 120 qualifying payments under an income-driven repayment plan or the Standard Repayment Plan.

What happens if my trade school closes?

If your trade school closes and you were unable to complete your program, or if it closes within 180 days after you withdrew from school, you may qualify for a Closed School Discharge, which means you are no longer obligated to repay your loans. Contact your loan servicer for the application. They can also walk you through the process of getting your loan discharged.

Can private trade school loans be forgiven?

Generally, private trade school loans are not eligible for forgiveness. Private lenders rarely offer forgiveness — except, sometimes, in extreme circumstances such as if the borrower becomes completely and permanently disabled or dies.

However, private loans may qualify for state-based forgiveness programs, employer-sponsored loan repayment assistance, or private scholarships or grants that help with loan repayment. Do some research to see what options are available for your situation.

What are the best alternatives to loan forgiveness for trade school debt?

Alternatives to forgiveness for trade school debt include employer-sponsored loan repayment assistance if your employer offers it, or private scholarships and grants that help you pay off student loan debt. You can also explore options that could help you manage your payments and potentially even lower them, such as loan consolidation and student loan refinancing.

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

SoFi 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.



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

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

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


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

SOSLR-Q125-016

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Apr
07
2025

What Is the PSLF Buyback Program?

By | Financial Topics, Student Loans | Comments Off on What Is the PSLF Buyback Program?

If you’re working toward student loan forgiveness through the Public Service Loan Forgiveness (PSLF) program, and your loans were in deferment or forbearance for a time, the PSLF Buyback program may help you achieve forgiveness faster. The program allows you to “buy back” forgiveness credits for months you didn’t make student loan payments because your loans were in deferment or forbearance. When you buy back those monthly payments, they then become qualifying payments for PSLF.

To be eligible, you must have an outstanding balance on your loans as well as approved qualifying employment in public service for the months in question. Buying back these months must also complete your total of 120 qualifying PSLF payments.

In this guide, you’ll learn how the PSLF Buyback program works and how it might help you achieve student loan forgiveness.

Key Points

•   The PSLF Buyback program allows borrowers to buy back months their student loans were in forbearance or deferment so that they become qualifying payments for Public Student Loan Forgiveness.

•   Eligibility requirements include an outstanding federal Direct loan balance and 120 months of qualifying public service employment.

•   Buying back the months in question must complete a total of 120 qualifying PSLF payments.

•   If approved for PSLF buyback, a borrower must send the amount owed to their loan servicer within 90 days.

•   Months that loans are in default or that the borrower is in bankruptcy do not qualify for PSLF buyback.

Eligibility Criteria

To be eligible for the PSLF Buyback program, buying back the months of deferment or forbearance must result in forgiveness under PSLF or Temporary Expanded PSLF (TEPSLF). In addition, you will need to meet certain loan and employment criteria.

Qualifying Employment Requirements

Borrowers interested in the PSLF Buyback will need to meet all of the following conditions:

•  At least 120 months of certified qualifying employment

•  No plans to certify any additional qualifying employment

•  Certified qualifying employment that includes the months of deferment or forbearance they intend to buy back

Outstanding Direct Loan Balance

To participate in PSLF Buyback, you must have a federal Direct loan with either an outstanding balance or an outstanding interest balance greater than $0.

A federal Direct loan is a type of student loan offered by the U.S. government. There are four different Direct loans:

•  Direct Subsidized loans are for undergraduate students with financial need. Interest on these loans is paid by the government while students are in school and for the six-month grace period after graduation.

•  Direct Unsubsidized loans are not based on financial need. Interest accrues on the loans while borrowers are in school.

•  Direct PLUS loans can be taken out by graduate and professional students as well as parents of undergraduate students.

•  Direct Consolidation loans combine some or all of a borrower’s federal student loans into one single loan with one loan servicer.

Ineligible Deferment or Forbearance Periods

With the PSLF Buyback, you can buy back months that don’t count as qualifying payments because your loan was in an ineligible forbearance or deferment.

To verify if your loan has been in deferment or forbearance (which would mean that you could qualify for PSLF Buyback), log into your StudentAid.gov account. On your dashboard, go to the “My Aid” tab, scroll to the loan breakdown section, and click on “view loan details” to see the status history of your loans.

How the PSLF Buyback Program Works

To take advantage of the buyback for PSLF, there are a few guidelines you need to know.

Identifying Nonqualifying Months

Certain months are ineligible for buyback. You cannot buy back any months when you were in one of the following situations.

•  In the process of loan origination

•  In school

•  During the grace period after graduation

•  If your loans were in default

•  You were in bankruptcy

•  If you were in the post-discharge monitoring period after qualifying for

•  a Total and Permanent Disability (TPD) discharge.

