Refinancing student loans involves taking out a new student loan (ideally with better rates and terms) and using it to pay off your existing loans. Generally, the reason why people refinance student loans is to save money, although there are some additional benefits that come along with refinancing.
Refinancing private student loans can be an easy decision if your income and credit score can qualify for a lower rate than you got originally. You can also refinance federal student loans with a private lender, potentially at a lower rate. But doing so means giving up federal benefits and protections, so it’s important to weigh the benefits against the risks.
Here’s what you need to know about refinancing student loans so you can decide if this option is right for you.
Benefits of Refinancing Private Student Loans
Refinancing private student loans comes with a number of potential perks. Here are some reasons why you might consider a student loan refinance.
A Lower Interest Rate
One of the main reasons people refinance their existing student loans is because they can find a lower interest rate through a new lender. This can help you save money, potentially thousands over the life of your loan. It can also help you pay off your loan faster, or lower the amount you pay each month.
While student loan interest rates have been on the rise in the last couple of years, you may still be able to do better if your financial situation has considerably improved since you originally took out your student loans.
Another reason why people refinance their private student loans is to lower their monthly payments. You can do this by qualifying for a lower interest rate. Or, you can do this by extending your repayment term. Generally, the longer the loan term, the less you pay each month. Just keep in mind that extending your loan term could cause you to pay more in interest over the life of your loan.
Consolidation of Multiple Loans
If your student loan debt is a messy mix of loans, it can be difficult to stay on top of your payments and track your repayment progress. In this scenario, refinancing can double as a form of debt consolidation and allow you to combine those different loans. Once you refinance, you’ll only have to deal with one loan (and one payment and one due date) each month.
Releasing a Cosigner
When students take out private student loans, they generally need a cosigner. These are usually family members or friends of the student, and they share legal liability for the loan.
If you originally needed a cosigner but are now in a financial position to handle your debt on your own, you might consider refinancing your private student loans. This will give you a new loan and, in the process, release your cosigner from liability for your debt. If you currently have a higher income or credit score than your cosigner, you might even qualify for a better rate.
Factors to Consider Before Refinancing
To determine if refinancing is the right move for you, here are some factors to consider.
Credit Score Requirements
Not every borrower is eligible for refinancing. To get approved, you typically need a credit score of at least 650. A score in the 700s, however, gives you a much better chance of qualifying.
Your credit score also helps determine your new interest rate. Generally, the better your credit score is, the more competitive your interest rate will be. If you can’t qualify for an attractive refinance on your own, you might want to recruit a cosigner who has excellent credit.
Financial Stability
A good credit score is one qualifier for a favorable refinance rate, but that’s not the full story. Lenders will generally look at a wide range of financial factors when determining your interest rate, including your annual income and your debt-to-income ratio (how much of your monthly income you currently spend on debts).
If all three of those financial factors have improved since you’ve taken out your private student loans, it can be worth shopping around for better terms. If, on the other hand, you don’t have consistent earnings and/or have a lot of credit card debt, you’ll likely want to wait until your situation stabilizes before looking into a refinance.
Refinancing allows you to alter your payment plan. Once you qualify, you can typically choose the new term of your loan, whether it’s five, 10, or 20 years. By setting a new repayment term, you can decide how quickly you want to pay off your loans.
You might choose a shorter repayment term to pay off your loan faster and potentially save on interest. Or, you might opt to go with a longer repayment term to lower your monthly payments. Keep in mind, though, that extending your term may mean paying more in interest over the life of the loan. It will also take you longer to fully pay off your loans.
When Refinancing Might Not Be the Best Option
Refinancing isn’t the right move for every borrower. Here are some scenarios where it may not make sense to refinance your student loans.
You Can’t Get a Lower Interest Rate
Before choosing to refinance, you may want to shop around and see what rates you can potentially qualify for.
Many lenders offer online prequalification where you can enter some information to receive a rate quote without having to submit an actual loan application (which results in a hard credit inquiry). Prequalifying lets you shop around for the personalized rates and terms so you have a better idea of what to expect if you were to refinance, without hurting your credit.
If you can’t get a better rate than you currently have, refinancing might not make sense, at least right now.
💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.
You Have Federal Loans and Could See a Decline in Income
If you have federal student loans and think your income could drop, or you might lose your job, it’s generally not a good idea to refinance those loans. Doing so means giving up federal student loan relief options, such as deferment and forbearance, as well as government programs like income-driven repayment. These protections could come in handy should you run into any financial hiccups.
