SoFi

When it comes to spending money, there are the needs in life, and then there are the wants. Discretionary expenses are those wants: non-essential outlays of cash that pay for things that are not essential. Think of upgrading to a new phone because the camera is cooler on the latest model or deciding to head to the beach for a long weekend.

Digging into the difference between discretionary and essential spending can help you understand and optimize your spending and your budgeting.

Because discretionary expenses are unnecessary, they can be a good place to trim one’s budget and find more funds to use elsewhere. Learn more about these costs and how to manage them.

What Is the Definition of a Discretionary Expense?

To understand what is a discretionary expense, first consider what essential spending is. For example, housing expenses, like mortgage payments or rent, are things a person can’t do without. Shelling out for food, fuel, taxes, and minimum debt payments are other examples of spending that’s essential.

Some of these necessary expenses will still be variable, changing every month. For example, an electricity bill may go up and down depending on how much time is spent at home and the season of the year.

However, the wants of life (or what some people may call the fun stuff) are those expenses paid from your discretionary or disposable income. They reflect the goods and services that may not be vital for survival but that people frequently spend money on.

Recommended: Student Budget Calculator

Discretionary vs Non-Discretionary Expenses: What’s the Difference?

Any expenses beyond core costs are considered discretionary; it’s a matter of needs vs. wants. Typically, discretionary costs reflect wants. They aren’t needed for a person to function in day-to-day life. Rather, they have more to do with lifestyle.

Broadly, discretionary expenses could include vacations, entertainment, luxury items, eating out in restaurants, and electronic gadgets.

Exactly what constitutes a discretionary expense can be subjective.

•  While food is generally thought of as a necessary expense, some types of eating are actually discretionary. Eating at restaurants is avoidable and often more expensive than making food at home. Buying luxury ingredients at the grocery store (ahem, imported cheeses) can be more costly than sticking to pantry staples.

•  Similarly, clothing, in many instances, is a necessary expense. If a person lives in a cold climate, owning an insulated winter coat is a legitimate need. (Without one, the person could risk their health or well-being).

Still, there’s tons of variation in the price of winter coats. Choosing to buy a utilitarian coat often costs much less than buying a designer jacket.

Even within the categories of essential expenses, individuals can exercise their discretion to spend wisely and keep the money in their savings account growing.

4 Common Examples of Discretionary Expenses

Here’s a list of some common types of discretionary expenses to consider. You might wind up cutting non-essential spending to free up money for other purposes.

1. Entertainment and Hobbies

Concerts, movies, comedy shows, and plays can be wonderful experiences. Though you may argue that Taylor Swift or Beyoncé tickets are necessary for survival, these are discretionary spending in truth. The same holds true for pursuing hobbies, such as spending a bundle on rock-climbing classes or booking a cycling trip through Europe. Practically speaking, you could stay fit by, say, running on a local trail or working out at home.

2. Dining Out and Travel

Your everyday meals are a necessity, but when you grab a pricey green juice to go, take a seat at the sushi bar, or join friends for drinks on a Friday, those are discretionary expenses. Also, while the “I need a vacation” sentiment can run strong, taking a trip is considered a discretionary expense.

3. Upgrades and Luxury Goods

As noted above, snagging the latest phone or laptop because it has cool new features is not a necessity. It could be considered FOMO spending. Also, buying luxury goods and services, such as a pricey wrist watch or expensive haircut, qualify as discretionary expenses.

4. Subscriptions and Memberships

Do you have wonderful things turn up on your doorstep regularly as part of a subscription? Whether makeup samples or snacks of the world, these don’t count as needs but wants. Similarly, if you spend money on memberships, such as at a yoga studio, that is not considered essential spending.

How to Budget for Discretionary Spending

Tracking discretionary expenses is key in case times get tough or a person wants to make a budget or tighten theirs up. When planning for financial goals, like saving up for a mortgage down payment, finding places to pare back can add up.

Tracking discretionary expenses can help with making or paring back budgets.