You also can’t buy back loans that are not Direct loans. Other loans ineligible for PSLF Buyback include loans that were paid in full, those in a forgiven or discharged status, or loans included in a Direct Consolidation loan.

If you have loans that don’t qualify for PSLF Buyback and you’re hoping to lower your student loan payments, you might want to consider student loan refinancing. With a student loan refinance, you trade your existing loans for a new loan from a private lender. Ideally, you might qualify for a lower interest rate or better loan terms. However, it’s important to understand that if you refinance federal student loans, you’ll lose access to federal benefits such as income-driven repayment plans.

Recommended: A Guide to Refinancing Student Loans

Calculating the Buyback Payment

The amount of your buyback payment is based on what your loan payment amount would have been during the deferment or forbearance months that you’re buying back.

For example, if you were on an income-driven repayment (IDR) plan, which bases your monthly payments on discretionary income and family size, before or after the months you plan to buy back, you’ll pay the lower of the two monthly IDR payments for the months before or after deferment or forbearance.

If you were not in an IDR plan, the Department of Education will use tax information for the relevant calendar year to determine the amount you’d have paid under an IDR plan. If the standard 10-year repayment would have given you lower student loan payments than an IDR plan, you’ll pay the standard plan amount. The government may request past tax records to help calculate your payment.

Finally, if you had little to no income and would have qualified for $0 under an IDR plan, you won’t pay anything to get the buyback.

Recommended: Changing Student Loan Repayment Plans

Making the Lump Sum Payment

If you are deemed eligible for the buyback program, you’ll receive a PSLF Buyback Agreement, which will list the amount you must pay. You’ll also be given instructions on how to pay the full amount to your loan servicer within 90 days.

If you don’t pay the lump sum within that time, the agreement will be void. If you still want to proceed with the buyback, you must begin the process over again.

Application Process

To apply for the PSLF Buyback, you’ll need to submit a request. Here are the steps to take.

Submitting a PSLF Reconsideration Request

First, use the PSLF Help Tool to make sure you’ve reported all periods of qualifying employment. Then verify the months of deferment or forbearance you want to buy back and confirm that you have approved qualifying employment for them.

Next, submit a request through PSLF Reconsideration with this specific wording, “I have at least 120 months of approved qualifying employment, and I am seeking PSLF or TEPSLF discharge through PSLF Buyback. Please assess my eligibility for PSLF Buyback.” You must include that statement to be considered for a buyback assessment.

Required Documentation

Documentation is not required to be sent in with your PSLF buyback request; it is optional. However, if you wish to submit backup, you can upload any documentation to support your case, such as paperwork detailing your payment history.

Timeline for Approval and Forgiveness

You will receive an automated email confirming the receipt of your reconsideration request. The DOE states that it will do an analysis of your account and respond to your PSLF Buyback request as soon as possible.

If your request is approved, you’ll receive an email with the PSLF Buyback Agreement. The agreement will provide the total buyback amount you must pay and instructions on how to do so. Your loan servicer must receive your total buyback payment within 90 days of the date the agreement was sent to you.

In the meantime, continue to make any regular monthly loan payments that are due. You’ll receive a refund later if applicable.

Associated Costs

There are no fees for PSLF buyback. However, you will have to pay the total PSLF buyback amount stipulated in your buyback agreement.

Determining the Lump Sum Payment Amount

As mentioned previously, your lump sum payment amount is based on whether you were on an IDR plan in the months before and after the months you plan to buy back, as well as the number of deferment or forbearance months you intend to buy back.

For example, say a borrower had a $60,000 loan balance with a monthly payment of $150 on an income-based repayment plan. In addition, they worked for 120 months, made 96 qualifying payments, and were in forbearance or deferment for two years.

In this case, the buyback amount would be 24 months x $150 per month, which equals $3,600.

Payment Deadlines and Procedures

The DOE will evaluate your eligibility for a buyback. If your request is approved, you’ll receive a buyback agreement via email that will tell you how much you need to pay and the procedure for doing so. Your loan servicer must receive that amount from you within 90 days.

Limitations and Considerations

The PSLF Buyback program is complicated, and it does have certain limitations. These include:

•  Requires a large lump sum payment. You’ll need to pay a large amount of money in a relatively short amount of time, which means you might have to dig into your savings or emergency fund.

•  The process isn’t easy. The PSLF Buyback program is complex. In addition, there’s no telling how long it might take the DOE to review and respond to your request.

•  You must still owe money on student loans. You’re not eligible for the PSLF Buyback program if you’ve already paid off your student loans.

