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A pass/fail grading system allows a student to receive either a grade of “P” (pass) or “F” (fail) for a particular class instead of the usual letter grading system. Many colleges offer this option in order to encourage students to explore new academic areas without having to worry about it affecting their transcripts.

However, the pass/fail grading system comes with some limitations, including restrictions on which and how many classes you can take pass/fail each year. And, in some cases, taking a class pass/fail can still have an impact on your academic record.

Read on to learn exactly what pass/fail means, what a passing (and failing) grade is, and when to consider a pass/fail option.

How Pass/Fail Grading Works

The traditional grading system was initially established centuries ago by English universities like Oxford and Cambridge as a way of encouraging students to work harder. While letter grades may still be the dominant system in American universities, some schools have deviated from this structure, establishing their own ways of evaluating students largely based on the pass/fail system.

Reed College in Portland, Oregon has a unique style of grading that encourages students to “focus on learning, not on grades.” While students are still assigned grades for each course, these grades are not distributed to students. Instead, students are given lengthy comments and reports on their academic performance. Reed does not have a dean’s list or honor roll either.

At Brown University, students can take an unlimited number of classes “satisfactory/no credit (S/NC),” and GPAs are not calculated. They also do not name students to a dean’s list.

Some schools, including Swarthmore College and MIT, have students take all classes pass/fail in the first semester of their freshman years. Swarthmore’s policy is meant to encourage students to stretch themselves and take risks, and is aligned with their policy of collaboration as opposed to competition with classmates. MIT’s policy is designed to help students adjust to increased workloads and variations in academic preparation and teaching methods.

In both cases, taking the emphasis off grades is meant to improve students’ experiences of higher education, helping them to take full advantage of their time on campus.

Of course, most schools emphasize letter grades more than Brown and Reed, as it allows them to distinguish high achievers and highlight specific areas where students excel or may need to improve.

It’s common, however, for colleges to allow students to take one class pass/fail per semester. Typically, this is only offered for elective (not core) classes. Often, a grade of “P” is equal to a grade of D- or higher, but has no impact on the student’s overall grade point average. A grade of “F,” however, will usually have the same effect on the grade point average as a traditional failure.


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What Are the Benefits of Pass/Fail?

While college can be a rewarding and stimulating time for students, it also has its challenges, including constant pressure to keep up your grades. The beauty of taking a class pass/fail is the sense of freedom it gives you — once the stress of getting a perfect grade is removed, you are at liberty to fully embrace the kind of intellectual curiosity that should be at the heart of a college experience.

Maybe you’re a pre-med student and want to take a painting class, or perhaps you’re majoring in sociology and want to dabble in art history. These options can lead you down unexpected paths, opening creative doors you might have avoided if you were solely focusing on your GPA.

Recommended: How Grades Affect Your Student Loans

The Limits to Pass/Fail

The pass/fail system also has some potential downsides. One is that should you end up doing really well in the class, you generally can’t change your mind and ask to take the class for a grade rather than pass/fail. By the same token, if you do poorly in a class, you can’t make a belated request for a pass/fail.

In addition, pass/fail grades generally don’t count toward a major or minor, which limits your options when deciding whether or not to go this route.

While it’s hard to know for sure, some students feel that taking a higher number of pass/fail classes could reflect poorly on their college academic record and be a strike against them when applying for a job or to graduate school. However, it’s also possible that a potential employer or an admissions officer might be impressed by a student’s breadth of study and sense of initiative in studying “outside the box.”


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The Takeaway

Taking a few of your classes pass/fail can be a great way to explore new academic areas of interest during college, and is unlikely to adversely impact your post-grad opportunities, including summer internships, employment, and graduate school.

Whether you take a class pass/fail or for a letter grade won’t have any impact on how many credits you get from the course — or the cost of tuition. If you’re concerned about how you’ll cover the cost of your education, keep in mind that you have a range of options — including savings, scholarships, grants, work-study programs, and federal or 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 does pass/fail grading work?

Pass/fail grading simplifies academic evaluation by assigning a “pass” for satisfactory performance and a “fail” for unsatisfactory performance, typically without letter grades. It reduces pressure and allows students to explore subjects without impacting their GPA.

Does pass/fail hurt your GPA?

Pass/fail courses generally do not affect your GPA. A “pass” does not add points, and a “fail” may or may not lower it, depending on the institution’s policy. Check your school’s guidelines for specific details.

Does a pass/fail class look bad?

Pass/fail courses typically don’t impact your GPA. A “pass” doesn’t add points, while a “fail” might or might not lower it, depending on your school’s policy. Always check your institution’s guidelines for clarity.

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

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

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.

