Sep
19
2023
What Is Satisfactory Academic Progress (SAP)?

What Is Satisfactory Academic Progress (SAP)?

By | Going to College, Student Loans, student_loan | Comments Off on What Is Satisfactory Academic Progress (SAP)?

Satisfactory Academic Progress (SAP) is the minimum amount of academic progress you need to make in college to keep receiving financial aid, including grants, work-study funds, and federal student loans.

Each school sets its own Satisfactory Academic Progress policy, but typically students need to maintain at least a C average and be on target to complete their program within 150% of the program’s length.

According to federal regulations, students who fail to make satisfactory academic progress towards their degree or certificate may lose their eligibility for federal student aid. However, students can file a SAP appeal if they believe that extenuating circumstances prevented the successful completion of SAP requirements.

Here’s more information on Satisfactory Academic Progress and what steps to take for a SAP appeal.

What Does SAP Stand For in College?

SAP stands for Satisfactory Academic Progress. Each college and university has its own SAP policy for financial aid purposes.

Your school’s SAP policy will likely outline:

•   The grade point average (GPA) you need to maintain

•   How many credits or hours you must complete by the end of each academic year

•   How an incomplete class, withdrawal, repeated class, change of major or transfer of credits from another school affects your Satisfactory Academic Progress

•   How often your progress is evaluated

•   What will happen if you fail to meet SAP requirements

•   Whether you are able to appeal your school’s decision on your SAP status and approved reasons for an appeal

•   How you can get back eligibility for federal student aid



💡 Quick Tip: Make no payments on SoFi private student loans for six months after graduation.

What Is Satisfactory Academic Progress?

The U.S. Department of Education requires that any student receiving federal financial aid meet and maintain academic progress standards as they continue through their educational program. This is known as Satisfactory Academic Progress, and a college’s student loan requirements must be at least as strict as the requirements stated by the Higher Education Act of 1965.

Colleges typically use an academic performance metric as well as a time-based metric to determine a student’s SAP status. To see your school’s standards for Satisfactory Academic Progress, check your school’s website or ask someone in the financial aid office.

Satisfactory Academic Progress GPA Requirement

Academic performance is based on a student’s GPA. Typically, if the academic program is two or more years, then the student must have a minimum 2.0 cumulative GPA, or a grade of “C”, on a 4.0 scale by the end of the second academic year.

If the student’s degree or certificate program is a year or less in length, the school may evaluate academic performance after each academic term. If the program is longer than a year, the school must review academic performance at least once per year.

Satisfactory Academic Progress Credit Hour Requirement

You may need to enroll in and complete a minimum number of credit hours to receive financial aid for the year. Students must typically complete at least 67% of cumulative credits attempted in order to meet SAP requirements.

Dropping a class could potentially hurt your satisfactory academic progress if you are taking the minimum number of credit hours each year.

Satisfactory Academic Progress Completion Rate Requirement

Students must progress through their undergraduate program no longer than 150% of the published length of the educational program. For a four-year Bachelor’s degree program, 150% of the normal length is six years. For a two-year Associate’s degree program, 150% of the normal length is three years.

Recommended: The Ultimate Guide to Studying in College

What Is SAP Used For?

SAP is used to make sure that students are at least meeting Satisfactory Academic Progress standards in order to continue receiving federal, state, or institutional aid. Part of the reason for SAP requirements is to prevent students from using financial aid as a form of welfare and indefinitely delay responsibilities to repay student loan debt.

What Is an SAP Violation?

An SAP violation means your GPA doesn’t meet satisfactory academic performance standards or you are in danger of not completing your degree or certificate within a certain timeframe. Federal regulations state that any student receiving federal financial aid who fails to meet SAP standards may lose their eligibility to receive federal assistance.

Some colleges may give out a financial aid warning if you don’t make Satisfactory Academic Progress. Financial aid will still be given after a warning, but academic performance must be improved after one academic term. If progress isn’t made by the end of the term, federal financial aid may be suspended.

