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Distance learning can offer students the flexibility to balance coursework with working, taking care of family, and other responsibilities. The cheapest online colleges can help you minimize student loan debt while working toward a degree and career advancement.

Online colleges offer degrees across a wide range of academic disciplines. In 2022, around 26% of college students were taking online classes exclusively.

This guide will explore online college costs, the least expensive online colleges, and strategies to pay for an online degree.

Overview of Online College Costs

Whether studying in-person or online, college costs typically include more than just tuition.

Students taking online classes may have to pay technology fees and purchase books and materials depending on their area of study. The cost of an online degree can also vary by institution and in-state vs. out-of-state residency.

Here’s a closer look at the main cost considerations for online colleges.

Recommended: Guide to Paying for College

Tuition and Fees for Online Programs

Like traditional college, tuition and fees account for most of the cost of attending online college.

Tuition usually varies based on enrollment status or, in other words, whether you’re a full-time vs. part-time student. Part-time students pay per credit hour, whereas full-time students taking 12 to 18 credits per semester may pay a flat rate.

Online programs may also include fees on top of tuition, such as a technology or distance learning fee, to access virtual resources and technical support services.

Cost Comparison: Online vs. On-Campus

Students considering studying online vs. on-campus may ask which is cheaper. In short, it depends on the institution, degree program, and location, but studying on campus tends to be more expensive.

For example, a first-year, in-state undergrad at Penn State’s University Park campus would pay $19,672 in tuition and fees for the 2024-2025 academic year. Meanwhile, an online undergraduate student would be charged $7,678 per semester, or $15,356 for the academic year.

Looking at tuition and fees is just part of the cost comparison. The total cost of attendance for studying on campus could include transportation expenses, room and board, and a meal plan — all costs that may not be incurred with the cheapest online colleges.

In-State vs. Out-of-State Online Tuition

The cost of online college can vary based on where you live.

At public institutions, students with in-state residency may benefit from subsidized tuition, even for online degree programs. However, most private schools do not differentiate tuition costs between in-state and out-of-state students.

Recommended: In-State Tuition: A Look at Establishing Residency

10 Affordable Online Colleges to Consider

Looking for the cheapest accredited online colleges? Here’s a short list of affordable online colleges to consider.

Factors Contributing to Lower Online College Costs

Why are online colleges cheapest for earning a degree? For starters, traditional colleges with in-person learning offer a range of experiences and infrastructure for students that online colleges don’t.

With online college, students have a much wider range of institutions and degree programs to choose from, increasing their options for an affordable education. Taking classes from home also avoids having to relocate and pay for moving costs.

Here are some additional factors contributing to lower online college costs.

No Campus Facilities or Housing

Dormitories, campus quads, athletic facilities, and many other facilities that define a quintessential college campus require a considerable budget to maintain. Besides tuition, students taking classes in-person may be required to pay for on-campus housing and meal plans for a portion of the full duration of their enrollment.

Meanwhile, students enrolled in online college are typically spared from paying housing and campus facility costs, including parking and recreation fees.

Recommended: Cheapest States to Go to College in the United States

Lower Administrative Overhead

Besides teaching faculty, traditional colleges require onsite staff to support student life on campus. This may include health services, campus events, dining services, and other areas related to student well-being.

With less support staff, online colleges have comparatively less overhead cost to meet the needs of their students.

Technology and Course Delivery Methods

Online colleges may charge additional technology fees for students enrolled in distance learning. However, online students could save on the cost of books and materials if primarily using digital resources for their coursework.

Taking classes online vs. in-person lectures can save on transportation costs, too, which average $1,360 annually for students who commute to college.

Flexible Scheduling and Self-Paced Options

Self-paced online programs allow students to watch lectures and complete assignments at their own speed. This approach can make it possible to take online classes while working or juggling family commitments, helping to pay for school and save on childcare costs.

Additional Cost-Saving Strategies

Though online college can be more affordable, students might consider other options for lowering costs.

Wondering how to pay for college? Here are some additional ways to reduce the cost of going to online college.

Transfer Credits and Prior Learning

Students who previously attended another institution could save on their online education by transferring credits. Transferring college credits usually involves an application fee or enrollment fee, but that’s still cheaper than taking the credit hours anew.

Financial Aid and Scholarships

Around 87% of college students receive some form of financial aid. Most colleges with free tuition or income-based tuition are in-person institutions, though students enrolled in online programs may qualify for financial aid and scholarships to help cover the cost of tuition.

When browsing online programs, keep in mind that colleges and universities must be accredited for students to be eligible for federal student aid, such as Pell Grants and federal student loans. Online students may also leverage private student loans and state and institutional financial aid in the form of scholarships or grants.

Already in the workforce? There are jobs that pay for your degree through scholarships or tuition reimbursement that could be a fit for your academic and professional goals.