Some private lenders offer relief programs but they may not be as generous as what you can get with the federal government.
You Are on an Income-Driven Repayment Plan
Income-driven repayment (IDR) plans are one of the many benefits available to federal student loan borrowers. When you choose one of these plans, the amount you pay each month is tied to the amount of money you make, so you never need to pay more than you can reasonably afford. Generally, your payment amount under an IDR plan is a percentage of your discretionary income (typically 10% to 20%).
Under all IDR plans, any remaining loan balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment period (either 20 or 25 years).
If you are currently on one of these federal repayment plans and you refinance, your loan becomes a private loan and you lose access to IDR plans.
You’re Working Toward Student Loan Forgiveness
In addition to the loan forgiveness associated with IDR plans, the federal government offers other types of loan forgiveness programs, including Public Service Loan Forgiveness, which is for public-sector workers, as well as a separate program just for teachers. If you think you may benefit from any of these federal relief programs, it’s probably not a good ideal to refinance your federal student loans. Doing so will bar you from getting your federal loans forgiven.
The Takeaway
So should you refinance your student loans? The answer depends on your financial situation and repayment goals. Generally, refinancing your student loans makes sense only if you can qualify for a lower rate than you have now.
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
Why do people refinance their student loans?
Often, people will refinance their student loans to get a lower interest rate, a lower monthly payment, or both. Refinancing can also simplify student loan repayment by replacing multiple loans with a single loan and just one monthly payment.
Why should you avoid refinancing student loans?
Refinancing generally doesn’t make sense if you can’t qualify for a lower rate. You’ll also want to avoid refinancing if you have federal loans and are using (or plan to use) federal benefits like income-driven repayment or student loan forgiveness. Once you refinance a federal student loan, you’ll no longer have access to these federal programs.
Why should private student loan borrowers refinance right now?
You might consider refinancing your student loans now if you are able qualify for a lower rate than you originally got. Refinancing also gives you the opportunity to change the terms of your existing loan, remove a cosigner, and simplify your repayment process by replacing multiple loans with a single loan.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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 FOREFEIT YOUR EILIGIBILITY 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.
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.
Has your soon-to-be college student chosen the school they’d like to attend in the fall? Or, are they just starting to think about the application process? Either way, it’s never too early to research ways to pay for college.
Student loans, federal and private, are one common method that students and their families use to cover the cost of higher education. Typically, students are the ones who take out these loans (and are responsible for repaying them). However, there are also student loans, both federal and private, available for parents.
Also keep in mind that if your child takes out a private student loan, you will likely need to act as a cosigner, which means you will be responsible for repayment if your child is unable to make payments.
No matter who acts as borrower, it’s important for parents to be in the loop when it comes to student loans. Here’s what you need to know.
Not All Loans Are Created Equally
When it comes to student loans, there are two main options:
• Federal loans (funded by the federal government)
• Private student loans (funded by private lenders)
Federal Student Loans
Federal student loans are provided by the U.S. Department of Education and come in several forms:
• Direct Subsidized Loans These are for undergraduate students and are awarded based on financial need. The government pays the interest on these loans while the student is in school and for six months after they graduate (known as the grace period).
• Direct Unsubsidized Loans These are available to undergraduates, graduate students, and professional students and are not awarded based on need. The borrower is responsible for paying all interest that accrues on the loan.
• Direct PLUS Loans These are for graduate and professional students and parents of dependent undergraduates. They are not based on financial need and a credit check is required.
• Direct Consolidation Loans This option allows you to combine all your federal loans into one loan payment under a single loan servicer.
All federal loans come with fixed interest rates, which means the rate won’t change over the life of the loan. Interest rates are set by Congress each year on July 1st. For most students, federal loan repayment starts after the post-graduation grace period.
💡 Quick Tip: Make no payments on SoFi private student loans for six months after graduation.
Private Student Loans
Private student loans are available through banks, credit unions, and online lenders. Many private student loans mirror the terms and repayment periods of federal student loans, but not always. Differences between federal versus private loans include:
• Credit checks Most federal student loans don’t require a credit check (except PLUS loans) but it’s required for private student loans. To qualify for a private student loan, you’ll need to meet the lender’s credit and other eligibility requirements.
• Repayment start date Some lenders might allow you to defer making payments until six months after you graduate, while others may require you to begin repayment while you’re still in school.
• Interest rates Federal student loans have fixed interest rates that don’t change over the life of the loan; private student loans offer fixed or variable interest rates.