Recommended: Ca$h Course: A Student’s Guide to Money

SAP Appeal

If your financial aid has been revoked because you didn’t meet your school’s standards, you may be able to file a SAP appeal if your school allows it. Your SAP appeal may be accepted based on extenuating circumstances and whether it can be linked to poor academic performance. Some examples include:

•   Death of a relative

•   Severe personal injury or illness

•   Other extenuating circumstances determined by the school

SAP appeals generally include the following:

•   An explanation of what happened Why weren’t you able to maintain Satisfactory Academic Progress? Explain what the problem was, when the problem occurred, how long the problem lasted and how this affected your ability to satisfy SAP criteria.

•   An explanation of what has changed Explain the corrective measures you have taken or will take to reach and maintain Satisfactory Academic Performance.

In addition to any forms required by your school, it may also be helpful to attach any relevant supporting documentation with your SAP appeal, such as a doctor’s note, hospital bill, or an obituary.

For information on how to file a SAP appeal, check your college’s website for directions.

Recommended: Am I Eligible for Work-Study?

SAP & Student Loans

If you’re successful in your request for a SAP appeal, your school may place you on financial aid probation. Although this allows you to continue receiving financial aid, probation that lasts longer than one academic term will require you to have an academic plan that addresses the faults that caused the financial aid suspension and to get you back on track. Academic progress is reviewed after each term while on probation.

On the other hand, if the SAP appeal was unsuccessful or if the school does not allow appeals, then financial aid is withdrawn until SAP requirements are met. Without financial aid, students are responsible for all costs associated with enrollment until they can raise their cumulative GPA to at least 2.0 and prove that they are on track to graduate within 150% of the normal timeframe.

While waiting for federal financial aid to be reinstated, students must pay costs out-of-pocket or rely on private student loans to help fund each academic term.


💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.

The Takeaway

You must meet your college’s Satisfactory Academic Progress standards or risk losing federal financial aid in grants, student loans, or work-study funds. Contact your school’s financial aid office if you’re worried about your SAP standing, wish to complete an SAP appeal, or have any questions about your school’s SAP policy.

If you’re not eligible for federal student aid, there are other financing options out there to help pay for your education. Private student loans can cover up to 100% of the school-certified cost of attendance, which typically includes expenses like tuition, food, books and supplies, room and board, transportation and personal expenses.

While private loans can be useful in helping students fill any gaps in funding when paying for college, they aren’t required to offer the same benefits or borrower protections as federal student loans — things like deferment options or income-based repayment plans.

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.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

Photo credit: iStock/skynesher

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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.

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

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.

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Sep
19
2023
What Are Pink Sheet Stocks?

What Are Pink Sheet Stocks?

By | Growing Wealth, invest, Investing | Comments Off on What Are Pink Sheet Stocks?

Pink sheet stocks are stocks that trade through the over-the-counter market or OTC rather than through a major stock exchange. The term “pink sheets” comes from the paper that stock quotes used to be printed on, though today, stock quotes and stock trading takes place electronically.

The over-the-counter market may appeal to smaller companies, companies that are reorganizing after bankruptcy or shell companies. A pink sheet stock does not face the same level of regulation as stocks from publicly traded companies that are traded on the New York Stock Exchange or NASDAQ.

What Is a Pink Sheet OTC?

Pink sheet stocks are those that trade over the counter (OTC), rather than via stock exchanges. OTC Markets Group provides quotes for pink sheet stocks, and broker-dealers execute trades directly with each other.

Pink sheet OTC stock trading happens on an open market that lacks the financial reporting rules mandated by trading on the NYSE, NASDAQ or another stock exchange. It’s not illegal, though the Securities and Exchange Commission (SEC) warns investors to stay vigilant for potential scams or fraudulent trading involving the pink sheets market and microcap or penny stocks.

A company may choose to sell shares on the over-the-counter market if it can not meet the listing requirements established by the SEC, or does not want the expense of going through the IPO process. Many pink sheet stocks are penny stocks.

Investors looking for bargain buys may consider dipping into the pink sheets market. But pink sheet stocks — and penny stocks, in particular — can be highly volatile so it’s important to understand both the risks and potential rewards.