One of the most important strategies for tracking discretionary spending is creating a household budget. Budgeting may help individuals to ensure there’s enough money to cover necessary expenses and bills. Once those needs are covered, it’s possible then to set the remaining money aside for discretionary spending.

Step 1: Calculate Your Discretionary Income

To start building a monthly household budget, tally up total monthly income after taxes. Be sure to include all sources of income, such as:

•  Salary

•  Any money made from freelance or side hustle gigs

•  Passive earnings, such as rental property income or dividends.

Then, you will allocate this amount of money to cover your needs, wants, and saving goals.

Step 2: Choose a Budgeting Method That Fits Your Style

There are a variety of different budgeting methods. Some are particularly suited to tracking monthly spending. Here’s a look at common budgeting strategies:

The 50/30/20 Rule: The 50/30/20 budget rule was popularized by Elizabeth Warren and her daughter Amelia Warren Tyagi in their book All Your Worth. The idea behind this strategy is that monthly income is divided proportionally between three categories:

•  50% goes to essentials, or needs

•  30% goes to discretionary spending, or wants

•  20% goes to savings.

This strategy prioritizes savings, removing it from the category of discretionary spending and making sure it’s part of every month’s budget. This budgeting strategy takes a broad view and can be good for people who are easily overwhelmed by tracking details.

Use an online 50/30/20 calculator to get a quick look at how your income falls into the three categories.

Line-item Budgeting: For those who love to dive into the nitty-gritty details of spending habits, line-item budgeting might be a better fit. Line-item budgeting can involve breaking out a spreadsheet, examining expenses in fine-toothed detail.

For example, rather than simply having a broad category for all groceries, a line-item budget could break down how much gets spent on buying meat, vegetables, dairy, bread, prepared foods, and coffee. Naturally, the more details that are tracked, the more information a budgeter has on exactly where their money is going.

There may even be pockets of “essential” spending — for instance, the types of groceries being bought — that could be pared back. Rather than helping a person to allocate funds, a line-item budget focuses on tracking spending.

Envelope Budgeting: In envelope budgeting, a person writes down their discretionary spending categories on individual paper envelopes. Next, they decide how much they’re willing to spend in each category and place that amount of cash in each envelope. The idea is to train oneself to avoid using debt or credit cards, which can encourage impulse spending.

And here’s the rub: Once the cash within a given envelope has run out, it’s gone. You could borrow from another envelope if that has some available cash. But most envelope budgeters strive not to spend beyond the predetermined funds. So if the entertainment fund has run dry, then it’s Netflix at home instead of going out to the movie theater.

Though this budgeting approach may sound harsh, it can provide stricter guardrails that help individuals to spend within their means.

Zero-Based Budgeting: With zero-based budgeting, every dollar of income has a designated role and can be assigned as an expense. Another way to look at it: One’s income minus expenses equals zero.

Zero-based budgeting can take a little bit of extra work, since individuals would need to sit down at the start of each month to assign exact dollar amounts to necessary expenses, discretionary expenses, savings, and other costs. Budgeters seek to stop spending in each category when the allotted dollar amount gets spent.

Still, it may not always be possible to avoid running over the anticipated budget. In those cases, the amount spent in excess of the budget could be subtracted from discretionary funds in the next month. Or perhaps the budgeter may want to allocate more funds in the future for discretionary categories.

Track Your Spending to Stay on Course

As you budget, it’s important to determine whether incoming money can cover both regular and surprise costs. Ideally, your budget can help you monitor how much money you are spending and allocate it wisely to reach your goals. You may need to try a couple of budgeting techniques to find one that helps you wrangle your discretionary expenses.

Also, when either income drops or the cost of a necessary expense goes up, it can be necessary to update one’s budget accordingly. Making cuts to discretionary expenses may be one place to find more cash and avoid depleting the funds in your bank account.