Recommended: How to Complete the FAFSA Step by Step

Accelerated or Competency-Based Programs

An online competency-based or accelerated program is another option for students to learn at their own pace instead of following a set semester schedule.

Generally, students can choose when to take an assessment to demonstrate they’ve mastered a competency, potentially earning their degree faster and at a reduced cost.

The Takeaway

The cheapest online colleges can make earning a college degree more affordable. Besides the cost of tuition and fees, financial aid and long-term career goals are important considerations when comparing schools and degree programs.

To pay for your online education, you can use cash savings, grants, scholarships, and student loans.

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 the cheapest accredited online college?

The cheapest accredited online college on our list is University of North Carolina at Pembroke. Note that the cheapest online college can differ based on a student’s chosen program, credit hours, and residency status.

Are cheap online degrees worth it?

A cheap online degree can offer a flexible and affordable path to higher education and career advancement. When evaluating online degrees, consider the program’s cost, curriculum, and reputation.

How can I maximize cost savings for an online degree?

You can save on online college by enrolling in a program offering cheaper in-state tuition or self-paced learning to earn a degree in less time.

Do employers value cheap online degrees?

Employers will value a cheap online degree the same as a traditional degree if it’s from an accredited institution and meets the same academic standards. Earning an online degree while working also demonstrates time management skills to potential employers.

Photo credit: iStock/DisobeyArt

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

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

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

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.

SOISL-Q324-033

While some fluctuations in your credit score are normal, that may not be much comfort if yours drops by 30 points. Take a deep breath, and remember that there are several possible reasons for a dip. Perhaps a few of your loan payments have been late, or you’ve recently had to charge a lot on your credit card. Or maybe it’s because of factors outside of your control, like an error on your credit report or identity theft.

In any case, it’s a good idea to investigate why your credit score dropped 30 points so you can help get your finances back on track. Here’s what to know.

Why Did Your Credit Score Drop 30 Points?

You may be thinking, Why did my credit score drop 30 points when nothing changed? The truth is, something triggered the dip, so it’s time to start digging. The first step is to review your credit report from each of the three national credit reporting agencies: TransUnion, Equifax, and Experian. You can check your credit report for free once a week; visit AnnualCreditReport.com to get started.

Review each report carefully, starting with the most recent activity and working your way back. There may be discrepancies between reports, so give each one a thorough read. If you spot inaccuracies, you can take steps to dispute them.

Should You Be Worried About Your Credit Score Dropping?

An occasional, slight drop in your credit score is probably not worth losing sleep over. After all, small dips tend to be temporary. However, a 30-point drop could be enough to bump you to a different credit score range, such as going from “fair” to “poor.” And that could affect whether you’re able to get approved or receive favorable terms for a loan or credit card.

Reasons Your Credit Score Went Down

Here are some of the most common reasons why credit scores fall.

Increased Credit Utilization Ratio

If you’ve been racking up purchases on your credit cards lately, you may have increased your credit utilization ratio — or the amount of available credit you’re using. Fortunately, there are a few ways to lower your credit utilization, such as paying down your debts.

Missed Monthly Payment

Go 30 or more days without making a payment, and the lender may report your delinquency to the credit bureaus.

Disputed Credit Report

Formal credit disputes can cause your report to be under dispute, which can cause a temporary drop.

Multiple Credit Applications

Each time you apply for credit, the lender performs a hard inquiry, which can knock a few points off your score. To help protect your score from getting dinged, avoid applying for multiple credit cards within a short time frame.

Credit Report Error

Mistakes happen, and sometimes another person’s late payment gets logged on your account. If you do find any errors, dispute them.

Identity Theft

Someone else may have opened a credit account in your name and run up charges. The more debt you have to your name, the lower your score may be.

Closed Credit Card Account

When you close out an account you’ve had for a long time, you run the risk of lowering the average age of your accounts. And that accounts for 15% of your credit score.

Bankruptcy or Foreclosure

Bankruptcy and foreclosures can deliver a major blow to your credit score and stay on your credit report for seven to 10 years.

What Can You Do If Your Credit Score Dropped by 30 Points?

If your credit score fell by 30 points, there are steps you can take to start building it back. One of the most important things you can do is ensure you’re paying your bills on time, every time. A spending app can help you manage bills. Other strategies include paying down debts, managing how much available credit you use, and maintaining a diverse credit mix.

Recommended: Why Do I Have Different Credit Scores?

Examples of Credit Score Dropping

Let’s take a look at some scenarios when you may see your credit score fall.

One example is sending in a payment 30 days after the due date. Even if you have an otherwise perfect track record, a late payment could shave as many as 100 points off your credit score, depending on your score.

Another situation when your score might drop is when you apply for a loan or new credit card and the lender performs a hard inquiry. Each inquiry could cause your score to fall by five points or more, and it may stay on your credit report for up to two years. However, when FICO™ calculates your score, it considers only credit inquiries made within the last 12 months.