Restrictions on Eligible Periods

There are some restrictions on the periods of eligibility for PSLF buyback. To qualify, you must have:

•  At least 120 months of qualifying employment that’s already certified

•  Enough buy back months to reach forgiveness under PSLF or TEPSLF

•  The months that you’re buying back may not include periods such as those when your loan was in default, when you were in school, during the six-month grace period after school, or when you were in bankruptcy.

Impact of Loan Consolidation

You can consolidate federal student loans into a Direct Consolidation Loan to be eligible for PSLF.

However, once you’ve consolidated your loans, you can only buy back the months on the current consolidation loan. You cannot buy back months from the loans included in the consolidation loan or for any period before the first disbursement date of the consolidation loan.

Interaction With Other Forgiveness Programs

If you are working toward forgiveness on an IDR plan and meet all the other requirements mentioned in this article, you may be eligible for PSLF and PSLF Buyback.

Forgiveness on most of the IDR plans is currently paused. However, forgiveness after the repayment term has been met is proceeding on the income-based repayment (IBR) plan because that plan was separately enacted by Congress.

Under the IBR plan, monthly payments are generally about 10% of a borrower’s discretionary income, and any outstanding balance is forgiven after 20 or 25 years.

The Takeaway

If you are pursuing student loan forgiveness through the PSLF program and your loans were in deferment or forbearance for a period of time, you may be eligible for PSLF buyback to earn credit for those months. To qualify, you’ll need to have an outstanding balance on your loans and approved qualifying employment for the months in question. And buying back those months must complete your total of 120 qualifying PSLF payments.

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


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

FAQ

Can I buy back months from loans included in a consolidation loan?

If you’ve consolidated your loans, you can only buy back months on the current consolidation loan. You can’t buy back months from the loans that were consolidated or for any period before the first disbursement date of the consolidation loan.

What happens if I can’t make the buyback payment within the specified time?

The PSLF Buyback Agreement becomes void if you cannot repay the amount specified in the agreement within 90 days. If you miss that time frame and you still want to apply for PSLF buyback, you’ll need to submit another reconsideration request.

Are there any fees associated with the PSLF Buyback Program?

No, there are no fees associated with the PSLF Buyback program. However, you will have to pay the full buyback amount listed in your PSLF Buyback Agreement if you are approved.

How does the PSLF Buyback Program affect my loan forgiveness timeline?

The PSLF Buyback program may help you achieve forgiveness faster. That’s because the program allows you to buy back months you didn’t make student loan payments due to the fact that your loans were in deferment or forbearance. However, the months you buy back must complete your total of 120 qualifying PSLF payments.

Can I participate in the PSLF Buyback program more than once?

No you can’t complete a PSFL buyback more than once. However, if you apply for the program but fail to make your payment within 90 days, you can reapply.

photo credit: iStock/Jacob Wackerhausen

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

SoFi 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.



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

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

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


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

SOSLR-Q125-014

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Apr
07
2025

Proposed Department of Education Shutdown: Student Loan Implications

By | Debt Payoff, Financial Topics, Student Loans | Comments Off on Proposed Department of Education Shutdown: Student Loan Implications

On March 20, 2025, President Donald Trump signed an executive order instructing the U.S. Secretary of Education to close down the Department of Education (DOE) “to the maximum extent appropriate and permitted by law.” Because the department was created by Congress, closing it fully would require an act of Congress. But with its workforce diminished, the department will presumably operate in a significantly reduced way.

On March 21, President Trump also announced that the Small Business Administration would take over the federal government’s student loan portfolio, though details and timing have not been shared.

What does this mean for student loan borrowers? Regardless of these potential changes, borrowers are still required to pay off their loans. Read on for more information about the proposed Department of Education shutdown, the ramifications for federal student loan borrowers, and how to handle student loan payments.

Key Points

•   The President has issued an executive order to close down the Department of Education (DOE).

•   Borrowers must continue making student loan payments to avoid default.

•   The student loan portfolio may move from the DOE to the Small Business Administration.

•   Lawsuits have been filed against the department’s closure.

•   Currently, federal financial aid is still being disbursed, and loan servicing is continuing as usual.

•   Borrowers can stay informed by checking updates regularly at StudentAid.gov; they should also keep records of their loan payments.

Overview of the Department of Education’s Role

While education in the U.S. is primarily handled by states and localities, the DOE provides funds to help schools achieve their goals.

The department has been responsible for overseeing 100,000 public and 34,000 private schools in the U.S., providing federal grants for needy schools and programs, evaluating public and private schools for curriculum quality, enforcing Title IX guidelines, and investing in education research and development.

The department also managed the nearly $1.7 trillion in federal student loans held by tens of millions of Americans, as well as approximately $30 billion in Pell Grants for lower-income college students. The DOE is the largest source of student loans in the U.S.

