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Apr
17
2025
What Is a Bull Call Spread Option? A Comprehensive Overview

What Is a Bull Call Spread Option? A Comprehensive Overview

By | Growing Wealth, invest, Investing | Comments Off on What Is a Bull Call Spread Option? A Comprehensive Overview

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

A bull call spread, also known as a long call spread or a type of vertical spread, is an options trading strategy used to capitalize on moderate price increases for a stock. The strategy involves buying a call option at a lower strike price and selling a call option at a higher strike price.

Investors use a bull call spread when they’d like to take advantage of a slightly bullish trend in a stock without taking too much risk. This type of options trading strategy limits both profits and losses, making it a popular strategy for investors with limited capital and a desire for downside protection.

Key Points

•   A bull call spread benefits from a moderately bullish stock trend while limiting risk and upfront costs.

•   The spread’s value increases as the stock price increases, but when it falls, losses are limited by the short call.

•   Volatility has minimal impact due to near-zero vega, with long and short calls offsetting each other.

•   Time decay affects the spread negatively if the stock price is below the lower strike, positively if it’s above the higher strike.

•   Pros include lower cost and limited losses, while the main con is capped potential gains.

What Is a Bull Call Spread Position?

To initiate a bull call spread, options traders buy a call option at a lower strike price while selling a call with a higher strike price. Both options have the same expiration date and underlying asset.

This options strategy establishes a net debit or cost and makes money when the underlying stock rises in price. The potential profits hit a limit when the stock price rallies above the strike price of the short call (the leg sold with the higher strike price), while potential losses hit a limit if the stock price declines beneath the strike price of the long call (the leg bought with the lower strike price).

In a bull call spread, a trader cannot lose more than the net premium, plus commissions. A trader’s maximum gain is the difference between the strike prices of the short and long call minus the net premium, plus commissions.

Recommended: How to Sell Options for Premium

Bull Call Spread Example

Let’s say a trader establishes a bull call spread by purchasing a call option for a premium of $10 (the long call). The call option has a strike price of $50 and expires in three months. The trader also sells (or writes) a call option for a premium of $2 (the short call). The call option has a strike price of $70 and expires in three months. The underlying asset of both options is the same and currently trades at $50.

Since options contracts typically cover 100 shares, the trader’s total net cost would be $8 per share x 100 shares, or $800.

Assume that three months have passed and the expiration date has arrived.

Scenario 1: Maximum Profit

If the stock price is $60 or above at expiration, both calls would be in-the-money. The maximum gain can be determined by subtracting the net premium paid for the options from the difference between the two strike prices. In this example, the maximum profit for the trader would be $1,200, minus any commissions or fees.

•   Strike price difference: $70 – $50 = $20 per share

•   Less net premium paid: $20 – $8 = $12 per share

•   Total max profit: $12 x 100 = $1,200

Scenario 2: Maximum Loss

If the stock price is $50 or lower at expiration, both options expire worthless. The maximum potential loss would be the net premium paid upfront, plus any commissions or fees.

•   The trader loses the entire initial $8 per share investment

•   Max loss = $8 x 100 shares = $800

Scenario 3: Breakeven Price

The breakeven occurs when the total gain offsets the initial cost, which can be determined by adding the net premium ($8) to the long call strike price ($50), which results in a breakeven price of $58.

•   Long call gains = (Stock price – $50) x 100

•   Breakeven price = $50 + $8 = $58

Variables Impacting a Bull Call Spread

As with any options trading strategy, various potential factors can have an effect on how the trade will play out. The ideal market forecast for a bull call spread is “modestly bullish,” or that the underlying asset’s price will gradually increase.

As with all options, the price of the underlying security is only one of several factors that can impact the trade.

Stock Price Change

A bull call spread will increase in value as its underlying stock price rises and decline in value as the stock price falls. This kind of position is referred to as having a “net positive delta.”

Delta estimates how much the price of an option is expected to change for every $1 change in the underlying security’s price. The change in option price is usually less than that of the stock price. For example, if the stock price falls by $1, the option may only fall by $0.50.

Change in Volatility

Volatility refers to how much a stock price fluctuates in percentage terms. Implied volatility (IV) is a factor in options pricing. When volatility rises, option prices often rise if other factors remain unchanged.

Because a bull call spread consists of one short call and one long call, the price of this position changes little when volatility changes (an exception may be when higher strike prices carry higher volatility). In options vocabulary, this is called having a “near-zero vega.” Vega is an estimation of how much an option price could change with a change in volatility, assuming all other factors remain constant.

Time

Time is another important variable that influences the price of an option. As expiration approaches, an option’s total value decreases, a process called time decay.

The sensitivity to time decay in a bull call spread depends on where the stock price is in relation to the strike prices of the spread. If the stock price is near or below the strike price of the long call (lower strike), then the price of the bull call spread declines (and loses money) as time passes. Conversely, if the stock price is above the higher strike price, time decay works in favor of the trader, as the short call loses value faster than the long call.

On the other hand, if the price of the underlying stock is near or above the strike price of the short call (higher strike), then the price of a bull call spread rises (and makes money) as time passes. This occurs because the short call loses time value faster than the long call, which benefits the trader. The long call is deep in-the-money, and therefore primarily composed of intrinsic value (and less affected by time decay).

In the event that the stock price is halfway between both strike prices, time decay will have little impact on the price of a bull call spread. In this scenario, both call options decay at more or less the same rate.

Risk of Early Assignment

Traders holding American-style options can exercise them on any trading day up to the expiration date. Those who hold short stock options have no control over when they may have to fulfill the obligation of the contract.