How to Build Credit

As we mentioned, paying bills on time, diversifying your credit mix, whittling down debt, and managing your credit utilization ratio are all ways to help build your credit score. But there are other steps you can take to boost your numbers.

One strategy is to be added as an authorized user on someone else’s credit card. Just be sure that person is someone you trust, has a good credit score, and responsibly manages the account.

Another option is to open a secured credit card. With secured credit cards, you put down a certain amount of money that acts as a security deposit. You get that same amount to spend as a line of credit. You can rebuild credit by making on-time payments each month.

You may also be able to help improve your credit score when you take out an installment loan, such as a personal loan or car loan. Besides giving you the opportunity to make regular, on-time payments, a loan can diversify your credit mix and lower your overall credit utilization.

Recommended: How Long Does It Take to Build Credit?

Allow Some Time Before Checking Your Score

It’s understandable to expect your credit score to tick upward right after you start taking positive actions. But change won’t happen overnight. In fact, it can take 30 days or more for your credit score to update and reflect payments you’ve made.

Closing a Credit Card Account Can Hurt Your Score

Sometimes the reason why your credit score drops by 30 points is because you closed a credit card you’ve had for a long time. After you’ve consistently paid your bills on time and knocked out the balance, consider keeping the card open. The length of your credit history impacts your score, and closing a card can bring down the average age of your accounts.

What Factors Impact Credit Scores?

What affects your credit score? Many factors, but let’s take a look at the five biggest ones and how much they impact your FICO score. (It’s used in 90% of lending decisions.)

•   Payment history (35%)

•   Amounts owed (30%)

•   Length of credit history (15%)

•   New credit (10%)

•   Credit mix (10%)

Pros and Cons of Tracking Your Credit Score

Except for the time it takes to get your credit report, there aren’t many reasons why you wouldn’t want to keep tabs on your credit score. The benefits, however, are many. You can spot errors or issues early on and start taking the appropriate steps to remedy the situation. You’ll also have a better idea of your current credit status and what potential lenders will see on your credit report.

How to Monitor Your Credit Score

One of the easiest ways to get credit score updates is to sign up for a service online. There are numerous companies offering safe, reliable credit score monitoring.

It’s also worth noting that you can check your report without paying. Banks, credit unions, and credit cards often offer free credit score updates to customers.

The Takeaway

If your credit score dropped 30 points, it’s a good idea to investigate why. Changes in your credit utilization or credit mix, applying for multiple lines of credit at once, late payments, errors, and identity theft could all cause a dip.

A good first step is to check your credit report and dispute any errors. At the same time, you can practice sound financial habits, like paying bills on time, monitoring how much of your available credit you’re using, and keeping older accounts open.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Why is my credit score going down if I pay everything on time?

There are multiple reasons your credit score could go down even if you’ve paid your bills on time. For example, has your credit utilization ratio gone up? If you just used your cards for some big transactions and increased the amount of debt you carry, that may be the reason your score dropped.

Why did my credit score drop 30 points when nothing changed?

Your credit score can drop 30 points for a variety of reasons. A good first move is to check your credit reports; you can receive them for free each week. Look for any unfamiliar activity, and dispute errors with the credit bureau.

Why did my FICO score go down for no reason?

Any change to the factors that go into your FICO score could prompt a drop. That said, one common reason is a change in your credit utilization ratio. Even if you pay your bills on time, a rise in debt could cause your score to fall.

Photo credit: iStock/MStudioImages

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

SORL-Q324-007

Divorce brings about many challenges, one of which is figuring out how to finance your child’s college education. College tuition is a significant expense — approaching $40,000 per year, on average — and the financial dynamics between divorced parents can add complexity to an already difficult decision-making process.

Understanding your options, obligations, and available resources is crucial for ensuring your child’s educational future is secure. Here, we’ll explore how divorced parents can approach paying for college tuition, including understanding legal obligations, navigating financial aid, and collaborating together to achieve the best outcome for their child.

Understanding Legal Obligations for College Payment

It’s important to understand your legal obligations when it comes to paying for college, particularly in connection with child support and divorce decrees. It’s also important to note that the FAFSA® guidelines for divorced parents have changed. Rather than using the financial information of who the child lived with the most, the FAFSA will use the information from the parent who provided the most financial support. Let’s take a look.

Child Support and College Expenses

Divorce settlement agreements often address who will pay for college, which is separate from child support.

What exactly is child support? When parents get divorced, it’s common for the parent who does not have custody to pay child support, which usually translates to financial support for minor children. Parents can stop making child support payments when a child turns 18 and the child graduates from high school (unless the child is still in high school and cannot support themselves).