Listing Requirements

In order for a company to get listed on OTC pink sheets, they must file Form 211 with the Financial Industry Regulatory Authority (FINRA). Companies do this through a sponsoring market maker, or registered broker dealer firm. The sponsoring market maker accepts the risk of holding a certain number of shares in a pink sheet company to facilitate trading of those shares.

The Form 211 asks for financial information about the listed company. The broker dealer can then use this information to generate a stock price quote. Pink sheet over-the-counter stocks do not need to adhere to the same financial reporting requirements as stocks that trade on major exchanges.

Are Pink Sheets and OTC the Same?

The terms pink sheet stocks, and OTC or over the counter, loosely refer to the same thing: Trades that take place outside of the traditional stock exchanges. The company OTC Markets provides quotes for companies listed on the pink sheets, as well as the OTCQX and the OTCQB trading marketplaces.

The OTCQX allows for trading of companies that are not listed on traditional exchanges but still subject to SEC rules. The OTCQB includes emerging companies with a stock price of at least a penny that are not in bankruptcy, have a minimum of 50 beneficial shareholders who each own 100 shares, and annually confirm that information is up to date. Of the three, the pink sheet OTC marketplace has the fewest financial reporting requirements.

There are also companies that adopt regulatory and reporting standards to list with the Over the Counter Bulletin Board (OTCBB) system. This was another electronic stock quote system that displays stock prices for securities not listed on a national exchange. It had regulation requirements, which means pink sheet stocks wouldn’t be listed, but has ceased operations.

Are Pink Sheets and Stocks the Same?

Pink sheet stocks are stocks, meaning each one represents an ownership share in a company. The primary difference between pink sheet stocks and other types of stocks, such as Blue Chip stocks, is how investors trade them. Investors trade pink sheet stocks over the counter, and other types of stocks on an exchange.

Pink sheet stocks may have much lower valuations than small-cap, mid-cap or large-cap stocks, or they may be newer companies that have yet to establish themselves in the market. This is why it’s possible to buy penny stocks or microcap stocks on the pink sheets for pennies on the dollar.

Companies that Use Pink Sheets

There are many companies that use pink sheet stocks, and that includes some big-name, well-known companies that most people would recognize. That said, most likely wouldn’t be recognizable immediately to the average investor. A quick internet search would yield many results and examples.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Pros and Cons of Pink Sheet Stocks

Pink sheet stocks have benefits and disadvantages, both for the companies that list over the counter and for investors. These may differ from exchange-traded stocks. Here are some of the most important pros and cons to consider when investing in pink sheet stock:

Benefits of Pink Sheet Stocks

From a business perspective, being listed on the pink sheets can save companies resources. Rather than going through the IPO process to become a publicly-traded company, pink sheet stocks circumvent the major stock exchanges and their listing requirements.

Foreign companies may choose the pink sheets to avoid SEC financial reporting rules. Additionally, companies delisted from a stock exchange may seek to trade on the pink sheets OTC market.

For investors, the appeal of pink sheet stock trading is the potential to pick up stocks at rock-bottom prices. If a company listed on the pink sheets takes off, that could result in significant profits for investors who bought in early. Because there are fewer reporting requirements, it’s possible to find a much broader range of stocks to invest in when trading on the OTC pink sheets.

Disadvantages of Pink Sheet Stocks

Trading on the pink sheets OTC can call a company’s reputation or credibility into question. Investors may wonder why a company is not seeking an IPO to get listed on a stock exchange or why a company has been delisted. That can make it difficult for a company to cement its footing in the marketplace and attract attention from new investors.

Investing in pink sheet stocks may have more risk than trading stocks on a major exchange, since there is less transparency around their finances. It can be difficult to “look under the hood,” so to speak, and get an accurate picture of a company’s fundamentals. That means investors are inherently taking on more risk when investing in the pink sheets simply because they may not know exactly what they’re buying.