On top of short-term expenses, it can be smart to allot amounts each month either to savings or an emergency fund. Automating savings might cut the temptation to shop, as these funds are already transferred to another vault or account (and, hence, harder to spend). Over time, as savings grow, funds could go toward pursuing long-term financial goals, such as a home down payment, starting a kid’s college fund, or investing for retirement.

Recommended: Passive Income Ideas

Why Tracking Discretionary Spending Is Key to Your Financial Goals

Consider these reasons why making a budget for discretionary expenses can benefit you:

•   Avoid overspending: When you have a budget, you have guardrails. You know how much money you have coming in and how it’s allotted. You know that if you spend too much, you could wind up with high-interest credit card debt, which can be challenging to pay down.

•   Paying off debt: With a budget for your expenses, you can likely rein in spending and focus on putting dollars toward wiping out high-interest debt.

•   Saving for your future: If you follow a budget and don’t go overboard with discretionary spending, you can likely funnel funds toward important goals, such as buying a house or paying for your child’s college education.

The Takeaway

Understanding discretionary expenses, which are non-essential, can help with smart budgeting and achieving one’s short- and long-term goals. Examples of discretionary expenses are often fun purchases and experiences, like jewelry, dining out, and concert tickets. Knowing how much you can afford to spend on these and sticking to your budget’s guidelines can help you manage your money better and enhance your financial health. Your bank may offer tools to help you monitor and manage your spending.

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

FAQ

Are groceries and clothing discretionary expenses?

Groceries can be a discretionary vs. essential expense when you buy premium items that aren’t needed as part of a basic diet, such as high-priced exotic fruit or premium coffee or chocolate (though of course splurges can be part of a budget). Similarly, clothing can be a discretionary expense if it’s not a necessity (meaning things like a warm winter coat or basic clothes to wear to work). When you buy something just because you like it but don’t need it, that’s a discretionary expense.

What are discretionary expense examples?

Examples of discretionary expenses include travel, entertainment, and eating out.

What are examples of non-discretionary expenses?

Non-discretionary expenses are typically the needs or musts of basic life, such as housing and utilities, food, healthcare, transportation, and minimum debt payments.

What percentage of my income should go to discretionary spending?

According to the 50/30/20 budget rule, 30% of your take-home pay should go to discretionary spending.

How can I cut back on my discretionary spending?

To cut back on discretionary spending, it’s wise to analyze your spending, set guidelines for non-essential spending, and be mindful when shopping or considering expenses. For instance, while a new phone with bells and whistles could be nice, if that means going into high-interest credit card debt, it may not be wise. Budgeting apps may help you rein in discretionary spending.

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

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

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

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

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

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

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

Online bill pay can automate payments of one-time and recurring bills, allowing you to seamlessly transfer funds from your bank account to a payee. Using technology in this way can not only be convenient, it may reduce the odds that you’ll forget to pay a bill and end up getting hit with a late fee.

If you’re curious to know more about what online bill pay is, how it works and how to set it up, read on.

What Is Online Bill Pay?

Bill pay is a way of paying your bills online and automating your finances. It allows you to use your mobile device, laptop, or tablet to send money from your account to that of another person or business. No check writing or manual transfers are required.

You specify the funds and provide details on the recipient, and the amount is automatically taken from your account and sent to the payee.

While you can do this in real time, you can also determine the “when.” That means you can schedule bills for payment in advance whenever you have time free, which can be a huge life hack. You can also typically set up recurring payments, which can make paying bills seamless and can help you avoid late fees, too.

How Does the Bill Pay Process Actually Work?

Online bill pay involves a few steps, such as logging into your bank account, accessing the bill pay feature, providing information on where the money should go and the amount, and when you would like it sent.

Then, the banks involved handle the rest, with the funds being electronically debited from your account as indicated and sent to your credit. Often, online bill pay uses the Automated Clearing House, or ACH, system to move the money between financial institutions.

With this process, you can avoid writing and mailing checks or using high-interest credit cards to make payments. In this way, bill pay can be a useful feature of online banking.