In some cases, one parent may also be required to pay for college, as well. Educational expenses typically get addressed during the divorce process, so you’ll know your exact responsibilities regarding your child’s college education. However, your obligation will depend on your state’s laws.

Some states may order divorced parents to help pay for college-related expenses, while others view them as conditional expenses. The following states allow courts to order non-custodial parents to help pay for college:

•   Alabama

•   Arizona

•   Colorado

•   Connecticut

•   Florida

•   Georgia

•   Hawaii

•   Illinois

•   Indiana

•   Iowa

•   Maryland

•   Massachusetts

•   Mississippi

•   Missouri

•   Montana

•   New Jersey

•   New York

•   North Dakota

•   Oregon

•   South Carolina

•   South Dakota

•   Utah

•   West Virginia

•   Washington

•   Washington, D.C.

Divorce Decrees and Education Provisions

A divorce decree refers to the legal paperwork that formalizes the end of a marriage and outlines the binding terms after a divorce. It outlines child support and other factors, including education provisions. A divorce decree should also identify who will pay for college preparation and college itself, which can include:

•   Standardized tests

•   Admission applications

•   College visits

•   Tuition

•   Room and board

•   Required college fees

For example, one parent may be required to pay for room and board, while the other parent may pay tuition. You may also want to consider an appropriate cap on these expenses, considering the rising costs of college and the length of time it can take students to complete their degrees.

Keep in mind, too, that parents are not required to pay for their child’s college education. College students can rely on cash savings, scholarships, and both federal and private student loans to cover the cost of college.

Recommended: Examining the Different Types of Student Loans

Strategies for Tuition Cost-Sharing Between Parents

Let’s take a look at some strategies for how to pay for college for divorced parents, from negotiating contributions to making proportional payments based on income.

Negotiating Contributions

It’s important to review your financial situation together, consider the resources each parent can draw from, and figure out which types of expenses to cover. It’s best to create a written plan using an attorney or mediator to outline how you’ll manage college costs. The financial situation of each party should dictate a customized plan.

It’s important to note that when splitting costs, you may not be able to divide costs right down the middle (though splitting it 50/50 might make sense if both parents have a similar income and educational values). For example, your ex may not agree on the necessity of studying abroad or expensive curtains for a dorm room. Since those expenses aren’t “necessary,” either the parent who wants to pay for them can, or the student can be responsible for paying for non-essential expenses on their own.

Proportional Payments Based on Income

Those undergoing divorce often agree to split college expenses based on income. If one partner has a significantly smaller income than the other, the income disparity may be taken into account. For example, if one parent makes 80% of the combined income, that parent would be responsible for 80% of college costs and expenses.

Maximizing Financial Aid Eligibility

To qualify for financial aid, students must fill out the Free Application for Federal Student Aid, or FAFSA. For divorced or separated parents, the FAFSA process may differ from that of married parents.

Reporting Divorced Parent Information

The FAFSA is a free application that students can use to apply for federal, state, and institutional aid. Every family should file the FAFSA, and how you fill it out depends on whether you and your ex live together or not.

You answer questions on the FAFSA about the parent who provided more financial support that year. If that parent has remarried, the stepparent’s financial information will also be required.

The parent’s income and assets are used to calculate the Student Aid Index (formerly the Expected Family Contribution), which determines the student’s eligibility for federal financial aid. The parent who provided the least financial support is not required to put their financial information on the FAFSA, but it may be needed for other financial aid applications, such as the CSS Profile, which some private colleges require.

If you’re divorced and live together, you’ll add “unmarried and both legal parents living together” and answer questions about both of them on the FAFSA. Note that if you are separated from your spouse but still live together, you’ll indicate your marital status as “married or remarried,” not “divorced or separated.”

Special Circumstances Considerations

If you get divorced during the middle of a school year, you may want to submit a special circumstances form through the financial aid office of the school your child attends. The financial aid office may take a divorce into consideration and readjust your child’s aid award due to your financial situation. Anytime you experience a change in income or assets, notify the admissions office immediately.

Loans and Financing Options for Divorced Parents

Even with financial aid, scholarships, and savings, many families find they still need additional funds to cover college costs. Several financing options are available to help bridge the gap, including:

•   Federal Parent PLUS Loans: Parent PLUS Loans are available to parents of dependent undergraduate students. They offer a fixed interest rate and flexible repayment options. However, they require a credit check, and parents are responsible for repayment.

•   Private Student Loans: These loans are offered by private lenders and can be used to pay for college costs not covered by financial aid. Interest rates and terms vary, and a cosigner may be required.

•   Home Equity Loans or Lines of Credit: If you own a home, you may be able to tap into your home’s equity to help pay for college. These loans often have lower interest rates than other types of loans, but they put your home at risk if you can’t repay.

•   Payment Plans: Many colleges offer payment plans that allow you to spread tuition payments over the course of the year. This can make payments more manageable without accruing interest.