In addition, pink sheet stocks may be thinly traded, meaning it can be more difficult to buy or sell shares. Allocating assets to pink-sheet stocks may not be appropriate for investors who want or need liquidity within their portfolio.

Finally, investors must consider the fees associated with trading pink sheet stocks, as fees can erode net returns and stock profit.

How to Find Pink Sheet Stocks

Finding pink sheet stocks can be as simple as searching the OTC Markets website. You can use the platform’s stock screener to filter for pink sheet stocks. The filter can tell you at a glance the stock’s ticker symbol, its country of origin, price and trading volume. You can also identify pink sheet stocks by looking for ‘PK’ at the end of their symbol on a stick ticker.

It may be helpful to use an online trading simulator to find pink sheet stocks. A simulator can help you to learn more about pink sheet stocks and penny stocks while simulating trades to estimate potential gains or losses. This can make it easier to familiarize yourself with how pink sheet stocks trade and what kind of volatility you might be able to expect before investing real money.

Pink Sheet Stock Investment Risks

Part of investing strategically means paying attention to risk management. Pink sheet stocks can present greater risk in a portfolio for a few reasons. For starters, there’s less liquidity surrounding these stocks due to lower trading volume. That could make it harder to unload shares of a penny stock or pink sheet stock if you decide that it’s no longer a good fit for your investment strategy.

The pink sheets market and over-the-counter trading in general can be more susceptible to stock volatility. Rapid price fluctuations could generate higher than anticipated losses if the price of a pink sheet stock nosedives unexpectedly.

Share dilution can also reduce the value of penny stocks or other pink sheet stocks. Dilution occurs when a company issues more shares of stock, watering down the value of the existing shares on the market.

Another issue with pink sheet stocks is that they can be susceptible to price manipulation or fraud. Unusual suspects might use shell companies, for example, to trade on the pink sheets for the purpose of laundering money or otherwise defrauding investors. Because there’s so little regulation and transparency surrounding these stocks, it’s important to do thorough research before investing to make sure the company is legitimate.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

How to Invest in Pink Sheet Stocks

If you’re interested in investing in pink sheet stocks, you’ll need a brokerage account to get started. Specifically, you need a broker that offers pink sheet trading. Not all brokers offer this service so you may need to research different options for where to trade pink sheet stocks online.

Once you find a brokerage you can decide how much you want to invest in pink sheet stock. Given the higher degree of risk involved, it’s important to consider how much you could realistically afford to lose if a pink sheet stock or penny stock gamble doesn’t pay off. This can help you come up with a number to invest.

When choosing a broker, ask about any applicable commission fees. Brokerages may charge higher trading fees for pink sheet stocks versus stocks that trade on a major exchange, so it’s important to factor cost in when estimating your risk/reward potential.

Pink Sheet Trading Time and Access

Trading pink sheet or OTC stocks occurs during normal market hours: Monday through Friday, 9:30am ET to 4:00pm ET, except on holidays. Investors can also place orders after hours, however.

The Takeaway

Pink sheet stocks, or OTC stocks, are stocks that do not trade on traditional large exchanges, and instead, trade “over the counter.” The over-the-counter market may appeal to smaller companies, companies that are reorganizing after bankruptcy, or shell companies, and listing OTC may be a way to circumvent the IPO process.

Investing in stocks may help you to build wealth for the long term. If you’re new to investing, you may want to start with trading stocks through an online brokerage account before diving into the over the counter market.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Why do companies use pink sheets?

Companies may choose to use pink sheets or list their stocks OTC if they can’t meet listing requirements set forth by the SEC, or if they don’t want to go through the IPO process, which can be resource-consuming.

What is the commission on pink sheet penny stocks?

Commissions or fees levied on pink sheet penny stock trading will vary depending on the platform being used to trade them. But in many cases, there are no commissions or fees to execute a trade.

What is the difference between pink sheets vs. OTCBB?

Pink sheets is a term used to describe over the counter, or OTC stocks. OTCBB, on the other hand, is the Over-the-Counter Bulletin Board, and was a quotation service offered by FINRA.