SOISL-Q325-045

When applying for college, there are many details to consider. Once the SAT scores are in, the essay is written, and the application is complete, there’s one more step: paying the college application fee.

If you are applying to more than one school, those fees can really add up. Luckily there is a way to get out of paying to apply to a school: a college application fee waiver.

Here’s more intel for students and their parents about college application fees and waivers.

The 411 on College Application Fees

Many colleges and grad schools require applicants to pay a fee. The average application fee is $48 at four-year public colleges and universities. At private universities, that fee is $54-$57, on average.

If a student is applying to more than one school, these costs can not only add up but also be prohibitive for some.

While there is no set standard for how many schools a student should apply to, some experts say it’s a good idea to apply to between six and eight colleges — two to three to act as safety schools, two as target schools, and two “reach” schools.

At $48 per college, on average, that could add up to $288 to $384. There are, however, ways to get around the fees.

Ask the College for a Waiver

Many colleges and universities allow students to directly ask for an application fee waiver.

Typically, the application will have a field that students or parents can fill out asking for the application fee to be waived.

If there is no space on the application, students or parents could simply call the school’s registrar office and ask what options may be available to them.

Recommended: Important College Application Deadlines

Getting Help From Nonprofits

Nonprofit organizations can play a vital role in easing the financial burden of college application fees for students from low-income or underserved backgrounds.

National Association for College Admission Counseling

The National Association for College Admission Counseling offers a request for an application fee waiver that can be filled out online and submitted with each application.

To fill out the form, the student simply writes the name of the college on the top line, and then fills out the “Student” section and checks the appropriate boxes in the “Economic Need” section. If none apply, an applicant can click “Other Request” and explain the financial need for the fee waiver.

Then, a school counselor, postsecondary support person, or principal at the student’s school, or a person from a community-based organization, needs to complete the “Authorized Official” section to verify economic eligibility.

Students send the completed form directly to the university’s admissions office. College applicants may want to check with the office if they do not hear back about an approval status within a month.

Recommended: Grants For College — Find Free Money for Students

Common Application

The Common Application is a generic application used by 1,000 schools. Using the application makes it easy for students to apply for more schools at once. And, within the application, students can request a fee waiver in the profile section.

According to the Common Application, students can qualify for a fee waiver for a variety of reasons. Those include if they are enrolled in or eligible to participate in the federal free or reduced-price lunch program, annual family income falls within the income eligibility guidelines set by the USDA Food and Nutrition Service, and if they are enrolled in a federal, state, or local program that aids students from low-income families.

Students can also qualify if their family receives public assistance or if they live in federally subsidized public housing or a foster home, or are homeless. Students who are wards of the state or can provide a supporting statement on economic need from a school official can also apply for a waiver.

The Common Application fee waiver may also be available for international applicants. It’s important to note that it is still up to each school if it accepts a fee waiver request.

Recommended: Paying for College Without Parents’ Help

College Board

Students aiming for college will likely have to take a standardized test, presumably either the ACT or the SAT, as part of their application. The SAT costs $68 for each standard SAT a student takes, and each ACT is $68 (there is an additional cost if a student wants to take the essay portion of the tests).

Eligible students can get fee waivers for up to two of each standardized test. Typically, they qualify if they live in a foster home or public housing or receive free or reduced-price lunches. Family income can also be a qualifier. Students will have to speak to a school administrator to receive the waiver, as each testing company allocates a specific number of waivers to each school.

So, how can this help with the college application fee? By qualifying for the SAT or ACT waiver, a student also gets to waive the application costs for four colleges. Those who are eligible for an SAT waiver will receive application waivers via the College Board, making it easy to streamline the process.

Attend a College Fair or Visit the School

Some colleges and universities may be willing to hand out application fee waivers to students who visit the school.

Most schools do not actively advertise these specials, so students are encouraged to dig deeply into their choice school’s website or call the school’s office of admissions to find out if this may be an option.

How to Find Colleges With No Application Fees

There are a number of colleges out there that don’t require an application fee at all.

Tulane University in New Orleans, Loyola University Chicago, and Baylor University in Waco, Texas are just a few of the many schools that don’t require an application fee.

In some cases, a school will waive their application fees during certain time frames, such as the middle of October. You can do an online search for “colleges with no application fees” to find lists, but will want to follow up with any schools you’re interested in to make sure the information is up to date.

Paying for College

Getting past the application is just the beginning. From there, students will have to navigate the cost of attendance, including housing, tuition, books, and more. For many, that means taking out loans.

Students can fill out the Free Application for Federal Student Aid, or FAFSA®, to see if they are eligible for student aid from the federal government. Colleges may then use the information provided to determine specific aid needs.