Tax Implications and Benefits

Fortunately, there are tax benefits to paying for college, beginning with claiming your student as a dependent.

Claiming the Student as a Dependent

Claiming a student as a dependent can save you thousands on your taxes. You can claim a college student as a dependent on your tax return as long as the student is younger than you, under age 24, and a full-time student for at least five months of the year.

Education Tax Credits and Deductions

Worried you can’t afford a child’s college bills? Don’t forget that tax credits and other tax benefits can offset the qualified costs of college or career school (tuition, fees, books, supplies, equipment). These benefits include:

•   American Opportunity Credit: The American Opportunity Credit allows you to claim up to $2,500 per student per year for the first four years of school your child is in school.

•   Lifetime Learning Credit: The Lifetime Learning Credit allows you to claim up to $2,000 per student per year for tuition and fees, books, supplies, and equipment.

•   QTP/529 Plan: If you contribute to a QTP/529 plan to prepay or save for education expenses, you can withdraw the money you put in, tax-free.

•   IRA Withdrawals: If you take money from an individual retirement account (IRA), you owe federal income tax on the amount you withdraw, but not the withdrawal penalty.

Communicating and Collaborating with Your Ex

Effective communication with your ex-spouse is key to successfully navigating college financing. Even if your divorce was contentious, it’s important to set aside differences and focus on what’s best for your child. This includes discussing financial responsibilities, coordinating on financial aid applications, and agreeing on a plan for covering any remaining costs.

It’s also important to involve your child in discussions about financing their education. Be open about the costs, what you and your ex-spouse can contribute, and what they may need to cover through scholarships, work-study programs, or student loans. This helps set realistic expectations and encourages your child to take an active role in their financial future.

The Takeaway

Paying for college can be a daunting task for divorced parents, but with careful planning, communication, and collaboration, it’s possible to navigate the challenges successfully.

You should start by understanding the legal obligations and exploring all available financial aid options. Work together with your ex-spouse to create a plan that works for both of you, and involve your child in discussions about financing their education.

Options for paying for college as a divorced parent include splitting the cost with your ex based on each of your incomes, having your student apply for scholarships, and relying on both federal and private student loans.

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

How is the expected family contribution calculated for divorced parents?

The expected family contribution (EFC) has been revamped to become the Student Aid Index (SAI) through the FAFSA Simplification Act. The SAI evaluates the financial resources that a student may contribute toward educational expenses. Because of the FAFSA Simplification Act, the parent who provided the most financial support during the year is the income that will be used to determine the SAI.

What if one parent refuses to pay for college?

Parents — married or divorced — are not obligated to pay for college. Child support might terminate when the child reaches the age of majority (such as 18 or 21), and students enrolled in a postsecondary educational institution might have to access financial support through college. Check with a family law attorney licensed in your state to give you guidance about who may be obligated to pay for college.

Can stepparents be required to pay for college tuition?

Stepparents are usually not required to financially support stepchildren, but in a few instances, family court may require a stepparent to pay financial support for a stepchild. Various factors may come into play, including the length of the marriage, relationship between stepparent and stepchild, existing financial support, and more.

Photo credit: iStock/FG Trade

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

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

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

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

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

SOISL-Q324-031

A high-risk personal loan can be a source of funding for people who have a low credit score or no credit history and need to access cash. It is considered “high-risk” because the borrower is seen as more likely to default on the loan. For this reason, the interest rate is likely to be significantly higher than what a borrower with a more creditworthy profile would be offered via a conventional personal loan.

Here, learn the details of high-risk personal loans, their pros and cons, and alternatives if you need a quick infusion of cash.

What Are High-Risk Personal Loans?

High-risk personal loans make cash available to those with a poor credit score or without a credit history. Some points to consider:

•   Most personal loans require a credit score of 580 or higher, but if you have a low credit score (typically between 300 and 579) or lack a robust credit history, you may be able to tap into a high-risk personal loan.

•   These loans can give you access to cash, but they often come with higher interest rates, higher fees, strict repayment terms, and limits on the amount of money you can borrow.

•   While some of these are unsecured personal loans, others may be secured. This means you may be required to put up collateral, or an asset, to be approved for the loan. In this situation, if you default on the loan, the lender can seize your asset.

•   Personal loans typically come with fixed interest rates, and you must repay them in fixed monthly installments over a specified period, usually up to seven years. High-risk personal loans may have much shorter terms, however.

It’s worth noting that personal loans don’t usually have any restrictions on their usage. You could use them to pay for a car repair, travel, credit card debt, a new kitchen appliance, and almost any other legal purchase or service.

Recommended: Personal Loan Glossary

Types of High-Risk Loans

Here are some options you might consider for high-risk personal loans.