The long call in a bull call spread doesn’t face early assignment risk, but the short call may be subject to the risk of early assignment. Calls that are in-the-money and have less time value than the dividends that a stock pays are likely to be assigned early.

This can happen because when the dividend payout is greater than the price of the option, traders would rather hold the stock and receive the dividend. For this reason, early assignment of call options usually happens the day before the ex-dividend date of the underlying stock (the day by which investors must hold the stock in order to receive the dividend payout).

When the stock price of a bull call spread is above the strike price of the short call (the call with a higher strike price), traders must determine the likelihood that their option could be assigned early. If it looks like early assignment is likely, and a short stock position is not desirable, then a trader must take action.

There are two ways to do away with the risk of early assignment. Traders can either:

•   Close the entire spread by buying the short call to close and selling the long call to close, or

•   Buy to close the short call and leave the long call open.

Pros and Cons of Using a Bull Call Spread

The main advantages of using a bull call spread is that it costs less than buying a single call option and limits potential losses. In the earlier example, the trader would have had to pay a $1,000 premium ($10 for 100 shares) if they had only been using one call option. With a bull call spread, they only have to pay a net of $800 ($8 for 100 shares).

The potential losses are also capped. If the stock were to fall to zero, the trader would realize a loss of just $800 rather than $1,000 (if they were using only the long call option).

The biggest drawback of using a bull call spread is that it caps potential gains. In the example above, our trader only realized a maximum gain of $1,200 because of the short call option position. In the event that the stock price were to soar to $400 or higher, they would still only realize a $1,200 profit.

The Takeaway

A bull call spread is a two-leg options trading strategy that involves buying a long call and writing a short call. Traders use this strategy to try and capitalize on moderately bullish price momentum while capping both losses and gains.

As with all trades involving options, there are many variables to consider that can alter how the trade plays out.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

Photo credit: iStock/kupicoo

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Apr
17
2025

How Do Employee Stock Options Work?

By | Building Your Career, Growing Wealth, invest, Investing, Life & Career | Comments Off on How Do Employee Stock Options Work?

Employee stock options (ESOs) may be included in an employee’s compensation package, as a way of giving an employee the opportunity to buy stock in the company at a certain price — and as an incentive to stay with the company for a period of time.

Employee stock options give employees the right to buy company stock at an established grant price once certain terms are met. But there’s no obligation to do so.

Exercising stock options means choosing to purchase the stock at the grant price, after a predetermined waiting period. If you don’t purchase the stock, the option will eventually expire.

Employee stock options can also give employees a sense of ownership (and, to a degree, actual ownership) in the company they work for. That can have benefits and drawbacks. But if you’re working in an industry in which employee stock options are common, it’s important to know how they work, the different types, and the tax implications.

Key Points

•   Employee stock options (ESOs) can be offered as part of an employee’s compensation package.

•   Employee stock options give employees the right to purchase X number of company shares for a certain price, by a certain date.

•   Stock options are typically offered on a vesting schedule, with a percentage of options available by a certain date or series of dates.

•   If the market price of the shares is higher on the exercise date, the employee may be able to realize a profit. But there are no guarantees, and the share price could drop below the exercise price.

•   Incentive Stock Options receive a more favorable tax treatment than Non-Qualified Stock Options.

What Are Employee Stock Options?

As mentioned, employee stock options give an employee the chance to purchase a set number of shares in the company at a set price — often called the exercise price — over a set amount of time. Typically, the exercise price is a way to lock in a lower price for the shares.

Typically, the exercise price is a way to lock in a lower price for the shares, although there are no guarantees.

This gives an employee the chance to exercise their ESOs at a point when the exercise price is lower than the market price — with the potential to make a profit on the shares.

Sometimes, an employer may offer both ESOs and restricted stock units (RSUs). RSUs are different from ESOs in that they are basically a promise of stock at a later date.

Employee Stock Option Basics

When discussing stock options, there are some essential terms to know in order to understand how options — general options — work. (For investors who are familiar with options trading, some of these terms may sound similar. But options trading, which involves derivatives contracts, doesn’t have any bearing on employee stock options.)

•   Exercise price/grant price/strike price: This is the given set price at which employees can purchase the stock options.

•   Market price: This is the current price of the stock on the market (which may be lower or higher than the exercise price). Typically an employee would only choose to exercise and purchase the options if the market price is higher than the grant price.

•   Issue date: This is the date on which you’re given the options.

•   Vesting date: This is the date after which you can exercise your options per the original terms or vesting schedule.

•   Exercise date: This is the date you actually choose to exercise your options.

•   Expiration date: This is the date on which your ability to exercise your options expires.

How Do Employee Stock Option Plans Work?

When you’re given employee stock options, that means you have the option to buy stock in the company at the grant price. If you don’t use the options to purchase the stock within the specified period, then they expire.

ESO Vesting Periods

Typically, employee stock options follow a vesting schedule, which is basically a waiting period after which you can exercise them. This means you must stay at the company a certain amount of time before you can cash out.

The stock options you’re offered may be fully vested on a certain date, or just partially vested over multiple years, meaning some of the options can be exercised at one date and others at a later date.

ESO Example

For example, imagine you were issued employee stock options on February 1 of 2025, with the option of buying 100 shares of the company at $10/share. You can exercise your options starting on Feb. 1, 2026 (the vesting date) for 10 years, until Feb. 1, 2036 (the expiration date).

If you chose not to exercise these options by Jan. 1, 2036, they would expire and you would no longer have the option to buy stock at $10/share.

Now, let’s say the market price of shares in the company goes up to $20 at some point after they’ve vested in 2026, and you decide to exercise your options.