You can discuss federal aid and loan options directly with the schools of choice. If you still have gaps in funding, you may be able to cover them with a private student loan. These are available through banks, credit unions, and online lenders. Keep in mind, though, that private loans don’t offer the same protections, such as government forgiveness or forbearance programs that come with federal student loans.

To qualify for a private student loan, you need to fill out a loan application alone or with a cosigner. The amount of money you can borrow and the interest rate usually depend on credit scores and income.

The Takeaway

Qualifying for a college application fee waiver can make a significant difference in your college application process, easing the financial strain and allowing you to focus on presenting your best self to potential schools. By understanding the eligibility criteria, gathering the necessary documentation, and taking advantage of available resources, you can increase your chances of securing these valuable waivers.

When it comes time to pay for college, students can rely on scholarships, grants, federal student loans, 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

What is a college application fee waiver?

A college application fee waiver is a form of financial assistance that allows eligible students to apply to colleges without paying the standard application fee. This can significantly reduce the financial burden of applying to multiple schools, making the college application process more accessible.

Who is eligible for a college application fee waiver?

Eligibility for a college application fee waiver varies by institution, but common criteria include financial need, participation in certain educational programs, being a first-generation college student, or having a low family income. Some colleges also offer waivers to students who have faced significant personal or educational challenges.

How do I apply for a college application fee waiver?

To apply for a fee waiver, you typically need to complete a waiver form provided by the college or university. This form may require you to provide documentation of your financial situation, such as tax returns or a letter from your high school counselor. Some colleges also accept fee waiver codes from standardized test providers like the College Board or ACT.

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

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

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.

SOISL-Q325-043

The Free Application for Federal Student Aid (FAFSA®) is a form that incoming and returning college students (and their parents) need to fill out to be considered for federal financial aid. The FAFSA helps students qualify for federal grants and loans, such as the Pell Grant and Federal Direct Subsidized Loans. States and colleges also use the FAFSA to determine eligibility for grants and scholarships.

Unfortunately, the FAFSA is known for being a long, tedious, and complex form to fill out. To help ease confusion — and encourage more families to fill out the form — the Department of Education rolled out a new streamlined and simplified FAFSA for the 2025-26 school year on November 21, 2024 (a delay from the usual October 1).

The simplified FAFSA also ushers in a new formula to determine who will qualify for aid and how much they’ll receive. Here’s what you need to know about the FAFSA changes, plus other updates to financial aid.

Why Is the FAFSA Changing?

The Department of Education has long fielded concerns about the complexity and length of the FAFSA. As a result, Congress passed legislation in 2020 — called the FAFSA Simplification Act (FSA) — to make the FAFSA easier for students and their families to complete. The act not only overhauls the FAFSA form, dramatically reducing the number of questions, but also changes the methodologies and formulas used for determining federal student aid eligibility.

The new provisions were designed to be implemented in the 2023-24 school year but, due to delays, the Department of Education has been using a phased approach, with only a few of the new rules appearing on the October 1, 2022, FAFSA. The remaining provisions are set to go into effect for the 2025-26 award year. The new form became available on November 21, 2024.

2025-2026 FAFSA Updates

The FAFSA updates include a shorter, simpler-to-fill-out form, along with changes in how your financial aid is calculated. Below, we break it all down.

Shorter Form/Fewer Questions

A major FAFSA change is that the form itself will shrink from an intimidating 108 questions to no more than 46 questions (though some will have multiple parts). The actual number of questions you’ll need to answer (which could be less than 46) will depend on your financial situation. The new form also makes it easier to import income data from your tax records.

The Department of Education is hoping that a shorter, simpler form will encourage more students and their families to fill out a FAFSA and increase access to financial aid.

Questions About Selective Service and Drug Convictions Dropped

The new FAFSA eliminates any questions about whether a student has had any drug-related convictions. A drug conviction will no longer prevent students from receiving Pell Grants. (This was enacted in the 2023-24 award year.)

In addition, the Selective Service registration — which required male students under 26 to enroll in the draft — was removed as part of the FAFSA Simplification Act. This was taken off the FAFSA in 2021. Students are no longer required to register for Selective Service to receive federal aid.

Other Demographic Questions Added

In the 2024-25 year, the Department of Education also added a new demographic survey to the signature and submission portion of the FAFSA. Students will fill in certain demographic information, such as their gender, race, and ethnicity before submitting the form. These questions are solely for research purposes (to create statistics on who is and is not applying) and are not factored into aid decisions. While you must fill out the demographic survey, you are allowed to decline the answers.

EFC Becomes SAI

The new FAFSA renames the current Expected Family Contribution (EFC) to the Student Aid Index (SAI). This went into effect for the 2024-25 FAFSA and will be carried over to the 2025-26 FAFSA.