High-Risk Unsecured Loan

With this loan, you will not need to put up collateral to obtain funding. Typically, the lender will offer you a lump sum of cash; perhaps up to $10,000. While this may supply a quick cash infusion, keep in mind that the “high risk” cuts both ways. The lender is taking a gamble on you, as the odds of you defaulting may be high. But you are also probably securing a loan at a high interest rate and with significant fees and limitations.

High-Risk Secured Loan

In the case of a high-risk secured loan, you will be required to put up a form of collateral (such as real estate or a savings account) to gain access to funding. If a lender offers you this kind of loan, keep in mind that if you default, you could lose your collateral.

Payday Loan

Payday loans are short-term, high-cost loans, usually due on your next payday. Typically they provide a small amount of money, such as $500, that needs to be repaid within two to four weeks, and are offered online or at retail locations of payday lenders.

Here’s how they often work: You write a post-dated check for the amount borrowed plus fees, and the lender debits the funds from your account on the day the loan is due. Or you might grant the lender permission to pull the funds from your bank account electronically. If you can’t pay off the loan on time, it could roll over with more interest and fees accruing.

Note that these loans can involve an annual percentage rate (APR) of up to an eye-watering 400%. For this reason, they are considered a last resort.

Car Title Loan

Not all states offer them, but a car title loan lender lets you borrow between 25% to 50% of your car’s value, typically starting at $100 with 15- to 30-day repayment periods. In exchange, you put your car up for collateral. This means the lender can take possession of your car if you don’t repay the loan. (In one review, the Consumer Financial Protection Bureau found that one in five borrowers of this kind of funding winds up losing their vehicle.)

Lenders who offer car title loans typically have very low or no credit requirements, and you can get funding fairly quickly, even in a day. They also likely come with extremely steep interest rates, up to 300% APR.

Pawn Shop Loan

With a pawn shop loan, you hand over an item as collateral (such as jewelry, a musical instrument, or a computer), and the pawn shop offers a loan based on the item’s appraised value.

The shop may lend 25% to 60% of the resale value of the item, but note that if you fail to repay the loan, the pawn shop can keep and then sell the item. The pawn shop may give you 30 to 60 days to repay the loan.

Here’s the risky part: The APRs are high, around 200%, and vary based on your state.

Recommended: Using a Personal Loan to Pay Off Credit Card Debt

Figuring Out if You’re a High-Risk Borrower

Here are signs that you would be considered a high-risk borrower by lenders:

•   You have a non-existent or thin credit history, meaning you don’t have a proven record of handling debt responsibly

•   You have a low credit score (generally, below 580)

•   You have made repeated late payments on loans or credit cards

•   You have defaulted on a loan in the past

•   You have a high debt-to-income ratio (DTI); typically, this means your debts add up to more than 35% of your income

•   You are unemployed

•   You have declared bankruptcy in the past seven to 10 years

Each lender will have its own guidelines regarding to whom they lend, how much, and at what rate and fees. It’s therefore important to check with your lender about the requirements for their personal loans and their terms.

Why Choose a High-Risk Loan?

If you have poor credit or no credit and want to borrow money, a high-risk loan may offer you the best (or only) option to access a loan, particularly if you have an urgent need for cash. You can often access high-risk loans with a lower credit score or minimal credit history than you would need to qualify for traditional loans.

You might seek this kind of loan vs. dipping into an emergency fund you just started or into a college or retirement fund. It could help you preserve those assets if, say, you need quick cash for a move.

It’s important to consider both the pros and the cons of these personal loans so you make the right choice about whether to pursue this type of funding.

Disadvantages to High-Risk Loans

High-risk loans come with several downsides, including the following:

•   Higher interest rates and fees: High-risk loans typically have higher APRs and fees, meaning that you’ll pay more over the loan term. An example: Some have a 400% APR vs. the average APR of 12.38% for conventional personal loans as of August 2024. Some people can get caught in a debt cycle of taking out high-risk loans continually (particularly in the case of payday loans).

•   Risking collateral: You may have to put up an asset as collateral for your loan. If you fall behind on payments, you may lose the asset because your lender will seize it.

•   Lower amounts: You may not get to borrow as much as you prefer, because many lenders will only pay out small amounts to high-risk borrowers. For instance, some payday loans max out at $500.

How to Qualify for a High-Risk Personal Loan

Here’s how you might qualify for a personal loan as a high-risk borrower. Personal loan lenders will want you to see that you’ll likely be able to cover a new loan payment. Among other factors, lenders may use your credit score, your income, and your DTI to assess your ability to repay a loan. In terms of a target DTI, lenders like to see you keep it below 35% for a standard personal loan. With a high-risk loan, you may qualify with a significantly higher figure.

Next, you’ll gather the documents, including:

•   Your ID

•   Social Security number

•   Pay stubs

•   W-2 forms

•   Federal income tax forms

•   Bank account statements

You can apply online for a high-risk personal loan in just a few minutes once you have your materials ready. Your lender will let you know if you need to submit more documentation. In most cases, you’ll have a loan decision fairly quickly (some lenders advertise approval in minutes). If approved, you’ll likely have funds within one to three business days.