You would buy 100 shares at $10/share for $1,000 total — while the market value of those shares is actually $2,000. In this scenario, the vesting period allowed the stock to grow and deliver a profit. But the reverse could also occur: The share price could drop to $8, in which case you wouldn’t exercise your options because you’d lose money. You might choose to wait and see if the share price rebounds.

Exercising Employee Stock Options

It bears repeating: You don’t need to exercise your options unless it makes sense for you. You’re under no obligation to do so. Whether you choose to do so or not will likely depend on your financial situation and financial goals, the forecasted value of the company, and what you expect to do with the shares after you purchase them.

If you plan to exercise your ESOs, there are a few different ways to do so. The shares you get are effectively the same as the shares available on online investing platforms and brokerages, but some companies have specifications about when the shares can be sold, because they don’t want you to exercise your options and then sell off all your stock in the company immediately.

Buy and Hold

Once you own shares in the company, you can choose to hold onto them — effectively, a buy-and-hold strategy. To continue the example above, you could just buy the 100 shares with $1,000 cash and you would then own that amount of stock in the company — until you decide to sell your shares (if you do).

Cashless Exercise

Another way to exercise your ESOs is with a cashless exercise, which means you sell off enough of the shares at the market price to pay for the total purchase.

For example, you would sell off 50 of your purchased shares at $20/share to cover the $1,000 that exercising the options cost you. You would be left with 50 shares. Most companies offering brokerage accounts will likely do this buying and selling simultaneously.

Stock Swap

A third way to exercise options is if you already own shares. A stock swap allows you to swap in existing shares of the company at the market price of those shares and trade for shares at the exercise price.

For example, you might trade in 50 shares that you already own, worth $1,000 at the market price, and then purchase 100 shares at $10/share.

When the market price is higher than the exercise price — often referred to as options being “in the money” — you may be able to gain value for those shares because they’re worth more than you pay for them.

Why Do Companies Offer Stock Options?

The idea is simple: If employees are financially invested in the success of the company, then they’re more likely to be emotionally invested in its success as well, and this may increase employee productivity and loyalty.

From an employee’s point of view, stock options offer a way to see some financial benefit of their own hard work. In theory, if the company is successful, then the market stock price could rise and the stock options could be worth more.

The financial prospects of the company influence whether people want to buy or sell shares in that company, but there are a number of factors that can determine stock price, including investor behavior, company news, world events, and primary and secondary markets.

Tax Implications of Employee Stock Options

There are two main kinds of employee stock options: qualified and non-qualified, each of which has different tax implications. These are also known as incentive stock options (ISOs) and non-qualified stock options (NSOs or NQSOs).

Incentive Stock Options (ISO)

When you buy shares in a company below the market price, you could be taxed on the difference between what you pay and what the market price is. ISOs are “qualified” for preferential tax treatment, meaning no taxes are due at the time you exercise your options — unless you’re subject to an alternative minimum tax.

Instead, taxes are due at the time you sell the stock and make a profit. If you sell the stock more than one year after you exercise the option and two years after they were granted, then you will likely only be subject to capital gains tax.

If you sell the shares prior to meeting that holding period, you will likely pay additional taxes on the difference between the price you paid and the market price as if your company had just given you that amount outright. For this reason, it is often financially beneficial to hold onto ESO shares for at least one year after exercising, and two years after your exercise date.

Non-qualified Stock Options (NSOs or NQSOs)

NSOs do not qualify for preferential tax treatment. That means that exercising stock options subjects them to ordinary income tax on the difference between the exercise price and the market price at the time you purchase the stock. Unlike ISOs, NSOs will always be taxed as ordinary income.

Taxes may be specific to your individual circumstances and vary based on how the company has set up its employee stock option program, so it’s a good idea to consult a financial advisor or tax professional for specifics.

Should You Exercise Employee Stock Options?

While it’s impossible to know if the market price of the shares will go up or down in the future, there are a number of things to consider when deciding if you should exercise options:

•   The type of option — ISO or NSO — and related tax implications

•   The financial prospects of the company

•   Your own investment portfolio, and how these company shares would fit into your overall investment strategy

You also might want to consider how many shares are being made available, to whom, and on what timeline — especially when weighing what stock options are worth to you as part of a job offer. For example, if you’re offered shares worth 1% of the company, but then the next year more shares are made available, you could find your ownership diluted and the stock would then be worth less.

The Takeaway

Employee stock options (ESOs) can be an incentive that companies offer their employees: They present the opportunity to invest in the company directly, and possibly profit from doing so. There are certain rules around ESOs, including timing of exercising the stock options, as well as different tax implications depending on the type of ESO a company offers its employees.

There can be a lot of things to consider, but it’s yet another opportunity to get your money in the market, where it’ll have the chance to grow.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


Invest with as little as $5 with a SoFi Active Investing account.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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Apr
17
2025
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How to Choose a 401(k) Beneficiary: Rules & Options

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on How to Choose a 401(k) Beneficiary: Rules & Options

Choosing a 401(k) beneficiary ensures that funds in your account are dispersed according to your wishes after you pass away. Whether you’re married, single, or in a domestic partnership, naming a beneficiary simplifies the estate process and makes it easier for your heirs to receive the money.

There’s room on 401(k) beneficiary forms for both a primary and contingent beneficiary. Before making any decisions on a beneficiary and a backup, it can help to familiarize yourself with 401(k) beneficiary rules and options.

Key Points

•   It is essential to choose a primary beneficiary for a 401(k) to make sure funds in the account are distributed according to the account holder’s wishes.

•   Naming a beneficiary for a 401(k) avoids having the account go through probate, which can be a lengthy and costly process.

•   A spousal waiver may be required if someone other than a spouse is named as a 401(k) beneficiary.