The EFC is a number that colleges use to determine a family’s financial need relative to other applicants. The name, however, caused confusion, since the EFC doesn’t actually represent the amount a family will have to contribute (or pay) for college. You could end up spending more, or less, than your EFC.

Besides the name change, there are a few differences in how EFC/SAI will be calculated. Here are some notable updates:

•  EFC factored in the number of family members in college but SAI does not. Families with more than one child in college no longer have an advantage in receiving aid.

•  The lowest EFC an applicant could receive was $0. The SAI can go as low as -$1,500, making it easier to more accurately determine an applicant’s financial need.

•  SAI will increase the Income Protection Allowance (IPA) that shelters a certain amount of parental income from inclusion in the calculation of total income.

Recommended: 31 Facts About FAFSA for Parents

Getting a Pell Grant Becomes Easier

The FAFSA Simplification Act, which took effect in the 2024-25 FAFSA year, increases the number of students eligible for a Pell Grant. The maximum awards will now go to all families who fall below the income thresholds for tax filing, or who have adjusted gross incomes below 225% (single) or 175% (married) of the poverty line. In addition, the Act restores Pell Grant eligibility to incarcerated students.

Students will also be able to estimate their eligibility for the grant before they complete the FAFSA.

Introduced the Term “Contributors”

A new term by the Department of Education — contributors — has been introduced for the 2025-26 FAFSA. A contributor is anyone required to provide information on the FAFSA, including the student, the student’s spouse, the student’s parents, and others.

Keep in mind that each contributor will need their own FSA ID, and it’s recommended to set this up a few days before completing the FAFSA.

How Will the FAFSA Changes Affect Students?

The new FAFSA will save time and headaches for all applicants. For many students and their families, the FAFSA changes will also mean more aid. For some, however, the changes will mean less help from the government.

Many families, especially low-income families, will likely get more aid, due to more generous formulas. For example, the IPA will increase by 20% for parents, up to about $2,400 (35%) for most students, and up to about $6,500 (60%) for students who are single parents.

In addition, more families will be eligible for the Pell Grants. Previously, families with incomes higher than $60,000 were generally ineligible for a Pell Grant. Now, students from families earning between $60,000 and $70,000 will likely receive some Pell Grant funding.

On the downside, the number of kids a family has in college will no longer be factored into the formula for the parent allowance. Indeed, families with multiple children in college at the same time may find that they will get less financial aid than they are used to.

Recommended: I Didn’t Get Enough Financial Aid: Now What?

When Does the 2025-2026 FAFSA Become Available?

The FAFSA traditionally opens on October 1 for the following academic year. This year, due to the FAFSA updates taking longer than expected, the Department of Education’s Office of Federal Student Aid released the 2025-26 FAFSA on November 21, 2024.

Even if you’ve filled out the FAFSA in the past, you need to complete a FAFSA every year to unlock federal student loans, grants, work-study, and even some private scholarships.

Once you submit the new FAFSA, you’ll receive your FAFSA Submission Summary, which details the information you included on the application and your SAI.

Cash vs. Private Student Loans: Which One Is Better?

Whatever cash you or your family members can save for college will benefit you in the long run, since it will mean borrowing less and paying less in interest. Therefore, cash is king when it comes to paying for college.

However, if you don’t have enough cash for college, you’re far from alone — and you still have plenty of funding options. By filling out the FAFSA, you may be able to access federal aid, including grants, scholarships, work-study, federal subsidized loans (no interest charged while you are in school), and federal unsubsidized loans (interest accrues while you are in school).

If you still have gaps in funding, you may be able to fill them with a private student loan. These loans are available through banks, credit unions, and online lenders. Each lender sets its own interest rate and you can often choose to go with a fixed or variable rate. Unlike federal loans, qualification is not need-based. However, you will need to undergo a credit check and students often need a cosigner.

If a student (or their cosigner) has excellent credit, it may actually be possible to get a private student loan with a lower interest rate than a federal loan, particularly if you’re looking at federal PLUS loans for parents or graduate students, which carry higher rates than federal loans for undergraduate students.

Just keep in mind that private student loans may not offer the same protections, such as income-based repayment plans, that automatically come with federal student loans.

The Takeaway

When the new simplified FAFSA became available at the end of 2023, it included many changes, including fewer questions and a switch from EFC to SAI (which will serve the same purpose). Some changes also took place behind the scenes, including updates to the formulas used to calculate aid eligibility. More students now qualify for Pell grants, but families with multiple children in college may see their award go down.

Specific changes to the 2025-26 FAFSA include an even more simplified version (no more than 46 questions as opposed to 108) and the introduction of the term “contributors,” which is anyone required to provide information on the FAFSA.