Legal Challenges to the Department of Education’s Potential Shutdown

As of March 25, two lawsuits have been filed against the Trump administration over the executive order to close the DOE. One of the lawsuits was filed by the National Education Association, public school parents, the NAACP, and a labor union; the other lawsuit was brought by two Massachusetts school districts, the American Federation of Teachers, and a coalition of labor unions, among other groups.

Both lawsuits say that closing the Department of Education and shifting student loans to the Small Business Administration violates federal law and the Constitution because only Congress can shut down the DOE and make these kinds of changes.

In a response to the lawsuits, a spokesperson for the Department of Education said the Trump administration has pledged to work with Congress to close the department.

Impact of the Potential Shutdown on Student Loans

Student loan borrowers may be confused by the proposed changes. Here are some possible effects of shutting down the Department of Education.

Disbursement of Federal Student Aid

The DOE awards more than $120 billion per year in grants, work-study, and federal student loans. As noted, the department is the largest source of student loans in the country.

As of late March 2025, Pell Grants and federal Direct student loans were still being disbursed. And the application process for financial aid, including filling out and submitting the Federal Application for Federal Student Aid (FAFSA) is not expected to change for the moment. It’s not yet clear, however, what might happen if or when the student loan portfolio moves to the SBA.

Loan Servicing and Repayment Processes

The DOE contracts with private loan servicing companies to manage student loan repayments. Loan servicers process loan payments, maintain loan and payment records, and provide borrower assistance. Your loan servicer can help with changing your student loan repayment plan, for instance.

These loan servicers, such as MOHELA, Aidvantage, EdFinancial, and NelNet, are expected to continue operating as usual. Student borrowers should keep making their monthly student loan payments.

Access to Borrower Support Services

As noted, borrowers should continue to have access to their loan servicers’ support services for their student loans. Be sure to keep your own records of your loan principal, what you owe, and the payments you’ve made.

New borrowers who are taking out loans to attend school should keep all the paperwork they receive about their loans. Check with your servicer if you have any questions.

Effects on Loan Forgiveness and Assistance Programs

Borrowers who are enrolled in federal loan forgiveness and assistance programs, such as Public Service Loan Forgiveness, income-driven repayment plans that can help lower student loan payments, and student loan deferment and forbearance, may encounter changes to some of these plans. This is what you need to know.

Public Service Loan Forgiveness (PSLF)

Public Service Loan Forgiveness (PSLF) forgives the remaining balance on your federal Direct loans as long as you make 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.

However, in early March 2025, President Trump signed an executive order to limit eligibility for PSLF. Organizations that do work involving what the order calls “illegal immigration, human smuggling, child trafficking, pervasive damage to public property and disruption of the public order” would be excluded from eligibility. But it is unclear exactly which organizations would no longer be considered a qualifying employer for the PSLF program.

Changes to PSLF likely won’t happen right away since the executive order requested an update to the program’s regulations, a process that can typically take at least a year. Currently, the DOE says PSLF is unchanged, and borrowers can continue to pursue forgiveness under the program.

In the meantime, it’s wise to save copies of any PSLF forms you submit, document all the qualifying payments you’ve made and continue to make, and keep records of your employment certification and recertification.

Income-Driven Repayment Plans

March 26, 2025: The SAVE Plan is no longer available after a federal court blocked its implementation in February 2025. However, applications for other income-driven repayment plans and for loan consolidation are available again. We will update this page as more information becomes available.

Income-driven repayment (IDR) plans — which include Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Saving on a Valuable Education (SAVE) — are designed to make repayment easier for those who can prove that paying back their student loans is a significant financial burden. Payments are based on a borrower’s discretionary income and family size.

Typically, the remaining balances on eligible student loans are forgiven under IDR plans after a borrower makes a certain number of qualifying on-time payments over 20 to 25 years. But as of late March 2025, forgiveness has been paused on all of the IDR plans except IBR (the IBR plan is excluded because it was enacted separately by Congress).
Applications for IDR plans were also on hold beginning in mid-February 2025, after a federal court issued an injunction that prevented the DOE from implementing the SAVE plan as well as parts of other IDR plans. But as of March 26, online applications for three of the IDR plans are now available again, and loan servicers will begin processing applications soon.
However, the SAVE plan remains blocked by a federal court. Forgiveness has been paused for borrowers who were already enrolled in the plan, and they have been placed in interest-free forbearance.

You can find out more and get updates on the Federal Student Aid website.

Deferment and Forbearance Options

Borrowers can still apply for deferment or forbearance if they’re having trouble repaying their federal student loans. You can find deferment and forbearance forms on the FSA website. Fill them out and send them to your loan servicer.