Here are some of the ways you might use online bill pay services:

For Electronic Payments to Major Companies

You can use bill pay for automated payments to such major companies as:

•  Your mortgage lender

•  Utilities

•  Your car loan lender

•  Your credit card issuer

•  Your student loan provider

•  Subscription services, like streaming platforms

For Paper Checks to Small Businesses or Individuals

You can also likely use bill pay instead of writing checks for such things as:

•  Gym memberships

•  Individuals, such as a dog walker or landscaper

•  Charities you donate to

Not only can this save you the time it takes to write a check, but it can also avoid any worry of the check being stolen or lost.

Bill Pay vs Autopay: What’s the Difference?

You may be tempted to use the terms bill pay and autopay interchangeably, but they are actually two different processes.

•   With bill pay, you are set up one or more payments; you are establishing when and how much money will be taken out of your bank account and transferred to the payee.

•   With autopay, however, you are authorizing a creditor to take money out of your account (which can make some people feel as if they are sacrificing control) or to use your bank’s bill payment system to do so.

Recommended: Paying Bills From a Savings Account

How to Set Up Online Bill Pay in 5 Steps

While bill pay can help make managing finances simpler, it does require some initial manual set-up. But, once you’ve learned how bill pay works, this automatic feature can make keeping track of and paying bills less cumbersome. Here’s how to set up bill pay:

Step 1: Choose a Bank or Credit Unions That Offers Bill Pay

While many financial institutions offer digital payment tools, like online bill pay, it’s worth investigating the features that are included at each before opening up an account. Online billing is free with some accounts, while some providers may charge for each transaction — either per bill or on a repeating monthly basis. You can likely set it up on your financial institution’s website or your banking app.

Step 2: Gather Your Bill Information

Next, think about which ongoing bills you want to automate.

•   Predictable expenses (or fixed vs. variable expenses) that don’t fluctuate from month to month, such as loan and mortgage payments or the internet bill, are solid candidates for recurring automated payments. You may want to schedule payment for a time each month when you know there’ll be sufficient funds in your account to cover what’s come due. Some service providers may even allow you to change the due date on certain bills.

•   Bills that change every month may be more challenging to automate. For instance, if your credit card bill might be $300 one month and $1,300 the next, it can be hard to be certain you’ll have enough money in your checking account to cover the cost.

When you know which bills you want to pay, you’ll sign onto your bank’s website or app and search for the “Pay a Bill” or “Online Bill Pay” function.

Worth noting: Some financial institutions place a cap on the amount of money that can be transferred electronically through bill pay. If an automatic payment exceeds that designated transaction limit, users may then need to pay via a physical method, such as a personal or cashier’s check.

Step 3: Add Your Payees in Your Banking App

The bank’s portal or app will then typically guide you to add details so your funds can be transferred from your checking account to your payee.

You’ll enter the details of each biller you want to pay, including their name, address, and your account number. Or you may be able to search for your biller or choose from a list provided by the bank.

Step 4: Schedule Your First Payment (One-Time or Recurring)

In this step, you can either schedule a one-time payment (to happen ASAP or at a later date), or you might set up a recurring payment at a given frequency (say, on the first of every month).

Step 5: Confirm the Payment and Set Up Alerts

Now, you’re ready to submit your payment. Before authorizing the transfer, double-check the payment details. When you’re ready to finish your transaction, you may be required to submit a security or multi-factor authentication code.

Some financial institutions place a cap on the amount of money that can be transferred electronically through bill pay. If an automatic payment exceeds that designated transaction limit, users may then need to pay via a physical method, such as a personal or cashier’s check.

What Are the Benefits and Risks of Using Bill Pay?

Here are details about some of the consequences of not paying bills on time.

Benefit: Helps Avoid Late Fees and Protects Your Credit

One of the ways companies or service providers enforce on-time payments is by penalizing people for paying late. Whether it’s a credit card, utility bill or simply missing a payment date by a single day, submitting a late payment can result in late fees, higher interest rates, or other charges.