Filling out the FAFSA determines your eligibility for federal funding, including grants, scholarships, work-study, and federal 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 FAFSA?

The FAFSA (Free Application for Federal Student Aid) is a form used by students to apply for financial aid, including grants, loans, and work-study programs, to help pay for college.

Will the FAFSA still require information about parental income?

Yes, the FAFSA will still require information about parental income, but the process will be streamlined, and some questions will be removed to make it easier to complete.

How will the new Student Aid Index (SAI) differ from the Expected Family Contribution (EFC)?

The SAI will be a more accurate measure of a family’s financial need, calculated using a different formula that aims to better reflect a student’s ability to pay for college.

About the author

Melissa Brock

Melissa Brock is a higher education and personal finance expert with more than a decade of experience writing online content. She spent 12 years in college admission prior to switching to full-time freelance writing and editing. Read full bio.

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

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

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.

SOISL-Q325-044

Personal loans can often be paid off early, and there can be advantages to doing so. Early payoff could save you money in terms of interest, but it also might trigger a prepayment penalty, adding to your costs.

Learn the details about early personal loan payoffs and whether it’s the right option for you.

How to Manage Your Personal Loans

Securing a personal loan may be top of mind for borrowers, but just as important is figuring out how to repay the debt. Having some basic info on hand — such as your monthly take-home pay, the cost of your essentials and non-essentials, and short- and long-term savings goals — will help.

While there’s no one-size-fits-all strategy to budgeting, here are two popular budgeting methods to consider that can help you pay off your loan in a timely way:

•  50/30/20 budget With the 50/30/20 budget strategy, your take-home pay falls into three main buckets, according to percentages: 50% to “needs” (housing, utilities, groceries, etc.), 30% to “wants” (take-out meals, entertainment, travel costs, etc.), and 20% to savings (emergency fund; IRA or other retirement contributions; debt repayment and extra loan payments, etc.)

•  Zero-sum budget This type of budget calls for earmarking every dollar you earn for either savings or discretionary spending. First, you assign monthly after-tax income dollars to non-negotiable bills, such as rent and groceries. Then you assign leftover funds to discretionary spending and saving, which could include making extra payments on a personal loan.

Tips to Pay Down Your Personal Loan

Creating a budget is one tool to consider, but here are other loan repayment strategies you may want to explore if you want to pay off the debt faster.

•   Switch to biweekly payments. Ramping up payments from once a month to twice a month could help you reduce the principal amount of a loan — and potentially pay off the debt — faster. It may even decrease how much interest you end up paying over the life of the loan.

•   Make extra payments when possible. Exceeding your minimum loan payments may help accelerate your loan repayment and potentially minimize the cost of high interest rates.

•   Tap a second source of income. Starting a side hustle is one way to boost your income, and you can put the extra cash toward your debt. You can also use tax returns, work bonuses, even birthday gifts to pay down a personal loan faster.

•   Refinance your loan. When you refinance a loan, you’re essentially replacing your old loan with a new loan that has a different rate and/or repayment term. Depending on the new rate and term, you may be able to save money on interest and/or lower your monthly payments.

•   Round up monthly payments. Over time, rounding up payments to the nearest $50 or $100 could slightly accelerate your payment schedule.

It’s important to note that many personal loans come with early payment fees, which could undo whatever money you would have saved on interest.

Can You Pay Off a Personal Loan Early?

It’s unlikely that a lender would refuse an early loan payoff, so yes, you can pay off a personal loan early. What you have to calculate, though, is whether it’s financially advantageous to do so. If a personal loan early payoff triggers a prepayment penalty, it might not make financial sense to do so.

Understand Prepayment Penalties

If and how a prepayment penalty is charged on a personal loan will be stipulated in the loan agreement. Reviewing this document carefully is a good way to find out if the penalty could be charged and how your lender would calculate it.

If you can’t find the information in the loan agreement, ask your lender for the specifics of a prepayment penalty and for them to point out where it is in the loan agreement.

There are a few different ways a lender might calculate a prepayment penalty fee:

•   Interest costs In this case, the lender would base the fee on the interest you would have paid if you had made regular payments over the total term. So, if you paid your loan off one year early, the penalty might be 12 months’ worth of interest.

•   Percentage of your remaining balance This is a common way for prepayment penalties to work on mortgages, for example, and you’d be charged a percentage of what you still owe on your loan.

•   Flat fee Under this scenario, you’d have to pay a predetermined flat fee for your penalty. So, whether you still owed $9,000 on your personal loan or $900, you’d have to pay the same penalty.