To be eligible for a student loan deferment, you must be experiencing such situations as economic hardship, cancer treatment, military service, unemployment, or be attending school. If you qualify, deferment allows you to temporarily stop making payments on your student loans. Interest does not accrue on certain loans during deferment, including most subsidized federal loans.

During a student loan forbearance, you can stop making payments or reduce your monthly payments for up to 12 months at a time. But in most cases, interest accrues on your loans while you’re in forbearance. To qualify for forbearance, you must apply for either general forbearance, which includes undergoing financial difficulties or a change in employment, or mandatory forbearance for individuals pursuing a medical residency or serving in the National Guard, for example.

Recommended: Should I Consolidate My Student Loans?

Steps Borrowers Should Consider

Whether or not recent headlines have you feeling nervous about your student loans, here’s some good advice on how to stay on top of your student loans that’s relevant regardless of what’s happening with the DOE.

Monitor Loan Accounts Regularly

Check your student loan accounts on a regular basis to monitor your payments, current loan balance, and loan status. Keep any documents you receive about your loans, including statements, correspondence about repayment, and records about your process toward forgiveness, if applicable. If you see any errors or have questions, reach out to your loan servicer.

Maintain Communication with Loan Servicers

Stay in touch with your loan servicer. Bookmark their website and save their contact information. Watch out for emails and other communication from your servicer that might contain important updates.

And remember, your monthly student loan payments are still due, so be sure to make them on time to avoid possible student loan default.

Stay Informed About Policy Changes

Follow the news for policy changes regarding student loans. You can set news alerts on your phone or computer to help stay on top of any updates, and regularly check the FSA website for developments. Read emails and letters from your loan servicer.

Long-Term Considerations for Borrowers

Over the long-term, there are some other important student loan issues for borrowers to consider. These include:

Changes in Loan Terms and Conditions

The terms and conditions of federal student loans that have already been issued shouldn’t change, student loan experts say. Those terms and conditions were established when you took out the loan and signed the promissory note.

Impact on Future Borrowers and Financial Aid

At this point, eligibility to qualify for future federal financial aid, including student loans and Pell Grants, has not been affected. However, future policy changes could potentially impact the process of administering and disbursing financial aid.

The Takeaway

In late March 2025, President Trump signed an executive order to close down the Department of Education, and he later announced that the Small Business Administration would take over the federal government’s student loan portfolio. Lawsuits have been filed against the administration saying that these changes violate federal law as well as the Constitution.

While it’s not clear what might happen next, borrowers are responsible for their monthly student loan payments. They should also monitor their student loan accounts and payments, keep good records of all transactions, stay in touch with their loan servicer, and watch for updates and additional changes.

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


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

FAQ

Will my student loan payments be paused since the Department of Education may be shut down?

No, student loan payments will not pause whether or not the Department of Education shuts down. Borrowers must continue to make their monthly student loan payments, regardless. Be sure to keep good records of your payments and loan balance, and if you have questions, contact your loan servicer.

How does the proposed shutdown affect the processing of new federal student aid applications?

As of late March 2025, the application process for financial aid, including filling out and submitting the Federal Application for Student Aid (FAFSA) and the disbursement of loans is not expected to change. However, given recent job eliminations at the agency, it’s possible that there could be future delays or complications.

How can I contact my loan servicer if the Department of Education is closing?

Log into your StudentAid.gov account, and scroll down to the “My Loan Servicers” section on your dashboard to get your loan servicer’s name and contact information. Then you can reach out to them directly. Keep in mind that shutting down the DOE would require an Act of Congress, so the agency will continue to operate for the foreseeable future.

Are there any legislative proposals to eliminate the Department of Education?

In addition to President Trump’s executive order instructing the Secretary of Education to close down the Department of Education, there is also legislation in motion to eliminate the department. In late January 2025, H.R. 899, a bill to abolish the DOE by the end of 2026, was reintroduced in the House of Representatives by Rep. Thomas Massie (R-Kentucky).

Will interest continue to accrue on my federal student loans if the Department of Education shuts down?

Yes, federal student loans will continue to accrue interest, even if the Department of Education closes.

photo credit: iStock/Jacob Wackerhausen

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

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



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

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

This article is not intended to be legal advice. Please consult an attorney for 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.


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

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Apr
07
2025
Guide to Moneyness in Options

Guide to Moneyness in Options

By | Growing Wealth, invest, Investing | Comments Off on Guide to Moneyness in Options


Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Moneyness in options refers to the relationship between an option’s strike price and the current price of the underlying asset.