On top of late penalties, some providers may also charge interest on the balance owed, essentially creating a double wallop of fees if you’re late paying a bill.

•   In some cases, the interest may be charged starting the day an account becomes overdue. In others, it may accrue going back to the purchase date or transaction day.

•   Depending on the interest rate charged and how frequently that interest compounds, this fee could quickly balloon to more than the initial fee assessed.

In addition, late payments are typically reported to the credit bureaus when a payment goes past 30 days unpaid. This in turn can negatively affect your credit score.

Benefit: Simplifies Your Financial Life

Another benefit of using online bill pay can make managing your money easier. There’s no check writing required, and you can make payments anytime, from anywhere you have a wifi connection. So if you need to pay a bill while you are on vacation or you want to set up monthly payments to your power company, it’s easy to do.

As noted above, being able to manage your bill paying with this electronic service can also help you avoid late payments, which can help maintain or build your credit score.

You can also schedule payments for those moments you know there’s enough money in your account to cover debits (say, right after payday), which can help you avoid overdraft fees.

Risk: Payments Aren’t Instant and Require Buffer Time

When using bill pay, it’s wise to keep in mind that it is not an instant payment. Processing times can vary on such factors as time of day and day of the work, as well as individual financial institutions’ policies. Typically, it can take a couple of days for an online bill pay to be completed, so it can be smart to schedule the payment for a few days ahead of the due date. Otherwise, you risk a late payment and possible fees.

Risk: Requires Sufficient Funds to Avoid Issues

Automating your finances doesn’t mean you don’t have to monitor your finances. If you don’t keep very careful tabs on your money, you could risk overdraft if you don’t have overdraft protection. Say you have unusually high expenses one month; your bank balance might be lower than needed to cover your automated bill payments. This could lead to fees and headaches.

Recommended: How to Pay Bills After Job Loss

How Long Does Bill Pay Usually Take?

Bill pay processing times can vary, but electronic payments usually take 2-5 business days. This can offer an advantage over mailing a paper check which requires time in transit as well as up to several days to process.

Keep in mind that scheduling a bill pay at 7pm on a Friday is likely to require more time to arrive at its destination than one that you schedule at 9am on a Monday. Timing and day of the week will impact your payments, so factor this in when scheduling. It’s often best to schedule payments a few days in advance to make sure they reach the creditor by the due date.

The Takeaway

Bill paying is a fact of life, but there are tools that can make it quicker and more convenient. Signing up for automated online bill pay can put you in control. It can ensure that bills get paid on time, reducing the likelihood of late-payment or overdraft fees. It can be a smart move to see what your bank offers in terms of this service and whether it can simplify your financial life.

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

FAQ

Is online bill pay safe to use?

Online bill pay is typically very safe. While no financial or digital process is entirely risk-free, a reputable bank or credit union usually uses state-of-the-art security measures, such as encryption and multi-factor authentication.

Can I stop a bill payment after I’ve scheduled it?

If a payment hasn’t yet been processed, you can likely cancel it. You may be able to stop a payment via your bank’s app or website or by contacting customer service. A fee may be involved. If the payment is already being sent, however, you may be out of luck in terms of stopping payment.

Can I use bill pay to pay an individual or a landlord?

While many people may think of bill pay as being used to send funds to, say, a utility or other company, you can often use bill pay to send funds to an individual (say, your landscaper or babysitter). You will need their banking details to set this up.

What happens if I schedule a payment but don’t have enough money in my account?

If you schedule an online bill pay but don’t have enough cash in your bank account, the payment will likely be declined. This means your payee doesn’t receive the funds, and you may be hit with late fees and/or overdraft fees. Typically, your bank will notify you that the funds didn’t transfer, and you will need to take action to remedy the situation.

Is there a fee to use online bill pay?

There typically isn’t a fee charged by your bank to use online bill pay. However, some financial institutions may charge a fee to expedite an online bill payment. Also, third-party bill pay services may sometimes charge a fee to use their services.