It may sound strange that a lender would include this kind of penalty in a loan agreement in the first place. Some lenders may, though, to ensure you’ll pay a certain amount of interest before the loan is paid off. It is an extra fee that, when charged, helps lenders recoup more money from borrowers.

Avoiding Prepayment Penalties

If your loan has a prepayment penalty, it could be in effect for the entire loan term or for a portion of it, depending upon how it’s defined in the loan agreement. However, you have some options.

•   For starters, you could simply decide not to pay the loan off early. This means you’ll need to continue to make regular payments rather than paying off the personal loan balance sooner. But this will allow you to avoid the prepayment penalty fee.

•   Or, you could talk to the lender and ask if the prepayment penalty could be waived.

•   If your prepayment penalty is not applicable throughout the entire term of the loan, you could wait until it expires before paying off your remaining balance.

•   Another strategy is to calculate the amount of remaining interest owed on your personal loan and compare that to the prepayment penalty. You may find that paying the loan off early, even if you do have to pay the prepayment penalty, would save money over continuing to make regular payments.

Recommended: How to Avoid Paying a Prepayment Penalty

Does Paying Off a Personal Loan Early Affect Your Credit Score?

Personal loans are a type of installment debt. In the calculation of your credit score, your payment history on installment debt is taken into account. If you’ve made regular, on-time payments, your credit score will likely be positively affected while you’re making payments during the loan’s term.

However, once an installment loan is paid off, it’s marked as closed on your credit report — “in good standing” if you made the payments on time — and will eventually be removed from your credit report after about 10 years.

So does paying off a loan early hurt your credit? Short answer, yes. Paying off the personal loan early might cause it to drop off of your credit report earlier than it would have, and it may no longer help build your credit score.

If You Pay Off a Personal Loan Early, Do You Pay Less Interest?

Since a personal loan is an installment loan with a fixed end date, if you pay off a personal loan early, you may pay less interest over the life of the loan. You won’t owe any interest anymore because the loan will be paid in full.

Recommended: Average Personal Loan Interest Rates & What Affects Them

Advantages and Disadvantages of Paying Off a Personal Loan Early

There are definitely some advantages to personal loan early payoff. One obvious benefit is that you could save on interest over the life of the loan.

For example, a $10,000 loan at 8% for 5 years (60 monthly payments) would accrue $2,166.50 in total interest. If you could pay an extra $50 each month, you could pay the loan off 14 months early and save $518.42 in interest.

Not owing that debt anymore can be a psychological comfort, potentially lowering bill-paying stress. If you’re able to make that money available for something else each month — maybe creating an emergency fund or adding to your retirement account — it might even turn into a financial gain.

If you no longer owe the personal loan debt, you’ll essentially be lowering your debt-to-income ratio, which could positively affect your credit score.

That said, if your personal loan agreement includes a prepayment penalty, paying off your personal loan early might not be financially advantageous. Some prepayment penalty clauses are for specific time frames in the loan’s term, e.g., during the first year.

If you pay off the loan during the penalty time frame, it could cost you just as much money as it might if you had just paid regular principal and interest payments over the life of the loan.

You might be thinking of a personal loan early payoff so you can put your money to work somewhere else. But if the interest rate on the personal loan is relatively low, it might make financial sense to put your extra money toward higher-interest debt, or to contribute enough to an employer-sponsored retirement plan so you can get the employer match, if one is offered.

Another thing to consider is whether paying off your personal loan early will hurt your credit. As mentioned above, making regular, on-time payments to an installment loan like a personal loan can have a positive effect on your credit score. But when the loan is paid off, and marked as such on your credit report, it’s not as much help.

What Happens If You Don’t Pay Back a Personal Loan?

Say your personal loan payment is due by the 1st of every month. One month, the 10th arrives, and you realize you haven’t paid what you owe. You’ll likely soon be considered delinquent on the loan. You may also be hit with a late fee, and your credit score could be impacted.

When Is a Loan Considered to Be in Default?

What happens if you stop making payments on a loan altogether? Then you’ll likely be considered in default on the loan. Note that there’s no set amount of time when a loan is considered in default — a borrower may be one payment behind or they may have missed 10 in a row. It depends on the type of loan, the lender, and the loan agreement.

What Happens When You Default on a Personal Loan?

When you default on a personal loan, you’ll likely be charged late fees. But you may face other consequences, such as:

•   Your credit may be damaged. Creditors may report payments that are more than 30 days late to the credit bureaus. The missing payments could end up on your credit reports and stay there for up to seven years. This could cause your credit scores to drop and may pose an issue the next time you apply for new credit.