• Repayment terms Federal loans have long repayment terms — from 10 to 30 years, depending on your plan. Private student loans also vary in term length, but might not be as long.
• Loan forgiveness Some federal student loans offer forgiveness options for certain career paths, or after you’ve made a certain number of payments on an income-driven repayment plan. Private student loans aren’t required to offer this option to borrowers.
How Parents Can Help
If your student has tapped all available financial aid, including federal student loans, you might look into student loans for parents.
The federal government offers Direct PLUS Loans for parents. They have higher interest rates and fees and qualify for fewer repayment plans than federal direct subsidized and unsubsidized loans for students. The interest rate for federal direct PLUS loans is 8.05% for the 2023-24 academic year. There is also an origination fee of 4.228%, which is deducted from each loan disbursement.
To get a PLUS loan, you can’t have an adverse credit history (there may be exceptions to this rule if you meet other eligibility requirements) and you must complete the FAFSA with your child.
It’s important to note that a parent PLUS Loan will ultimately be your responsibility to repay. The only way to transfer parent loans is to have your child refinance the loan with a private lender in their name.
You also have the option of getting a parent student loan through a private lender, such as a bank or credit union.
If you have solid finances and expect to be able to work the entirety of your loan term, a private student loan may be a better deal. Private student loans often offer lower interest rates and typically don’t have origination fees. However, they generally don’t offer as many protections should you lose your income and have trouble repaying the loan.
You Can Use Loan Money Only for Certain Things
Typically, student loans are paid out directly to the school. The school will then apply your loan money to tuition, fees, and room and board (if your student lives on campus), and give any remainder to your student. They can then use the surplus funds but only for education-related expenses. This includes textbooks, computers/software, transportation to and from school, housing, meal plans or groceries, and housing supplies (e.g., sheets, towels, etc.).
Students can’t, however, use the proceeds of a student loan to pay for entertainment, going out to dinner, takeout meals, clothing, or vacations.
Federal Loans Offer More Forgiveness Options
Some student loan repayment plans, like income-driven plans, give graduates the opportunity to have their loans forgiven if they aren’t fully repaid at the end of the repayment period, which may be 20 or 25 years.
Depending on the field of work your student may enter, there may be other forgiveness options. For example, under Public Service Loan Forgiveness (PSLF), borrowers can have their loans forgiven after 120 monthly loan payments. To qualify, you must work for an eligible non-profit organization or government agency full-time while making those qualifying payments.
With the Teacher Loan Forgiveness Program, borrowers can qualify for up to $17,500 in loan forgiveness if they teach full-time for five full and consecutive academic years in a low-income elementary or secondary school or educational agency.
There are far fewer student loan forgiveness programs available for private student loans than federal loans. However, some private lenders offer loan modification or repayment assistance programs.
💡 Quick Tip: Would-be borrowers will want to understand the different types of student loans that are available: private student loans, federal Direct Subsidized and Unsubsidized loans, Direct PLUS loans, and more.
The Takeaway
You and your student will generally only want to look into student loans after you’ve tapped more cost-effective forms of funding, such as scholarships, fellowships, and grants — since that’s money you don’t have to pay back.
After that, you might consider federal student loans. You don’t need a credit history to qualify, and they come with low interest rates and programs, like income-driven repayment plans and loan forgiveness, that private loans don’t offer. If you still have gaps in funding, you might next look at private student loans.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).
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.
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.
You may have noticed when shopping around for student loans that some lenders display an interest rate, while others show an APR. What’s the difference? The main distinction is that APR (which stands for annual percentage rate) includes any fees or other charges the lender may add to the loan principal. The “interest rate” does not.
When shopping for a student loan, it’s key to know whether you’re looking at an APR or an interest rate, since this can have a significant impact on the total cost of the loan. Read on to learn more about APR vs. interest rate, what each number includes, and how to compare student loan rates apples to apples to find the best deal.
How Do Student Loan Interest Rates Work?
As with any loan, the interest rate represents the amount your lender is charging you to borrow money. It’s expressed as a percentage of your loan amount (or principal) and doesn’t reflect any fees or other charges that might be connected to your loan. Interest rates can be fixed (the same for the life of the loan) or variable (may fluctuate over the life of the loan).
Interest rates work differently depending on whether a student loan is federal or private. Congress sets the interest rate for federal student loans. The rate is fixed — and it’s the same for all borrowers. The federal student loan interest rate for undergraduates is 6.53% for new loans taken out for the 2024-25 school year, effective from July 1, 2024 to July 1, 2025.