•   Beneficiary designations should be updated regularly, especially after significant life changes like marriage, the birth of a child, and divorce.

•   Beneficiaries should be informed about 401(k) account details and how to access account information.

Why It’s Important to Name 401(k) Beneficiaries

A 401(k) account is a non-probate asset. That means it doesn’t have to go through the lengthy probate legal process of distributing your property and assets when you die — as long as you name a beneficiary.

However, if you die without a beneficiary listed on your 401(k) account, the account may have to go through probate, which can be costly and take months, potentially delaying the distribution of the assets.

Some plans with unnamed beneficiaries automatically default to a surviving spouse, while others do not. If that’s the case — or if there is no surviving spouse — the 401(k) account becomes part of the estate that goes through probate as part of the will review.

The amount of time it will take for your heirs to go through the probate process varies depending on the state and the complexity of your assets. At a minimum, it can last months.

Another downside of having a 401(k) go to probate instead of being directly inherited by a beneficiary is that the account funds may be used to pay off creditors if the deceased had unpaid debts that can be covered by the estate.

By naming a 401(k) beneficiary, you ensure your heirs receive the funds in full. For example, this is important if you weren’t legally married but want to insure that your domestic partner is your legal beneficiary. A beneficiary designation is currently required in order for your domestic partner to inherit your 401(k).

Having named 401(k) beneficiaries is a decision that overrides anything written in your will, so it’s important to review your beneficiaries every few years or even annually to make sure your money goes to the person you choose.

What to Consider When Choosing a Beneficiary

Your 401(k) account may hold a substantial amount of your retirement savings. How you approach choosing a 401(k) beneficiary depends on your personal situation. For married individuals, it’s common to choose a spouse. Some people choose to name a domestic partner or their children as beneficiaries.

Typically, you can choose a primary beneficiary and a contingent beneficiary.

•   Your primary beneficiary is the main person you want to receive your 401(k) assets when you die.

•   The contingent beneficiary (aka the secondary beneficiary) will inherit the assets if your primary beneficiary can’t or won’t.

Another option is to choose multiple beneficiaries, like multiple children or siblings. In this scenario, you can either elect for all beneficiaries to receive equal portions of your 401(k) account, or assign each individual different percentages.

Recommended: IRA vs. 401(k): What’s the Difference?

For example, you could allocate 25% to each of four children, or you could choose to leave 50% to one child, 25% to another, and 12.5% to the other two.

In addition to choosing a primary beneficiary, you can also choose a contingent beneficiary if you wish, as noted above. This individual only receives your 401(k) funds if the primary beneficiary passes away or disclaims their rights to the account. If the primary beneficiary is still alive, the contingent beneficiary doesn’t receive any funds.

401(k) Beneficiary Rules and Restrictions

Essentially, an individual can choose anyone they want to be a 401(k) beneficiary, with a few limitations.

•   Minor children cannot be direct beneficiaries. They must have a named guardian oversee the inherited funds on their behalf, which will be chosen by a court if not specifically named. Choosing a reliable guardian helps to ensure the children’s inheritance is managed well until they reach adulthood.

•   A waiver may be required if someone other than a spouse is designated. Accounts that are ruled by the Employee Retirement Income Security Act (ERISA) have 401(k) spouse beneficiary rules. A spousal waiver, signed by your spouse, is required if you designate less than 50% of your account to your spouse. Your plan administrator can tell you whether or not this rule applies to your specific 401(k).

How to Name Multiple 401(k) Beneficiaries

You are allowed to have multiple 401(k) beneficiaries, both for a single account and across multiple accounts. You must name them for each account, which gives you flexibility in how you want to pass on those funds.

When naming multiple beneficiaries, it’s common practice to divide the account by percentage, since the dollar amounts in the account may vary based on what you use during your lifetime and investment performance.

Complex Rules for Inherited 401(k)s

You may also want to consider how the rules for an inherited 401(k) may affect a beneficiary who is your spouse vs. a non-spousal beneficiary.

Spouses usually have more options available, but they differ depending on the spouse’s age, as well as the year the account holder died.

In many cases, the spouse may roll over the funds into their own IRA, sometimes called an inherited IRA. Non-spouses don’t have that option. If the account holder died in 2020 or later, a non-spouse beneficiary must withdraw all the funds from the account within 10 years. (If the account holder died in 2019 or earlier, different rules apply, including taking withdrawals over five years and emptying the account in that time, or taking distributions based on your own life expectancy beginning the end of the year following the account holder’s year of death.)

A beneficiary can also take out the money as a lump sum, which will be subject to ordinary income tax. But you need to be at least age 59 ½ in order to avoid the 10% early withdrawal penalty.

Because the terms governing inherited 401(k) are so complex, it may be wise to consult a financial professional.

Recommended: Rollover IRA vs. Traditional IRA: What’s the Difference?

What to Do After Naming Beneficiaries

Once you’ve selected one or more beneficiaries, take the following steps to notify your heirs and continually review and update your decisions as you move through various life stages.

Inform Your Beneficiaries

Naming your beneficiaries on your 401(k) plan makes sure your wishes are legally upheld, but you’ll make the inheritance process easier by telling your beneficiaries about your accounts. They’ll need to know where and how to access the account funds, especially since 401(k) accounts can be distributed outside of probate, making the process potentially much faster than other elements of your estate plan.

For all of your accounts, including a 401(k), it’s a good idea to keep a list of financial institutions and account numbers that you leave for your heirs. This makes it easier for your beneficiaries to access the funds quickly after your death.

Impact of the SECURE Act

You also need to inform beneficiaries about the pace at which the funds must be dispersed after your death.