Alternatives to High-Risk Loans

You can also consider alternatives to high-risk loans, including:

•   Payday alternative loans: Credit unions may offer their members short-term loans as an alternative to payday loans. Payday alternative loans (PALs) are divided into PALs I and PALs II. PALs 1 offer between $200 and $1,000 with a maximum APR of 28%, and one- to six-month repayment terms. PALs II offer up to $2,000, a maximum 28% APR, and one- to 12-month repayment terms.

•   Family or friend loan: Family members or friends may be willing to lend you money. However, ensure that you can repay the loan in a timely manner so you don’t risk damaging the relationship.

•   Get a cosigner: You can approach someone you know who has good credit to become a cosigner on your application to help you qualify for a standard personal loan. Make sure, however, that both parties involved understand that the cosigner is responsible for taking over your monthly payments if you default on repaying the loan. That’s a major commitment on your cosigner’s behalf.

•   Look for “buy now, pay later” offers: These allow you to purchase an item and then pay it off on an installment plan, which may or may not charge interest.

•   Build your credit: Perhaps it seems obvious, but building your credit can play a key role in helping you qualify for more favorable loans in the future. You might work on positively impacting the factors that determine your credit score or meet with a qualified credit counselor to learn strategies.

Recommended: Guide to Personal Loans

The Takeaway

High-risk personal loans can be a source of quick cash for people with a low credit score or a thin credit history. They can be risky for the lender, because there is a fair chance the borrower might default. They can also be risky for the person seeking the money because the interest rate, fees, and other terms may prove very expensive and/or involve potentially losing any collateral that might be put up.

If you are a high-risk borrower, it’s important to fully understand what these loans involve and the downsides if you cannot repay them on time. It may also be wise to review what options exist before you decide to apply for a high-risk personal loan.

If you’re seeking a standard personal loan, see what SoFi offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

What is considered a high-risk loan?

High-risk loans are funds offered to individuals who may have bad or no credit. In exchange for accepting a higher-risk applicant, lenders typically charge higher APRs and fees and/or may require the borrower to put up collateral.

What type of bank offers high-risk loans?

Banks typically don’t offer loans to high-risk borrowers, though it may be worth checking with them before moving on to another type of lender. Those who do offer high-risk personal loans could be online lenders or a retail payday loan provider, for example.

What two types of loan should you avoid?

There are several types of loans you may want to avoid if possible, including car title loans and payday loans. Why? You will pay high interest rates which can trap you in a cycle of debt. Also, with a car title loan, you are using an asset as collateral, which means you risk losing your vehicle if you can’t repay the loan on time.

Photo credit: iStock/Eleganza

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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.

SOPL-Q324-008

All federal student loans and most private student loans have simple interest. With simple interest, borrowers pay interest only on the principal of the loan.

Loans with compound interest charge interest on the principal and on unpaid interest. This makes them more expensive than simple interest loans.

It’s important to understand how the interest on your student loans is calculated so that you know what you’re paying over the course of your loan term.

Understanding Simple and Compound Interest

The interest you pay on a student loan is the cost of borrowing the money. Here’s how simple vs. compound interest works.

Simple Interest Explained

Simple interest means you pay interest only on the principal balance. You do not accrue interest on any unpaid interest.

Simple interest is calculated using this formula: Principal x Interest Rate x Loan Term.

Compound Interest Defined

With compound interest, you pay more interest over time. The lender charges interest on your loan balance plus the unpaid interest that accrues.

How much compound interest you’ll pay depends on the number of compounding periods your loan has. The more compounding periods, the more the compound interest amount will be.

For example, if your loan compounds daily, the daily interest rate is applied to the principal along with any unpaid interest up until that point.

Over the life of the loan, compound interest will cost a borrower more.

Recommended: Student Loan Debt Guide

How Student Loan Interest Works

The way student loan interest works depends on the type of loan you have.

Federal Student Loan Interest

Federal student loans, which are backed by the U.S. Department of Education, have fixed interest rates, which means the interest rate never changes. While the interest on these loans begins accruing immediately, how the interest is handled depends on the type of loan you have.

With Federal Direct Subsidized loans, which are awarded based on financial need, borrowers do not pay interest while they are in school, during a six-month grace period after graduation, or during any deferment period. The government covers the interest payments during these times.

Direct Unsubsidized loans, which are not awarded based on financial need, work differently. Borrowers are responsible for paying the interest on these loans at all times. If they don’t pay the interest while they are in school, during the six-month grace period after graduation, or in times of student loan deferment, the interest will accrue and be added to the principal of the loan.

All Federal Direct loans are “daily interest” loans, which means interest adds up each day.