Photo credit: iStock/PeopleImages

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Sep
19
2023
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Basics of the Time Value of Money (TVM)

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Basics of the Time Value of Money (TVM)

If you’ve ever heard the expression, “A dollar today is worth more than a dollar tomorrow,” then you know the basic definition of the time value of money. Essentially, having $1,000 today is more valuable than having $1,000 a year from now because of the potential for growth over that time period.

Other factors can also influence the time value of money, or TVM. For example, inflation naturally increases over time, and that can lower the purchasing power of future dollars. In short: Money you can put to work now is usually worth more than the same amount down the line.

Investors and business owners use TVM as a way to compare values of certain sums of money over different time periods.

Recommended: How to Build an Investment Portfolio for Beginners

What Is the Time Value of Money?

The time value of money is the relationship between a dollar at one point in time and the value of that same dollar at another point in time. For example, $50 today likely won’t have the same value as $50 a year from now, just as $1 million now is not the same as $1 million 20 years ago (when a million dollars bought more than it does now).

You don’t need to know the formula for time value of money to understand the basic forces at play here. First, there is the potential for a present sum of money to earn a profit (if you invest it) or to gain interest (if you save it or buy debt instruments like bonds) over time.

Inflation is also an important consideration when calculating the time value of money. As goods get more expensive, each dollar will purchase less than it did the year before. For example, the historic rate of inflation is about 2% per year. If you consider how much $10,000 can buy today, it would buy roughly 2% less in a year — about $9,800 worth of goods.

So the time value of money is a framework for comparing lump sums of money and/or payments across different time periods. Dollars can be future, present, or past — almost like different currencies.

The definition of the time value of money may seem like a purely academic concept, but has many real-world applications. Time value of money is used in personal finance, real estate, and investing decisions.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

How Does Time Value Work?

The time value of money can look at both the present and future value of money and the value of cash flows. It allows both institutional and retail investors to compare payments or sums of money over different time frames.

Within a business context, calculating the time value of money using a TVM formula is important because it can help with decision making, e.g. about acquiring a new business or developing a new product. If you put $X amount of cash into a new line of business, what is the future value of that amount? And would the new investment equal or exceed it — or not (in which case it might not be a good use of your capital)?

To determine the value of money over periods of time, investors can use a formula that takes into account the present value and future value of a specific amount, and how it will change over time.

How to Calculate TVM for a Future Value

Quite often, investors are called upon to evaluate the future value (FV) of a present dollar amount. That formula is:

FV = PV x [1 + (i / n)](n x t)

Where:

•   PV – Present value of money

•   FV – Future value of money

•   i – interest rate or other amount that can be earned on the money

•   t – number of years being considered

•   n – number of compounding periods of interest per year

Let’s say you have $2,000 that’s earning 5% per year in interest payments. You could keep your money where it is, or you could consider another investment opportunity. In order to decide, it helps to know what the future value of your cash will be, given current parameters.

In this case, the calculation would look like this, employing the FV formula above:

FV = $2,000 x [1 + (5% / 1) ](1 x 2)

FV = $2,000 x [1 + 0.05](2)

FV = $2,205

This calculation tells you that your money is likely to be worth $2,205 in two years, assuming nothing changes. This could help you gauge whether the new opportunity would be likely to deliver a higher or a lower return.

How to Calculate TVM for a Present Value

It’s also possible to consider a future sum that’s being offered, and what that translates to in present dollars. Let’s say you could earn $2,000 now or be given $2,200 in a year. You’d need to calculate what the present value of $2,200 is.

To determine whether it makes sense to wait one year for an extra $200, here’s how to calculate the present value of that future amount, assuming you could earn 5% in the coming year.

PV = FV / (1 + (i / n)(n x t)

PV = $2,200 / 1 + ( 5% / 1)(1 x 1)

PV = $2,095

In this case, the present value of the $2,200 being offered in one year is higher than taking just $2,000 now ($2,095). Which suggests that waiting to take the $2,200 payment might be a better move.