Thanks to the terms in the SECURE Act (Setting Every Community Up for Retirement Enhancement), if an account holder died in 2020 or later, beneficiaries generally must withdraw all assets from an inherited 401(k) account within 10 years of the original account holder’s death. Some beneficiaries are excluded from this requirement, including:

•   Surviving spouses

•   Minor children

•   Disabled or chronically ill beneficiaries

•   Beneficiaries who are less than 10 years younger than the original account holder

Revise After Major Life Changes

Managing your 401(k) beneficiaries isn’t necessarily a one-time task. It’s important to regularly review and update your decisions, especially as major life events occur. The most common events include marriage, divorce, birth, and death.

Common Life Stages

Before you get married, you may decide to list a parent or sibling as your beneficiary. But you’ll likely want to update that to your spouse or domestic partner, should you have one. At a certain point, you may also wish to add your children, especially once they reach adulthood and can be named as direct beneficiaries.

Divorce

It’s particularly important to update your named beneficiaries if you go through a divorce. If you don’t revise your 401(k) account, your ex-spouse could end up receiving those benefits — even if your will has been changed.

Death of a Beneficiary

Should your primary beneficiary die before you do, your contingent beneficiary will receive your 401(k) funds if you pass away. Any time a major death happens in your family, take the time to see how that impacts your own estate planning wishes. If your spouse passes away, for instance, you may wish to name your children as beneficiaries.

Second Marriages and Blended Families

Also note that the spousal rules apply for second marriages as well, whether following divorce or death of your first spouse. Your 401(k) automatically goes to your spouse if no other beneficiary is named. And if you assign them less than 50%, you’ll need that signed spousal waiver.

Financial planning for blended families takes thought and communication, especially if you remarry later in life and want some or all of your assets to go to your children.

Manage Your Account Well

Keep your 401(k) beneficiaries in mind as you manage your account over the years. While it is possible to borrow from your 401(k), this can cause issues if you pass away with an outstanding balance. The loan principal will likely be deducted from your estate, which can limit how much your heirs actually receive.

Also try to streamline multiple 401(k) accounts as you change jobs and open new employer-sponsored plans. There are several ways to roll over your 401(k) into an IRA, which makes it easier for you to track and update your beneficiaries. It also simplifies things for your heirs after you pass away, because they don’t have to track down multiple accounts.

How to Update 401(k) Beneficiaries

Check with your 401(k) plan administrator to find out how to update your beneficiary information. Usually you’ll need to just fill out a form or log into your online retirement account.

Typically, you need the following information for each beneficiary:

•   Type of beneficiary

•   Full name

•   Birth date

•   Social Security number (this may or may not be required)

Although your named beneficiaries on the account supersede anything written in your will, it’s still smart to update that document as well. This can help circumvent legal challenges for your heirs after you pass away.

The Takeaway

A financial plan at any age should include how to distribute your assets should you pass away. The best way to manage your 401(k) is to formally name one or more beneficiaries on the account. This helps speed up the process by avoiding probate.

A named beneficiary trumps anything stated in your will. That’s why it’s so important to regularly review these designations to make sure the right people are identified to inherit your 401(k) assets.

It’s true that you will likely use your 401(k) funds yourself, for your retirement. But because an inherited 401(k) can be a significant asset, beneficiaries will likely face certain income and/or tax consequences when they inherit it. Thus, it’s best to inform the people whom you’re choosing.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help grow your nest egg with a SoFi IRA.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of Individual Retirement Accounts (IRAs).

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

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Apr
17
2025
woman writing in notebook

4 Places to Store Short-Term Savings

By | Budgeting & Goals, money | Comments Off on 4 Places to Store Short-Term Savings

If you have a savings goal that’s coming up in the not-too-distant future — such as a large purchase, vacation, or wedding — you may want to consider some good short-term savings options.

There isn’t a hard and fast definition of short-term savings, but it’s typically considered to be money you want to use within the next few months or years.

While there are a number of options for short-term savings, one of the best places to start stashing cash for a short-term goal can be a savings account. They can offer safety (so you shouldn’t lose any money), liquidity (allowing you to access money when needed), and growth (meaning they are interest-bearing).

But some of these accounts offer more liquidity and higher interest than others. With a little reading and research, you can start socking your cash away in the right place — and start moving closer to those short-term savings goals.

Key Points

•   Short-term savings are for goals you plan to accomplish in the next few months or years.

•   Online savings accounts generally offer higher APYs than regular savings accounts, as well as lower (or no) fees.

•   CDs lock in interest rates for fixed periods and may offer competitive rates.

•   Money market accounts combine savings and checking features but often have higher minimum balances.

•   Cash management accounts provide flexibility, allowing users to spend, save, and potentially invest from a single account.

Should You Invest Short-Term Savings?

Depending on your short-term savings goals, a savings account may be a wise move. One significant downside to any cash savings account is that they tend to have relatively low-interest rates.

You might however wonder: Should I invest this money in stocks or a mutual fund in order to meet my short-term goals more quickly?

Generally speaking, for short-term money, your goal is not necessarily to maximize returns. It is to control the risk — to keep it safe — so that the money is available when it’s needed.

While everyone’s risk tolerance is different, the downside to investing in the market is that you might lose money in the short term. Investment returns start to “smooth out,” or return their average yield, over longer periods. Shorter periods tend to be volatile and unpredictable — especially in the stock market.

To invest in the short-term would require complete flexibility — if the market were to fall steeply, it would likely be best to wait it out and avoid realizing losses. Suddenly, you’re on the market’s timeline, not your own.

Because of this, these investments may be inappropriate for an emergency fund, which needs to be accessible at all times. The same goes for those financial goals with a hard deadline (such as wanting to use this money as a down payment in two years).