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

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

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

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

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

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

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

SOBNK-Q325-101

Student loans can be discharged in certain circumstances. When federal student loans are discharged, your requirement to pay back some or the entire remaining amount of your debt due is eliminated. However, this usually only happens in unique life situations, such as school closure, permanent disability, or death. However, because of a new student loans bankruptcy process, it may be possible to discharge student loans in bankruptcy.

Ahead, we explain who may qualify for student loan discharge, and other options for managing student loan debt.

When You Can Discharge Student Loans

Interested in discharging your student loans? Wondering when can student loans be discharged during bankruptcy? Here are details about some of the circumstances under which you may qualify for student loan discharge.

Total and Permanent Disability Discharge

To qualify for a federal student loan discharge due to disability, you must have a “total and permanent” disability that can be verified by the U.S. Department of Veterans Affairs, the Social Security Administration, or a qualified doctor. You also must complete a discharge application available at StudentAid.gov, which includes documentation showing you meet the government’s requirements for being considered disabled.

Veterans may be eligible for student loan discharge if they can provide paperwork from the VA demonstrating they either have a disability that is 100% disabling due to their service, or are totally disabled due to an individual unemployability rating.

For those borrowers who are eligible for Social Security Disability Insurance or Supplemental Security Income, you may also qualify for loan discharge by providing documentation of your Social Security award.

Not all private student lenders give you the option to discharge your loans if you’re permanently disabled. While you might be able to file an application to discharge your federal student loans because of disability, with private loans, you may have to consider legal action. You should speak to an attorney to determine if that’s the right course of action.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Student Loan Discharge Due to Death

Federal student loan discharge may also be granted if the borrower dies. Parents who have taken out Parent PLUS loans on behalf of a student may also have these loans forgiven if the student or parent dies.

Proof of death, such as an original death certificate or certified copy, must be submitted in order for the loans to be canceled.

Declaring Bankruptcy and Discharging Student Loans

Can student loans be discharged during bankruptcy? And does bankruptcy clear student loans? The answer is yes to both questions, but the process can be lengthy and somewhat complicated.

Until late 2022, it was challenging and rare for federal student loans to be discharged through bankruptcy. But a process unveiled by the Justice Department in November 2022 makes it easier. Those filing for bankruptcy must fill out what’s called an attestation form to verify that they fit the definition of “undue hardship.” Their request is then evaluated by the bankruptcy judge under new standards, and their debt may be fully or partially forgiven.

Borrowers must pass a three-part test to prove they qualify for “undue hardship” and should have their federal loans discharged:

1.    Is the borrower able to maintain a minimal standard of living while paying their student loans?

2.    Have they made a good faith effort to repay the loans?

3.    Will they continue to struggle to make payments during the remaining term of their loan?

It’s important to understand that filing for bankruptcy can have serious consequences. For instance, bankruptcy will impact your credit for years. It’s best to consult with a qualified professional, such as an attorney specializing in bankruptcy law, before making any decisions.

Closed School Discharge of Loans

If your school closes, you may be eligible for a 100% discharge of certain loan types, including Direct Loans, FFEL, and Federal Perkins loans. However, for this to apply, you must meet one of the following criteria:

•   You must have been enrolled at the time the school closed

•   You must have been on an approved leave when the school closed

•   Your school closed within 180 days after you withdrew

Only federal student loans can be discharged due to school closure and other circumstances. For private loans, you must contact your lender directly to see if you will qualify with them.

Loan Discharge Because You Were Misled By Your College

If you have federal loans, and you feel your school “misled” you — for instance, by promising you’d get certain jobs or certain salaries — you may qualify to apply for Borrower Defense Discharge through the Department of Education. Note that this program has been challenged in court, but borrowers can still submit an application.

The application process is lengthy and submitting an application does not guarantee that your loans will be canceled.

False Certification Discharge

In very rare circumstances, you may be eligible for a discharge if loans were issued but they should not have been given out to you in the first place. For instance, this may apply if:

•   Your school falsely certified that you had a high school diploma or GED

•   You had a disqualifying status, such as a physical or mental condition, criminal record or other circumstance, at the time of the school certified your eligibility

•   Someone else or your school signed your name on the loan application or promissory note

In all of the above circumstances, your loans might be discharged.