•   You may need to deal with debt collectors. If you fall far enough behind to be contacted by a debt collector, you may encounter aggressive behavior on the part of the collection agency. However, keep in mind that the Fair Debt Collection Practices Act limits just how far debt collectors can go in trying to recover a debt. If you feel a debt collector has gone too far, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).

•   You could be sued. A lender or collection agency may file suit against you if they believe you aren’t going to repay the money you owe on a personal loan. If the judgment goes against you, your wages could be garnished, or the court could place a lien on your property.

•   Your cosigner may be impacted. If you have a cosigner or co-applicant on your personal loan, and you default on that loan, they could be impacted. For example, a debt collector could contact you and your cosigner about making payments. And if your credit score drops because of a default, theirs may drop, too.

If you’re facing a loan default, there are some things you can do now to help yourself. A good first step is to contact the lender, preferably before your next payment is due. Explain your situation to them, and find out if they can offer you any relief measures — for example, temporarily deferring loan payments.

You may also want to reach out to a credit counselor. They can work with you to create a budget that covers the essentials and frees up funds so you can pay down what you owe.

Depending on your situation, it may also be a good move to contact a lawyer. Having legal assistance is especially crucial if you’ve been served with a lawsuit.

Recommended: Better Money Management Tips

Types of Personal Loans

In general, there are two types of personal loans — secured and unsecured. Secured loans are backed by collateral, which is an asset of value owned by the loan applicant, such as a vehicle, real estate, or an investment account.

Unsecured personal loans are backed only by the borrower’s creditworthiness, with no asset attached to the loan. You might hear unsecured personal loans referred to as signature loans, good faith loans, or character loans. Typically, these are installment loans the borrower repays at a certain interest rate over a predetermined period of time.

Personal Loan Uses

Acceptable uses of personal loan funds cover a wide range, including, but not limited to:

•   Consolidation of high-interest debt

•   Medical expenses not covered by health insurance

•   Home renovation or repair projects

•   Wedding expenses

While there are benefits to taking out a personal loan, it might not always be the right financial move for everyone. Personal loans offer a lot of flexibility, but they are still a form of debt, so it’s a good idea to weigh the pros and cons before signing a personal loan agreement.

The Takeaway

If you’re able to pay off your personal loan early, that’s terrific. Doing so could help you save on interest over the life of the loan, provide more of a cushion in your monthly budget, lower your debt-to-income ratio, and alleviate debt-related stress.

However, if your personal loan agreement includes a prepayment penalty, that could take a bite out of any savings you might see on interest costs. Early payoff could impact your credit score as well, so consider the big picture when making this decision.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is it good to repay a personal loan early?

Paying off a personal loan early can be a good financial decision, as long as any prepayment penalty charge doesn’t cost more than you might pay in interest.

If I pay off a personal loan early, do I pay less interest?

Paying off a personal loan early doesn’t affect the interest rate you’ve been paying up until that point. It would mean, however, that the total amount of interest you’d pay over the life of the loan would be less than anticipated.

Does paying off a personal loan early hurt your credit?

Because making regular, on-time payments on an installment loan such as a personal loan is a positive record on your credit report, removing that history early can have a slight negative affect on your credit.

What is the smartest way to pay off a loan?

There are a number of ways you can go about paying down debt. Two popular methods include the avalanche method (which focuses on making extra payments toward highest-interest rate debt first) and the snowball method (which calls for paying off the smallest debt first, the moving on the next largest debt, and so on).

Do you save money if you pay off loans early?

Paying off loans early could save borrowers money in interest. However, you may be hit with a prepayment penalty, which could negate those savings.

Are shorter or longer loans better?

It depends on your financial needs and goals. Generally speaking, borrowers with longer-term loans tend to pay more interest over the life of the loan. By comparison, borrowers with shorter-term loans typically have lower interest costs but higher monthly payments.

How long can you stretch out a personal loan?

Lenders offer a range of loan term lengths, though generally speaking, most are between two and seven years.

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.

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A no-interest, or 0%, credit card means you won’t be charged any interest on your purchases for a certain period of time. In some cases, these cards also offer 0% interest on balance transfers for a set period of time.

But these cards also have some potential downsides. For one, the 0% annual percentage rate (APR) is only temporary. Once the promotional period ends, a potentially high APR will start accruing on any remaining balance you have on the card. In addition, you typically have to pay a fee to transfer your balance, which might negate any savings on interest.

Here are key things to know before signing up for a no-interest credit card.

Pros of No-Interest Credit Cards

Using a 0% APR credit card can create some breathing room within your budget. Here’s a look at some of the key perks, and how to make the most of them.

No Interest During the Promotional Period

Of course, one of the biggest advantages of a zero-interest card is that you’ll pay just that — zero interest — for a certain period of time, which may be anywhere from six to 18 months or perhaps a bit longer. If you use the card to make a large purchase and are able to pay it off in full before the end of the promotional period, it can be the equivalent of getting an interest-free loan.