That said, there’s a trade-off. Many of the options for short-term savings may not keep up with increasing prices, or inflation, and its impact on the cost of living. “For money you’ll use in three to seven years, you may be prepared to take slightly more risk than a savings account,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. You might choose to use a brokerage account where you can invest that money in stocks, bonds, cash, or other asset classes. Just be sure to keep your comfort with risk in mind.”

If you’d prefer to avoid risk with your short-term savings, here are options to consider.

Option 1: Online Savings Account

Online savings accounts, also sometimes referred to as high-yield savings accounts, are an increasingly popular option for short-term savings. As their name implies, these accounts are offered by banks or financial institutions that only operate online. Here’s the scoop:

•   That means no brick-and-mortar locations and no chatting up a banker face-to-face. The upside: When you compare accounts offered by traditional banks vs. online banks, the latter typically have lower overhead costs and pass that savings onto their customers in the form of a higher annual percentage yield (APY).

•   A potentially higher rate of interest isn’t the only reason to use online-only savings accounts. The websites and mobile apps for online accounts essentially serve as storefronts, so online financial institutions often devote lots of resources to make sure they’re optimized and easy to navigate.

•   Additionally, many online-only institutions don’t have monthly account fees, which can be a real burden for those at the start of their savings journey. (For example, some traditional banks might charge a fee when you balance drops below the minimum.)

•   Banking online doesn’t mean you have to forgo the conveniences of your neighborhood bank. You can typically still do all of the important banking duties, such as depositing checks (via mobile deposit, or snapping a picture of the check on your phone), moving money back and forth between accounts, and speaking with a customer service rep.

In the past, the Federal Reserve limited savings account withdrawals to six per month, but this rule has been lifted. Even so, some banks have continued to put limits on the number of withdrawals you can make from a savings account. Before you sign up, you’ll want to understand the rules for accessing your money.

Also, while online banking is now considered mainstream, it’s always smart to do a little background research before you open an online account. You may want to check, for instance, to make sure an institution has Federal Deposit Insurance Corp (FDIC) coverage, a government-guaranteed program that protects your money up to certain limits.

Option 2: Certificate of Deposit

A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a designated period of time, such as six months or three years. In exchange for the deposit, the bank pays a fixed rate of interest.

Generally, CDs with longer maturities offer higher interest rates. However, this isn’t always the case. For example, banks may offer high interest rates on short-term CDs when they expect the Federal Reserve to cut rates in the future. As a result, it pays to shop around and compare CD rates and terms.

You may also want to keep in mind that the interest rate on a CD is locked in at the point of purchase, as opposed to the interest rate in a savings account (both traditional and online-only), which may fluctuate. If you’re interested in locking in a certain rate, you may want to consider a CD. (Although be aware that you would be locking yourself into a lower rate if rates rise.)

While savings accounts are designed to provide regular access to your money, CDs are not. Because CDs have a fixed time frame, there may be a penalty to access the money before the period is over. And in exchange for the lock-up period, CDs generally offer higher rates than traditional savings accounts.

CDs can be a good option for people who don’t need to touch their short-term savings for a certain period of time. And they are typically FDIC-insured.

Option 3: Money Market Account

A money market account (MMA) is a mix between a savings and a checking account.

These accounts, offered by banks and credit unions, can allow you to write checks (though you may be limited on how often) and may also have a debit card. (Savings accounts, whether online or at a traditional bank, typically do not offer checks or a debit card.)

Returns on these accounts often beat those on traditional savings accounts. Depending on what’s happening in the economy overall, an MMA may be in line with that of an online-only bank account.

However, MMAs sometimes require higher minimum balances than other types of savings accounts. So, this might be a better option for those with more money to save.

MMAs are considered a safe choice since, like other types of savings accounts, they are typically covered by FDIC if held by a bank, and National Credit Union Administration (NCUA) if held by a credit union. (Although, it’s always a good idea to double-check insurance coverage to be sure.)

Keep in mind that MMAs differ from money market mutual funds, which are not FDIC- or NCUA-insured.

Option 4: Cash Management Account

A cash management account (CMA) is a cash account offered by a financial institution other than a bank or credit union. These accounts are designed to merge the services and features of checking, savings, and investment accounts, all into one offering.

While CMAs are typically offered by financial service providers that are not themselves technically classified as banks, they are still usually covered by FDIC deposit insurance like regular bank deposits — often through a partner bank.

Generally, CMAs function similarly to a traditional checking account, yet pay interest that is often higher than regular savings accounts.

Some brokerage firms require a large minimum deposit to open a CMA, or may charge monthly fees for anyone under that minimum. Before opening a CMA, it’s a good idea to ask about monthly fees and minimum balance requirements.

Also, since CMA providers typically “sweep” your uninvested cash into interest-paying deposit accounts held at partner banks, you’ll want to make sure those sweep accounts are FDIC-insured.

The Takeaway

Short-term savings is money that you likely will need in the not too-distant future, such as within a few months or years.

There are a number of options for short-term savings, but some good bets include online savings accounts, CDs, money market accounts, and cash management accounts. These accounts tend to be low-risk and generally offer a higher return than a traditional savings or checking account.

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.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Apr
16
2025

What Are Possible Solutions to the Student Loan Debt Crisis?

By | Financial Topics, Student Loans | Comments Off on What Are Possible Solutions to the Student Loan Debt Crisis?

What Are Possible Solutions to the Student Loan Debt Crisis?

Student loan debt has tripled in the past two decades. Today, student loan debt totals $1.77 trillion, according to the Federal Reserve, up from $579 billion in 2008.