Options are either in-the-money (ITM), out-of-the-money (OTM), at-the-money (ATM), or near-the-money. You can also have options that are deep-in-the-money or far-out-of-the-money.

Generally, a call option is in-the-money when the strike price is below the underlying asset price while a put is ITM when the strike price is above the underlying asset price.

You flip the relationship for out-of-the-money options: an OTM call’s strike price is above the underlying stock price while an OTM put’s strike price is below the stock price.

Key Points

•   Moneyness describes the relationship between an option’s strike price and the underlying asset’s price.

•   Options can be in-the-money, out-of-the-money, at-the-money, or near-the-money.

•   In-the-money options have both intrinsic and time value.

•   Out-of-the-money options only have time value.

•   Moneyness impacts trading strategies and option pricing.

What Is Moneyness?

The moneyness of an option describes the relationship between the strike price of an options contract and the price of the underlying shares. The strike price is the price at which an investor can buy or sell a derivative contract.

Option moneyness may change as the underlying stock price fluctuates. A call option that is out-of-the-money one day could become in-the-money if the stock price rises.

Moneyness may also change throughout the trading day depending on price fluctuations in the underlying stock.
Moneyness of options plays a role in constructing options trading techniques, such as going long or short options, purchasing puts or calls, and executing more sophisticated options strategies.

Recommended: How to Trade Stock Options

How Does Moneyness Work?

Understanding the moneyness of an option is important for different core options trading strategies. As explained earlier, moneyness works by comparing the strike price of an option to the market price of the underlying shares.

Because options are complex, it’s also important to know options terminology.

•   An in-the-money (ITM) option has intrinsic value and time value.

•   An out-of-the-money (OTM) option only has time value, and thus is worthless if exercised.

•   OTM options have zero intrinsic value and thus are cheaper than in-the-money options.

•   At-the-money (ATM) options are rare since it might only occur for a moment when the stock price equals a specific strike price — near-the-money options are more common.

•   A near-the-money option has a strike closest to the underlying share price on an options chain.

Traders who are bullish on a stock may consider purchasing call options that are out-of-the-money, as these could experience significant percentage gains if the stock price rises sharply. They also drop the most if the price moves against the position.

In-the-money options may be more effective for traders anticipating moderate price movements. Due to leverage, ITM options can result in greater potential returns or losses compared to directly purchasing the underlying stock.

The deeper in-the-money an option is, the greater the sensitivity it will have to movements in the underlying shares.

Understanding Intrinsic and Time Value of Options

What’s the difference between intrinsic value and time value? It’s important to understand how these two factors play into the value of options.

The intrinsic value of an in-the-money call option is calculated as the difference between the stock’s market price and the option’s strike price. The intrinsic value of an in-the money put is the strike price of the option less the price of buying the stock.

The difference between the intrinsic value and the actual current price of the option is time value. Options that are in the money always have intrinsic value. Out-of-the-money options have no intrinsic value, but they might have time value.

Time value is influenced by multiple factors, including volatility and time until expiration. Learning about the option Greeks can help traders inform their strategies.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Types of Moneyness

An option can be categorized in four common ways with respect to the relationship with its strike price and underlying share price: in-the-money, out-of-the-money, at-the-money, and near-the-money. Understanding the differences between in-the-money vs. out-of-the-money options is essential for pricing and risk.

In-the-Money (ITM)

In-the-money options have intrinsic value, and may also retain some time value depending on time expiration and implied volatility. For a call option, that means the underlying stock price is above the option’s strike price. A put option is in-the-money when the stock price is below the strike price.

If a call option is in-the-money, the contract holder can exercise the option, receive shares at the strike price, then immediately sell the shares in the market. In-the-money puts allow the option holder to sell a stock at a higher price compared to the market price of the security. Long calls are usually used to place bullish bets on a stock while long puts are generally used when a trader is bearish.

In-the-money options, while having intrinsic value, also have a degree of time value. It is often advantageous for an options trader to exit the trade in the market rather than exercising immediately.

Options that can be exercised at any time before expiration are known as American Style options. Options that can only be exercised upon expiration are European Style. There are other differences between American and European options but the different exercise options are most relevant to this discussion.

Out-of-the-Money (OTM)

An out-of-the-money call option is one in which the strike price is above the underlying stock price. The owner of a call option anticipates that the share price may rise prior to expiration, potentially giving the option intrinsic value.

The seller of a call option benefits when the underlying stock price remains below the exercise price so they can keep the premium they collected when they sold to open the call.

Puts are out-of-the-money when the strike price is below the market price of the underlying shares. The owner of puts is bearish on the stock, so they want the stock to fall below the strike price, so that the puts become in-the-money.

Put sellers, who are neutral to bullish on the stock, hope the share price stays above the exercise price.