Private Student Loan Interest

Private student loans are offered by private lenders such as banks, credit unions, and online lenders. These loans may have either a fixed or variable interest rate.

The interest rates for private student loans are determined by the lender and are based largely on the borrower’s credit score and income.

Many private loans have simple interest, however, some use compound interest. Before taking out a loan, find what type of interest it has. This is one way to help manage student loan debt.

Check out our private student loan guide to learn more about how the interest works on these student loans.

Capitalization of Interest

When interest capitalizes, the unpaid interest is added to the principal amount of the student loan. This increases your loan’s principal balance, and interest is charged on the new, larger balance.

For instance, capitalization may happen during periods of deferment if you have Direct Unsubsidized loans. In that case, the interest may be added to the principal amount of the loan. This might increase your monthly payment and the overall cost of the loan.

Calculating Interest Costs on Student Loans

To calculate interest costs on student loans, first find out what kind of interest the loan has. In most cases, it will be simple interest. As discussed, all federal student loans and many private student loans have simple interest.

To determine how much the monthly simple interest would be, you first need to find out what the daily interest on the loan is. To calculate that, divide the interest rate by 365 and multiply that number by the principal amount.

For a $10,000 loan with a 6.00% interest rate, the calculation would look like this:

0.06/365 x 10,000 = $1.64

You’re paying $1.64 in daily interest. If your billing cycle is 30 days, multiply 1.64 x 30 = 49. That means you’re paying $49 a month in simple interest.

If the student loan has compound interest, the calculation is more complicated. As mentioned, the amount of compound interest you’ll pay depends on the number of compounding periods your loan has. For example, if your loan compounds daily, the interest rate is applied each day to the principal along with any unpaid interest up until that point.

So if your loan is $10,000 and your daily interest amount is $1.64, the next day, that interest is added to the principal and you’re charged interest on the new, higher amount of $10,001.64. The interest charges will continue to increase this way each day.

A student loan with compound interest can end up costing you more and result in your living with student loan debt over the long term.

Strategies to Minimize Student Loan Interest

Fortunately, there are ways to minimize student loan interest. Here are some steps that can help.

Making Interest-Only Payments

If you have Federal Direct Unsubsidized student loans or private student loans, making interest-only payments while you’re in school could save you money. These payments will help keep the interest from accruing and being added to your principal.

Refinancing for Lower Rates

When you refinance student loans, you take out a new private loan to cover the cost of your current loans. Refinancing may allow you to get a lower interest rate or better loan terms and help you simplify your loan payments. Using a student loan refinancing calculator can help you determine if you could benefit from refinancing.

It’s possible to refinance private and federal student loans. However, it’s important to note that if you refinance federal loans with a private lender you will no longer have access to federal programs and protections like income-driven repayment plans.

Paying Off High-Interest Loans First

Paying off your loans with the highest interest first could help you save you money over the long term because you’re paying off your costliest debt. To do it, make payments on all your loans when they’re due, but put any extra money you have toward the highest-interest loan.

After you pay off that loan, tackle the next-highest interest loan, and so on until your debt is paid off. This is commonly called the debt avalanche method of paying off debt.

Tax Implications of Student Loan Interest

It’s possible to get a tax deduction for the interest you pay on student loans. This is known as the student loan interest deduction and it allows you to potentially deduct up to $2,500, or the amount of interest you paid on your federal or private student loans — whichever amount is less — from your taxable income.

There are income phaseouts to this deduction based on your modified adjusted gross income (MAGI). Your MAGI must be below a certain limit, which typically changes each year, in order to claim the deduction.

The Takeaway

The interest on most student loans is simple interest and not compound interest. All federal student loans have simple interest and many private loans do as well.

Before you take out a student loan, make sure you understand what kind of interest it has and how the interest accrues. Depending on the type of loan it is, you may want to make interest payments while you’re in school to help manage your debt.

Refinancing your student loans may also be worth considering if you can qualify for a lower interest rate or better terms. You can shop around with different lenders for the best rates and terms 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.

FAQ

Do federal student loans have simple or compound interest?

Federal student loans typically have simple interest, which is interest calculated only on the amount of money you borrowed (the loan principal). Many private student loans use simple interest as well, but some private student loans do use compound interest, in which interest is charged on your loan balance and on the unpaid interest that accrues.

Which type of interest is more expensive for borrowers?

Compound interest is more expensive than simple interest is for borrowers. That’s because compound interest is calculated on the accumulated interest as well as on your original principal. With compound interest, you end up paying more over time.

Can interest be deferred on student loans?

When you defer Direct subsidized federal student loans, the interest is deferred. However, interest continues to accrue on unsubsidized federal student loans during a deferment, and the unpaid interest will be capitalized and added to your loan principal when the deferment ends.

Photo credit: iStock/Rockaa

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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