Opportunity to Pay Down Debt Faster

In some cases, you also get the 0% APR on any balance you transfer over from another credit card. This can make a no-interest card a good option for consolidating and paying off high-interest credit card debt. If you have a plan in place to pay off the debt within the promotional period, a balance transfer could improve your financial situation.

💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

Perks and Bonus Rewards

Some credit cards with 0% APR introductory rates on purchases and/or balance transfers also have additional rewards bonus programs. This might include a welcome offer and/or cash back or rewards points based on each dollar you spend. These extras can lead to even more savings.

For example, say you want to purchase a new chair that costs $500. After some research, you find a credit card offering an introductory 0% APR for 15 months and a $200 rewards bonus after you spend $500 on purchases within the first three months of opening the account. You decide this will work for your financial situation, so you apply and are approved. After buying the chair with the new credit card, you pay the balance in full before the promotional period ends.

With this example, not only would you have paid nothing in interest, you would also have netted $200 in rewards cash.

Cons of No-Interest Credit Cards

Some might look at no-interest credit cards as too good to be true. That’s not necessarily the case, but there can be some drawbacks to them. Here are some potential pitfalls to be aware of.

Temporary Promotional Rate

Alas, that 0% APR doesn’t last forever. If you use the card for a large purchase but are unable to fully pay it off before the end of the promotional period, any balance will start accruing the card’s regular APR.

At that point, the card may not have any advantages over any other card. In fact, the card could have an APR that is higher than the average credit card interest rate. When comparing 0% rate cards, it’s important to look at what the rate will be when the promo period ends and exactly when it will kick in.

Also keep in mind that you could lose the 0% intro APR before the end of the promo period if you are late with a payment. Here again, it pays to read the fine print.

Fees for Balance Transfers

Some — but not all — no-interest credit cards also feature a 0% APR on balance transfers. However, you typically still have to pay a balance transfer fee, often around 3% to 5% of the transferred balance. If you’re transferring a large balance from another card, the balance transfer fee could actually be significant. You’ll want to do the math before making the switch to be sure it will work in your favor.

Interest May Apply Retroactively

Similar to a no-interest credit card, a deferred-interest credit offer is one that’s commonly a feature of retail or store cards. If you’ve been asked if you’d like to apply for a store’s credit card when you’re making a purchase, it might be one that comes with a deferred interest promotion.

Like no-interest credit cards, a deferred-interest card doesn’t charge interest as long as the balance is paid in full within a certain time period. The biggest difference between the two: If the balance is not paid in full before the promotional period ends, interest will be applied to the entire purchase — not just the remaining balance. And APRs on deferred-interest cards can be even higher than APRs charged by regular credit cards.

Recommended: Personal Loan Calculator

Can Credit Scores Be Affected by No-Interest Credit Cards?

Applying for a new credit card results in a hard inquiry on your credit report, which can have a minor, temporary negative impact on your credit scores. This is generally nothing to worry about.

However, repeatedly opening new credit cards and transferring balances to them can cause a long-term negative impact on your credit. That’s because too many hard inquiries too close together can lead lenders to believe you’re applying for more credit than you can pay back.

While no-interest credit cards have their advantages, credit card debt could escalate. If that occurs, it can be wise to seek credit counseling or look into a credit card consolidation loan, which can offer a lower interest rate and streamlined payments.

The Takeaway

A 0% intro APR card can help you avoid paying interest on your purchases for a set period of time. It can also allow you to consolidate and pay down credit card debt faster.

Keep in mind, however, that cards with no interest often come with a balance transfer fee. Also be aware that your interest rate will likely be much higher when the intro APR offer ends if you haven’t paid off your balance by then. Another option could be paying off high-interest credit cards with a personal loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is it a good idea to get a zero-interest credit card?

If you make on-time payments and pay off your balance before the intro period ends, then it can be a good idea to get a 0% APR credit card. But if you overspend and carry a balance, you may face high interest rates when the introductory period is over.

Does a 0% credit card affect your credit?

Credit bureaus don’t look at your interest rate, but they do look at your credit limit and what percent of that you are utilizing. So in that way, no-interest cards can impact your credit score. Also, when you apply for one of these cards, the issuer likely conducts a hard credit pull, which will usually lower your score by a few points temporarily.

Is 0% interest a trap?

A 0% interest credit card can be a valuable financial tool if used responsibly. However, if you can’t pay off your balance, when the introductory period ends, you may be stuck with your debt growing thanks to the high interest rate that kicks in. In that way, you could find yourself in a debt trap.

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.

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