How did student loan debt get so big? And what are solutions to the student debt crisis? Read on to learn about causes of student loan debt, federal student loan forgiveness programs that might offer borrowers some relief, potential help from employers and the private sector, and strategies borrowers can use to make their student loan debt more manageable.

Key Points

•   Student loan debt rose over 500% between 2004 and 2023. Reasons for the high debt include the rising cost of tuition, which has more than doubled in the past 25 years.

•   More students take out student loans today to cover the cost of college. The number of student loan borrowers has more than doubled since 1992.

•   Student loan debt delays major life milestones for borrowers and reduces consumer spending. Half of adults with student loan debt say their debt delayed the purchase of a home.

•   Possible solutions to the student loan debt crisis include loan forgiveness programs and income-driven repayment plans that adjust monthly payments based on discretionary income and family size.

•   More universities are offering free or reduced tuition to students whose family income is below a certain level. These initiatives aim to make higher education more accessible and help reduce the financial burden.

Understanding the Student Loan Debt Crisis

Student loan debt has grown faster than other sources of household debt. Between 2004 and 2023, student loan debt rose over 500%, and it is now the third-largest source of household debt after mortgages and auto loans.

One of the reasons for the skyrocketing student loan debt is rising tuition costs. The average cost of college has more than doubled over the past 25 years. Today, the average annual cost of attendance at an in-state public school is $27,146, while at a private university, the average annual cost is $56,628.

Another factor is that more students are taking out loans to pay for college. The number of students borrowing loans to afford their education has more than doubled since 1992.

As a result, there are now 42.7 million Americans with student loan debt. Per borrower, the average student loan debt balance is $38,375, according to the Education Data Initiative (EDI).

The Impact of Student Loan Debt on Borrowers

Student loan debt can have a wide-ranging impact on borrowers, from reducing consumer spending, to delaying their ability to buy a home or start a family.

Half of adults with student loan debt say their debt delayed the purchase of a home, according to EDI data. And 31% report that it has pushed back their purchase of a car, while 22% have postponed starting a business.

Day-to day spending among student loan borrowers also takes a hit. Each time a borrower’s debt-to- income ratio increases by 1%, their consumer spending decreases by 3.7%.

The effect of student loan impacts on borrowers may be long-lasting: It takes the average student loan borrower 18 ½ years to fully pay off their loans.

Recommended: The Impact of Student Loan Debt on the Economy

Government Policy Solutions

Possible solutions to student debt include government programs and policies that address federal loan repayment and forgiveness. Some schools have also introduced initiatives to make college more affordable.

Federal Student Loan Forgiveness Programs

Students who have qualifying federal loans may be eligible for student loan forgiveness. Under these programs, borrowers typically make a certain number of payments under a qualifying repayment plan for a set period of time to have their outstanding student loan balance forgiven.

For example, with Public Service Loan Forgiveness (PSLF), student loan borrowers working full-time in public service for a government agency or qualifying nonprofit organization may be eligible for forgiveness. Borrowers must have qualifying federal Direct loans and make 120 qualifying payments under an income-driven repayment (IDR) plan or the Standard Repayment Plan. After completing their qualifying payments, any remaining Direct loan balance they have is forgiven.

Income-Driven Repayment Reforms

Income-driven repayment (IDR) plans base borrowers’ monthly federal student loan payments on their income and family size. Repaying loans under an IDR plan allows borrowers to achieve forgiveness after 20 or 25 years. By the end of the repayment period, which is 20 or 25 years, the remaining loan balance is forgiven. However, forgiveness under most of these plans — except for the Income-Based Repayment (IBR) plan — is paused as of the end of March 2025.

Online applications for three of the four IDR plans are now available after being temporarily on hold earlier this year due to a federal court injunction. The IDR plans are:

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

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

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

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

Expanding Public Service Loan Forgiveness

In June 2024, Representative Bill Foster (D-IL) introduced the Public Service Loan Forgiveness Inclusion Act of 2024 to expand the types of repayment plans that would qualify for loan forgiveness for those who work in public service. Because PSLF can be a complicated process, millions of borrowers who have applied for it over the years have been denied and did not receive forgiveness. Expanding the repayment plan options for borrowers could potentially make the program more accessible and easier to navigate.

The bill was referred to the House Committee on Education and Workforce, but no other additional actions were taken.

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

Tuition-Free or Reduced-Cost Higher Education Initiatives

Some universities across the country have started offering free tuition programs to students whose family income is below a certain level. In addition to being a possible student loan debt solution, these initiatives can make college attendance more accessible.

Some notable examples of schools that have introduced these programs include:

•  Harvard University: The Ivy League institution announced that it would offer free tuition for students whose families make less than $200,000 a year beginning with the 2025-2026 academic year. Those whose families earn less than $100,000 will have all their costs covered, including housing and food.

•  University of Texas system: As of 2024, students at the University of Texas system whose families make $100,000 or less receive free tuition and fees at any one of the system’s nine institutions.

•  Massachusetts Institute of Technology (MIT): Starting in fall 2025, undergraduates from families with an annual income of less than $200,000 can attend MIT tuition-free, and families with an income below $100,000 will have all costs covered, including housing, dining, and fees.

•  Carnegie Mellon University: Students whose families earn less than $75,000 annually can attend the university tuition-free beginning with the fall 2025 semester.

•  Brandeis University: Brandeis covers all tuition costs for students with a family income of $75,000 or less, and half the tuition costs for families making between $75,000 and $200,000.

Private Sector and Employer-Based Solutions

Over the past few years, more employers have started to offer student loan repayment assistance to employees. In addition, some companies have teamed up with universities to offer scholarships and tuition aid for students to learn specialized skills.