If there are multiple times per year when interest compounds, the result can be quite different. If interest compounds daily, monthly, quarterly or yearly can have a big effect on the TMV calculation (see below for more on compounding).

Why Is the Time Value of Money Important?

Time changes the value of money. Being able to calculate the present vs. the future value of money enables you to make better choices about how to invest and spend your money.

Therefore, TVM is inherently important in both an investing and a business context because it can help you gauge the value of different opportunities, and assess which makes the most sense financially.

Time Value of Money and Compound Returns

For the individual investor, there is perhaps no way in which the time value of money is more important than with the potential for earning compound returns.

To earn compound returns is to earn a rate of return on both the initial principal invested and all subsequent profits. As profits grow, so does the potential to earn more — and all that this exponential growth requires is that you stay invested.

The key to harnessing the raw power of compound returns is to spend as much time invested as possible — another example of the time value of money. Each year of positive returns is fuel for greater future returns.

This can be hard for investors to wrap their heads around because the results can take decades to reveal themselves. To understand compound returns, and the phenomenon of compounding in general, it helps to start with a comparison of simple and compound interest.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Comparing Simple Interest to Compound Interest

With simple returns, a rate of return is produced on the principal investment in each period. An example is a basic Treasury note or bond that pays a 5% rate of return on $1,000 each year for five years. Each year the bondholder receives a $50 payment ($1,000 x 5%). The amount is not reinvested (i.e. there is no compounding), and at the end of five years the investor gets back the principal, and makes a profit of $250 (5 x $50) for a total of $1,250.

The time value of money has a bigger impact when you have a savings bond that pays 5% that compounds semi-annually. At the end of the five years, the investor’s initial $1,000 investment has grown to approximately $1,276. This is a total profit of $276, compared to simple interest’s $250. While this might not seem like much, this gap will continue to grow as compound return growth increases.

Likewise, the more frequent the compounding is, the greater the potential for growth would be. Thus compounding is an important factor in the time value of money as well.

Factors Affecting Compound Returns

There are four variables at play when calculating compound returns: the rate of return, the principal invested, the duration, and the frequency of compounding (e.g. monthly, quarterly, annually).

Check out a compound returns calculator for a better understanding of how these variables interplay. What you’ll find is that all factors can have a powerful impact on the time value of money.

Investors should also consider inflation. Inflation, or rising prices over time, also has a compounding effect. Investors can consider using a time value of money formula for inflation, and think about ways to hedge against inflation.

How Does Inflation Impact the Time Value of Money?

Inflation is another reason that money is typically worth more in the present than in the future. As time goes on, inflation erodes the purchasing power of money. So the same amount of money can’t buy as many goods in the future as it can today.

This is sometimes called inflation risk, and it refers to the need for investors to factor in the potential gains of an investment over time vs the impact of inflation, so they can protect their money. Invested money that gains more than the rate of inflation won’t lose value over time.

Recommended: Is Inflation a Good or Bad Thing for Consumers?

Working With the Time Value of Money

Investors use the time value of money to understand the worth of money in relation to time, which helps them understand the value of their funds in the present and the future and how to invest them.

As noted above, factors such as interest rates, inflation, and risk all affect investments over time, so having formulas to help make decisions is a useful tool. Here are some other factors to consider.

Discount Rate

To decide whether the future cash flows from an investment will be worth more than the money required to fund the project now, in the present, you can use something called the discount rate. The discount rate is the rate of interest used to assess the present value (PV) of those future dollars.

For example, if you put $1,000 into an account or investment with a guaranteed 5% annual return, the future value of that money will be $1,050 in a year. So the discount rate in this case is 5%; you would discount $1,050 by 5% to arrive at its PV.

Sinking Funds

There is also the option to use the TVM calculation for so-called sinking funds, which is actually a savings strategy.

If you’re saving up for something in the future and know how much you need to save, you can figure out how much you need to save each month or year to reach that goal if you are earning interest on those savings.

Real Estate Investments

An investor might look at a property in a high-growth neighborhood and predict that it will be worth a certain amount in five years, but they want to calculate whether it is actually a good investment. They can use the TVM calculation to discount that estimated future value to find out the current value and see how the two compare.