Out-of-the-money options do not have intrinsic value. Their premium is made up of time value only. Out-of-the-money options generally have lower premiums compared to in-the-money and at-the-money options, as they have a higher probability of expiring worthless.

At-the-Money (ATM)

At-the-money options have strike prices that match the market price of the underlying stock. These options, like out-of-the-money options, have no intrinsic value. At-the-money options typically cost more than out-of-the-money options, but less than in-the-money options.

This type of option moneyness means that calls and puts are heavily influenced by volatility and time decay of the option.

Near-the-Money

Near-the-money options have strike prices that are very close to the market price of the underlying stock, so they are just slightly in-the-money or out-of-the-money.

Near-the-money options are much more common than at-the-money options since the stock price is rarely precisely at a specific strike price. Near-the-money strikes are used when a trader wants exposure to an at-the-money option that is not available in the market.

Other Moneyness Terms

Other terms for moneyness include deep-in-the-money and far-out-of-the-money. These terms have no real qualitative difference between in-the-money and out-of-the-money, but are simply intensifiers. They are, however, in fairly common usage.

What Moneyness Means to Investors

Option moneyness tells a trader important information. The trader can use the moneyness of an option to help construct a trading thesis.

For example, if a trader expects a stock price to decline significantly in a short time frame, they may consider purchasing an out-of-the-money put option, as its value could increase if the stock price drops sharply.

Moneyness becomes increasingly important in complex options strategies, as multiple option legs can have different moneyness levels. Understanding this relationship is key to managing risk and exposure.

Still, an option holder might exit an option by selling or covering in the market rather than exercising early so that they can capture the time value of an option in addition to any intrinsic value.

The Takeaway

Moneyness describes the relationship between an option’s strike price and the price of the underlying stock. It can help options traders gauge the amount of intrinsic value an option has and inform simple and complex options strategies.

Beyond its role in pricing, moneyness also influences an option’s risk profile and profit potential. Understanding how options move between in-the-money, at-the-money, and out-of-the-money can help traders develop strategies that align with their market outlook and risk tolerance.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

FAQ

How is moneyness calculated?

For a call option, moneyness is calculated by taking the underlying asset’s price and subtracting the option’s strike price. If that is a positive value, the call option is in-the-money. If it is a negative value, the call is out-of-the-money. The moneyness definition describes an option’s strike price relative to its underlying stock’s market price. A call option is in-the-money when the underlying asset price exceeds the strike price for a call to be in-the-money.

For a put option, the opposite is true: Moneyness is calculated by taking the underlying asset’s price and subtracting the option’s strike price. If that is a positive value, the put option is out-of-the-money. If it is a negative value, the put is in-the-money. The underlying asset price has to be below the strike price for a put to be in-the-money.

An at-the-money option is simple when the stock price and strike price are the same. Near-the-money options have strikes very close to the share price.

How are moneyness and delta different?

Option moneyness refers to the relationship between a strike price and the price of the underlying asset. Delta, on the other hand, tells a trader how sensitive an option is to changes in the underlying stock.

How are moneyness and implied volatility related?

Implied volatility tends to be lowest with at-the-money options. It increases when the option moves further out-of-the-money or further in-the-money. The “volatility smile” illustrates how implied volatility varies with an option’s moneyness.

Photo credit: iStock/AsiaVision

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

SOIN-Q125-068

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Apr
07
2025
Leap Options: What Are They? Pros & Cons

LEAPS Options: What Are They? Pros & Cons

By | Growing Wealth, invest, Terminology | Comments Off on LEAPS Options: What Are They? Pros & Cons


Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

LEAPS are long-term options contracts that have an expiration period between one and three years, versus less than a year for standard options. LEAPS is an acronym, which stands for “long-term equity anticipation securities.”

LEAPS options are derivatives contracts traded on exchanges, and allow investors to utilize less capital than if they were purchasing the underlying asset outright.

Other than the longer-than-normal expiration date, leap options are functionally much like other types of options — they’re contracts that grant the buyer the right to buy or sell an underlying asset at a specific price before its expiration date.

LEAPS Options Defined

Like standard options, purchasing a LEAPS contract gives the investor the right — but not the obligation — to buy or sell the underlying asset at a set price (the strike price) before the contract expires.

LEAPS options are a variation on standard options contracts, offering extended expiration periods that some investors may include among their strategies for trading options.

LEAPS come in two basic flavors: call options and put options. And like shorter-term options, traders pay a premium when buying LEAPS options. Further, LEAPS can be tied to individual stocks or ETFs, as well as market indexes and other types of securities.

Recommended: Options Trading 101

How to Buy LEAPS Options?