Employer Student Loan Repayment Benefits

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

Partnerships Between Companies and Universities

Companies are also partnering with universities to help students get the knowledge and skills they need to be successful in their jobs. Students in specific programs may receive financial assistance with tuition, fees, and other costs to earn their degree and potentially land a position at the sponsoring company. Current employees at the company could learn new skills to advance on the job, while receiving tuition assistance from their employer.

Incentives for Early Loan Repayment

Some employers use programs that incentivize student loan repayment. For example, when an employee makes their regular monthly student loan payment, an employer can send an additional contribution toward their student loans. As a result, the employee’s student loan gets paid off faster and they save money on interest. The company may benefit, too: The program could help attract employees and encourage loyalty.

Personal Strategies for Managing Student Loan Debt

There are a number of methods that borrowers might use to help manage their student loan payments and reduce the amount of student debt they owe. Here are some to consider.

Refinancing and Consolidation Options

With student loan refinancing, you pay off your existing loans with a new loan from a private lender. Ideally, the new loan will have a lower interest rate, which could lower your monthly payments, or more favorable loan terms.

There are different types of refinancing borrowers can consider, including medical resident refinance if you’re pursuing a career in medicine.

If you have federal loans, it’s important to know that refinancing federal student loans makes them ineligible for federal benefits like income-driven repayment plans.

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

But there are some drawbacks. You may have a longer repayment period, pay more in interest, and lose access to some loan cancellation options with loan consolidation.

💡 Quick Tip: Refinancing comes with a lot of specific terms. If you want a quick refresher, the Student Loan Refinancing Glossary can help you understand the essentials.

Budgeting and Debt Repayment Plans

Creating a budget and sticking to it can help pay borrowers on the path to repaying their loans. To get started, add up all the money you have coming in, like income from your job and anything you earn from a side hustle, and then make a list of your expenses, such as rent, utilities, and student loan payments. Put aside enough funds to cover these expenses and then see what you have left. With any luck, you might be able to direct additional money to your loan principal, which could help reduce the amount of interest you owe over the life of the loan.

There are specific debt repayment methods you can consider as well. For instance, with the debt avalanche method, you put extra funds toward repaying the student loan with the highest interest rate first and then move on to the loan with the next highest rate. With the snowball method, you pay off the smallest loan first and work your way up. With either option, you continue to make minimum payments on all your other loans.

Seeking Loan Forgiveness Opportunities

Check into the federal forgiveness programs mentioned above, such as PSLF and the IBR income-driven repayment plan, to see if you qualify. In addition, your state may offer a state-specific forgiveness program, especially if you work in a public service field like teaching or health care. Search your state government website to see what may be available.

The Future of Student Loan Debt Reform

The future of student loan debt reform is uncertain. In March 2025, after issuing an executive order for the Department of Education to be closed down, President Trump announced that the Small Business Administration would take over the student loan portfolio. No details or timeline has been given, and lawsuits have been filed against the administration over these actions. Much uncertainty remains about the proposed changes.

There has been some potentially positive action regarding debt reform, however. A bipartisan bill called the Affordable Loans for Students Act was introduced in Congress in March 2025. If passed, the legislation would cut interest rates on new and existing federal student loans to 2%. (By comparison, the current interest rates on federal student loans currently range from 6.53% to 9.08%, depending on the type of loan). The 2% interest rate would be retroactive, and also automatic so that loan borrowers would not need to opt in.

The Takeaway

With student loan debt at an all-time high, many borrowers are looking for some relief. There are federal loan forgiveness programs they can pursue, income-driven repayment plans that could help lower their monthly payments, and employer loan repayment assistance programs, if offered by their company.

Additionally, borrowers can create a budget to help repay their loans, use a specific debt repayment strategy like the avalanche method, or consider student loan consolidation or refinancing.

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


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

FAQ

What is the main cause of the student loan debt crisis?

There are several causes of the student loan debt crisis, including the rising cost of tuition and more borrowers taking out student loans. The average cost of college has more than doubled over the past 25 years. And the number of students borrowing loans in order to afford their education has more than doubled since 1992.

How does student loan forgiveness work?

Under student loan forgiveness programs, borrowers typically make a certain number of payments under a qualifying repayment plan for a set period of time to have their outstanding student loan balance forgiven. For instance, with Public Service Loan Forgiveness, borrowers who work in public service for a qualifying employer make 120 qualifying monthly payments under a qualifying repayment plan. After that, PSLF forgives the remaining balance on their qualifying federal Direct loans.

Are there any new policies addressing student loan debt?

The latest legislative action aimed at reducing student loan debt is the Affordable Loans for Students Act, a bipartisan bill that was introduced in Congress in March 2025. If passed, the legislation would cut interest rates on new and existing federal student loans to 2%. The 2% interest rate would be automatic so that loan borrowers would not need to opt in.

Can employers help with student loan repayment?

Yes. Some employers offer loan repayment assistance, a benefit in which they help employees repay their student loans. The programs work differently, but generally, an employer might contribute a certain amount to loan repayment, and the employee may have to work for the company for a specific period of time to be eligible. Check with your HR department to find out if your employer offers such a program.

What can borrowers do to manage student loan debt more effectively?

There are several strategies borrowers can use to manage student loan debt more effectively. First, they can create a budget to make sure they have the funds to pay their student loans each month. If they have funds left over after paying their bills, they can pay extra toward their loan balance. In addition, they can explore income-driven repayment plans, which could help lower their monthly student loan payments, check to see if they qualify for a federal or state forgiveness program, and consider loan consolidation or student loan refinancing.

photo credit: iStock/blackCAT
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).

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


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

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

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

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

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

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

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