Investing With SoFi

The time value of money (TVM) is an important concept for investors. It underscores the notion that time affects the value of money, along with other factors, and being able to calculate TVM in different scenarios, from investing to business, can help you decide whether one choice is likely to be more profitable over time.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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

FAQ

Why use the time value of money concept?

A dollar now is almost always worth more than that same dollar in the future, owing to that dollar’s potential for growth (and the diminishing effect of inflation) over time. Using TVM formulas, it’s possible to gauge the long-term impact of different choices so you can make the more profitable one.

Is the time value of money concept always true?

Yes, for the simple reason that it’s always possible to invest your money now and gain some interest over time, even a minor amount.

What are some factors that may affect the time value of money?

The main factors that can impact the time value of money are the rate of interest, the number of years the money will earn that rate, and how often interest compounds.

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

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Sep
19
2023
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Do I Need a Trust?

By | Family Finances, Life & Career | No Comments

Where do you want your money and your assets to go when you die? It’s an important question to think about.

A trust might help ensure that the person or people you want to benefit from your assets will be honored. Using a trust can often provide tax benefits as well as the ability for assets to change hands outside of probate. This can all be done with the help of a trustee, a person given control of a trust so that they can legally administer it according to specific wishes.

Here’s how a trust works, the different types of trusts, and how to decide if a trust is right for you.

What Is a Trust?

The IRS defines a trust as “a legal arrangement which can help you to control your assets and possessions. Often, trusts can help to reduce taxes on your estate and speed up the process of allowing beneficiaries access to those assets.”

A trust can hold cash, stock, real estate, and any other assets. You might meet with an attorney who specializes in trusts to officially name your beneficiaries and dictate how you want the trust to be handled.

You could also apply special rules to your trust, like how often the beneficiary can receive a payment from it, or how the money can be used (say, for education expenses or to buy a home).

The beauty of a trust is that you get to decide and control how you want your assets to be used.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

The Difference Between a Trust and a Will

After someone dies, the legal process to settle an estate and distribute assets, also known as probate, begins. The probate process goes through a court of law and a judge will validate any existing will for the distribution of assets.

If you have a trust, the probate process could be skipped, which might save time and ensure assets go to the chosen beneficiaries. (It’s important to note that if you die and don’t have a will or a trust, assets are distributed according to state law.)

Other major differences between a will and a trust include these factors:

•   A will goes into effect only after you die. It’s also called a “last will and testament.”

•   A trust can go into effect while you are still alive.

The Difference Between a Trustee and a Beneficiary

A trustee holds legal title to the property or assets of another person, the beneficiary. A trustee is responsible for administering the trust on behalf of those beneficiaries.

There are at least two two types of beneficiaries:

•   One who receives income from the trust during their lives

•   One who receives the remainder of the estate after the first set of beneficiaries dies

Choosing the Right Type

A Living Trust

A living trust is similar to a will, but not exactly the same. A living trust is a legal arrangement that you (the grantor) create during your lifetime (like a will), but instead you specify exactly the way you want your estate handled while you are still alive. A living trust might be used for people who have complex financial situations and more than one beneficiary.

When you die, the trustee you appoint carries out your instructions without having to go through the legal process of probate. A living trust might be more effective than a will in carrying out the transfer of assets according to your wishes. Types of living trusts include:

•   A revocable trust. This gives you continued control and access to the assets in the trust as well as the option to make changes to beneficiaries or even revoke the trust whenever you want. A revocable trust keeps your decision-making flexible and fluid. Once you die, the revocable trust becomes irrevocable, and whatever wishes you’ve listed become final.

•   An irrevocable trust. This cannot be changed, modified, or adjusted without the permission of the beneficiaries. That means that any assets transferred into an irrevocable trust cannot be taken back. Irrevocable trusts might be appropriate for those who want to permanently remove assets from their estate.

The IRS lists assets that are often included in an irrevocable trust as insurance policies, cash, and business investments. Once the ownership passes to the beneficiaries, the assets listed in the trust are no longer taxable as part of the individual’s estate.