Buying LEAPS options involves selecting a contract with a longer expiration date — typically more than one year out — compared to standard options. Traders begin by identifying a target asset, choosing a strike price, and deciding whether to purchase a call or put option.

From there, it’s a matter of evaluating the contract’s premium, expiration timeline, and how the option fits into a broader investment strategy. Because LEAPS contracts extend over a longer period, they may be better suited towards investors with a long-term market outlook.

Remember, LEAPS options expire more than a year from when they’re purchased, so opting for the longer-term expiration date will differentiate a LEAPS option from a standard option purchase. This may be helpful when considering long-term vs. short-term strategies.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

What Are the Pros & Cons of LEAPS Options?

Like trading other types of options, there are some upsides and downsides to trading and investing with LEAPS options:

What Are the Pros of LEAPS Options?

One potential advantage of trading LEAPS options is their longer time frame, which results in slower time decay and allows their value to more closely track the price movements of the underlying asset.

A less recognized advantage of the longer time frame is that — unlike options that may expire in months, weeks, or even days — the need to constantly oversee the markets and to take advantage of short-term moves is lessened.

LEAPS also tend to cost less than their underlying asset, making them an attractive alternative for some investors.

But perhaps the biggest advantage to LEAPS is their potential for outsized returns — though they also carry risks, including the potential for total loss of the premium and exposure to long-term volatility.

What Are the Cons of LEAPS Options?

On the flipside, investors should know that LEAPS can have higher premiums than standard options due to the much higher time value of LEAPS, while still remaining cheaper than the underlying asset.

Purchasing LEAPS options requires a higher upfront investment than shorter-term options, increasing potential capital risk.

LEAPS are also not available for every stock, industry, or index out there (index investing is a separate strategy, but some options are tied to indexes). So, you may not be able to buy a LEAPS option for a specific desired asset.

Plus, because LEAPS tend to cost more than shorter-term options, they can also magnify potential losses if the trade doesn’t perform as expected.

LEAPS Options: Pros and Cons
Pros

 Cons
Potentially magnify investing gains Potentially increase investing losses
Costs less than the underlying asset Higher premiums vs. standard options
Value mirrors underlying asset more closely LEAPS may not be available for all assets

Explaining LEAPS Options Trading

How does LEAPS options trading actually work?

Let’s run through an example, noting that trading LEAPS is essentially the same as trading options, but with longer expiration periods:

If you believed that a certain stock was going to see a decline in value at some point in the next few years, you could use LEAPS options to position yourself accordingly. Specifically, you’d look at buying a LEAPS put option on that stock with a long-term expiration date.

The stock is trading at around $55, but again, you think that it will fall. As such, you pay a $7.50 premium for a $45 put that matures more than a year from now.

If the stock declines in price, the put option’s value may increase, allowing you to sell it for a profit before the contract expires. Or, on the other hand, you can wait for the stock to drop below $37.50 (your break even point = $45 – $7.50 = $37.50) and exercise your option or sell the option. Based on time to expiration and multiple other factors, you can decide which choice is more profitable.

Recommended: Long-term Investing Strategies

What Are Some Helpful LEAPS Options Strategies?

There are different strategies for trading options, and many can be applied to trading LEAPS.

One basic LEAPS options trading strategy is to buy calls when bullish on an asset, and try to benefit from a potential increase in value of the underlying asset over the course of a year or two.

LEAPS can almost stand in for the underlying asset itself because they offer longer exposure to its price movements, and offer a couple of key advantages: They can increase returns by allowing you control over more shares for less capital, and minimizing your potential losses to the cost of the option’s premium.

Active investors can use LEAPS alongside standard options to benefit both from short- and long-term market activity. If, for instance, you thought a stock was going to experience a value decline in the next few months, but suspect that it may bounce back and increase in value over two or three years’ time.

You could buy a standard put option with a long-term LEAPS call option to express both short-term caution and longer-term optimism.

The Takeaway

The chief difference between LEAPS options and standard options is that they have longer-than-normal expiration periods of one to three years versus less than a year for traditional options. Investors may use LEAPS to express long-term views on a stock or index without committing the full capital required to own the asset outright.

LEAPS are similar to standard options, however, in that they’re derivative contracts that grant the buyer the right to buy (call options) or sell (put options) an underlying asset at a specific price before its expiration date.

Options trading can be complex and high risk, whether trading LEAPS or short-term options, so investors interested in options should carefully consider their risk tolerance and investment goals before incorporating them into a portfolio.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

🛈 While SoFi does not offer LEAPS options at this time, investors may purchase put and call options on SoFi’s options trading platform.

Photo credit: iStock/dusanpetkovic

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

SOIN-Q125-066

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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