Unpaid Refund Discharge

If you leave school after getting a loan, your school may also be required to return part of your loan money. You may be eligible for a partial discharge if you withdraw from school, and the college did not return the portion it was required to under the law.

In this case, only the amount of the unpaid refund would be discharged.

Alternatives to Discharging Student Loans

Since qualifying for a student loan discharge is only permitted under certain circumstances, it’s important to look at other options for federal loans. Here are some of the other choices you may have to help you pay off your student loan debt:

Forbearance: Forbearance temporarily allows you to stop making your federal student loan payments or reduce the amount you have to pay. You may qualify if you are unable to make monthly loan payments because of financial difficulties, medical expenses, or changes in employment. Usually interest will still accrue while your loan is in forbearance.

Deferment: You may be able to defer your loans in certain circumstances, such as going back to school. Depending on your loan type, your loans may still accrue interest while in deferment. However, if you qualify for deferment on federal subsidized loans, you generally will not be charged interest during deferment. Note that deferment for economic hardship or unemployment will no longer be an option for loans issued after July 1, 2027.

Income-based repayment: With income-driven repayment, you may be able to reduce your monthly student loan payments if you can’t afford your monthly payments on a Standard Loan Repayment plan. With an IDR plan, you’ll make monthly payments of 10% to 20% of your monthly discretionary income. The Income-Based Repayment plan will forgive your remaining balance after 20 or 25 years. Note that two current options, PAYE and ICR, are set to close in the coming years. Existing borrowers will still be able to use IBR or switch to the new Repayment Assistance Plan (RAP).

Cancellation: If you have a federal Perkins Loan, you may qualify for up to 100% cancellation if you served full-time in a public or nonprofit elementary or secondary school system as a teacher serving low income students or students with disability or teach in a certain field. In addition to teachers, the following jobs may qualify you for partial or whole Perkins Loan cancellation: early childhood education provider, employee at a child or family services agency, faculty member at a tribal college or university, firefighter, law enforcement officer, librarian with master’s degree at Title I school, military service, nurse or medical technician, professional provider of early intervention (disability) services, public defender, speech pathologist with master’s degree at Title I school, volunteer service (Americorps Vista or Peace Corps).

Forgiveness: For borrowers working certain qualifying public service jobs, student loan forgiveness may be an option. With this option, your remaining student loan balance will be forgiven after you make 120 qualifying monthly payments while working full-time for a qualifying employer, which can include government organizations and certain not-for-profit organizations.

When to Refinance Your Student Loan Debt

Unlike student loan forbearance or deferment, which are temporary, short-term solutions, student loan refinancing can be a long-term debt solution. If you don’t qualify for the options mentioned above, refinancing can help simplify your repayment process since all of your loans can be taken care of with one monthly payment. If you refinance with a private lender, you can also change the term length on your student loans.

Should you refinance your student loans? You’ll need to weigh the pros and cons. One very important consideration is that if you refinance your federal student loans with a private lender, you will forfeit your eligibility for federal loan benefits, including student loan forgiveness or deferment. Using a student loan refinance calculator can show you how much you might save.

Recommended: Student Loan Refinancing Guide

The Takeaway

As you can see, it is possible to discharge student loans, but only in unique life circumstances, such as disability or false certification. If you do qualify, you may not have to pay some or all of your student loans, though you may have to pay taxes on the discharged balance.

If you don’t qualify for student loan discharge or one of the alternatives programs, refinancing your student loans with a private lender like SoFi can help get you a potentially lower interest rate, or a lower monthly payment if you extend your loan term. (You may pay more interest over the life of the loan if you refinance with an extended term.) Refinancing federal student loans also means losing access to federal discharge programs and other benefits.

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 FORFEIT YOUR ELIGIBILITY 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.