Testamentary Trust

Then there is a trust that is not considered a living trust:

A testamentary trust is created by the person who writes a will, called a “testator.” These are not to be confused with living trusts. This type of trust would not go into effect until the death of the testator.

A Few Things to Consider

You may have to consider attorney fees if you set up a trust with the help of a lawyer — there are also options to set up the trust on your own online. A good trust attorney should know the best ways to make your trust as airtight and efficient as possible. You may want to keep in mind the potential ongoing costs of maintaining a trust as well.

For instance, depending on the type of trust established, the trust may become its own tax entity, and you might need to be prepared to pay an accountant to file a trust tax return each year. Should you elect to have a corporate trustee, where someone from a bank or trust company acts as trustee for the trust, there are typically ongoing fees associated with that service as well.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How to Choose a Beneficiary for Your Trust

Your beneficiaries will likely be members of your family. But a beneficiary of a trust can also be a group or an institution (like a nonprofit organization or a charity). Ultimately, your beneficiary is anyone or any group that receives beneficial enjoyment from your assets, like income, the ability to use property, or ultimate ownership, per your wishes.

Where to Hold a Trust

Setting up a trust could ensure that your beneficiaries get what you intended them to have before and after you die. The IRS recommends opening a bank account for a trust, which would require the following:

•   Legal documents and identification that proves you are the legal trustee

•   A Trust Tax ID number

When opening a trust bank account after the grantor has passed away, you typically need a new Trust Tax ID number to replace the Social Security number of the deceased grantor. This number will be used on every trust-related document going forward.

Trusts and Taxes

Establishing and funding trusts could help you remove assets from your estate and reassign ownership to others. This might help reduce income taxes on the assets if transferred to a beneficiary in a lower tax bracket, or help you reduce or avoid estate and gift taxes.

Are Trusts Only for “Trust Fund Babies”?

No, trusts are not only for trust fund babies. Although the common perception might be that trust funds are only for children of the super wealthy, that is not the case. A trust fund is meant to help you make sure your money goes to whom you want it to, and that it’s put to use the way you wish. If you have children or grandchildren, and you want your money to be used in a certain way by them, a trust might help you do that.

Financial Planning for the Future

When it comes to trusts, laws can change and they can also differ from state to state. You might want to consider consulting an attorney who specializes in trusts for the most updated direction and advice.

If you’re working on financial planning based on your specific financial goals and life situation and thinking about ways to save and invest for the future, you may want to consider setting up an investment account. You could also consider talking with a SoFi Financial Planner about such topics as budgeting and saving.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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

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

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

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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Sep
19
2023

2024-2025 FAFSA Changes, Explained

By | Going to College, Student Loans, student_loan | Comments Off on 2024-2025 FAFSA Changes, Explained

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 2024-25 school year on New Year’s Eve, 2023 (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 2024-25 award year. The new form became available on New Year’s Eve, 2023.


💡 Quick Tip: You’ll make no payments on some private student loans for six months after graduation.

2024-2025 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 36 questions (though some will have multiple parts). The actual number of questions you’ll need to answer (which could be less than 36) 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.

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

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). 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 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.

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 2024-2025 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 new simplified FAFSA on New Year’s Eve, 2023 for the 2024-2025 academic year.

Even if you’ve filled out the FAFSA in the past, you need to submit the new simplified FAFSA. That’s because 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 by getting 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.


💡 Quick Tip: Federal student loans carry an origination or processing fee (1.057% for Direct Subsidized and Unsubsidized loans first disbursed from Oct. 1, 2020, through Oct. 1, 2024). The fee is subtracted from your loan amount, which is why the amount disbursed is less than the amount you borrowed. That said, some private student loan lenders don’t charge an origination fee.

The Takeaway

When the new simplified FAFSA became available at the end of 2023, it included a lot of 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 qualify for Pell grants, but families with multiple children in college may see their award go down.

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.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

Photo credit: iStock/skynesher

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

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.

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