Private student loan companies are allowed to set their own interest rates, which may be higher or lower than rates for federal loans. Interest rates on private loans may be fixed or variable and typically depend on the creditworthiness of the borrower (or cosigner) — those with higher credit scores generally qualify for lower rates, while borrowers with lower credit scores tend to get higher rates.
💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.
What Is the Student Loan APR, and How Is It Different From Interest Rate?
A loan’s annual percentage rate (APR) represents a more comprehensive view of what you’re being charged. It tells you the total cost of the loan per year, including any fees, such as an origination fee. Because of that, a loan’s APR may be higher than its interest rate.
Looking at the APR helps you compare different loan offers and get a real picture of the overall cost you will pay for borrowing money for your education. If a loan doesn’t have any fees then the interest and the APR will be the same.
Federal student loans publish interest rates but not the APRs, so it’s important to keep in mind that the headline interest rate of a federal student loan is not the total cost of that loan. These loans also charge an origination fee, which is 1.057% for Direct Subsidized and Direct Unsubsidized loans, and 4.228% for Direct PLUS loans (unsubsidized loans for the parents and graduate/professional students.)
For private student loans, origination fees vary by lender. While some private lenders charge origination fees, it’s possible to find a private loan that doesn’t come with these fees. However, it’s important to keep in mind that private student loans generally don’t come with the same protections as federal student loans, such as income-driven repayment plans and forgiveness programs.
What Fees / Charges Might Be Included in a Student Loan APR?
For student loans, the most common fee is the loan origination fee. Whether the loan is federal or private, this fee is typically based on a percentage of the total loan amount and will be deducted from your loan amount before the loan is dispersed. This means that if you borrow $10,000 and the origination fee is 1.057%, $105.70 will be deducted from your total loan amount — so you would actually receive $9,894.30 for the year.
While origination fees can be small, the cost can add up. Because these fees are deducted from the total loan amount, you are paying the fee with borrowed money and will pay interest on the fee paid.
Both private and federal student loans may also have late fees and returned payment (or insufficient funds) fees, both of which add to the total amount you must repay. However, you can avoid these fees by always paying your bill on time and making sure you have enough money in your bank account to cover the payment.
Fees vary widely from one lender to the next, and some private lenders may not charge any fees.
If a Loan’s Interest Rate and APR Are the Same, Does That Mean There Are No Hidden Fees?
Typically, yes. Just keep in mind that interest rates published for federal student loans are not APRs and do not include the origination fee. This fee will come out of the amount of money that is disbursed (paid out) to you while you’re in school.
The student loan APRs listed by private lenders include any additional charges and fees. If the lender doesn’t charge any fees, the APR and interest rate will be the same.
When Shopping for a Loan, Should I Look at Interest Rate, APR, or Both?
Whenever available, you’ll want to look at the APR of a student loan, since this number allows a more apples-to-apples comparison of loan costs. If you just compare straight interest rates, you can miss the big picture in terms of the total cost of the loan. Sometimes those additional fees can make a big impact.
It’s also important to know when the interest rate or APR will kick in. Although the interest rate is the same for federal Direct Subsidized and Direct Unsubsidized loans, the latter loan ends up costing significantly more because interest starts accruing from the time the funds are disbursed. With subsidized federal loans, the interest does not accrue while you are still in school.
With private student loans, interest typically begins to accrue as soon as the loan money is disbursed to your school.
Whether interest starts accruing immediately or later, you typically don’t have to start making any payments on private or federal student loans until after you graduate.
A student loan’s interest rate is the cost of borrowing money and is expressed as a percentage of the loan amount. APR includes the interest rate as well as the additional costs and fees associated with borrowing. As a result, it gives you a more complete picture of the total cost of the loan. Understanding APR vs. interest rate is important when you’re researching best rates for student loans. It will help you make informed decisions that may lower your cost of borrowing.
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.
FAQ
What is a good APR for a student loan?
For new loans taken out for the 2024-25 school year, the federal student loan interest rate is 6.530% for undergraduates (whether the loan is unsubsidized or subsidized). For graduate students it’s 8.08%, and for parents it’s 9.08%.
Average private student loan annual percentage rates (APRs) range from just under 4% to almost 15% percent.
Is APR better than interest rate?
The annual percentage rate (APR) gives you a more accurate picture of the true cost of financing. The APR of a loan tells you how much you will pay for a loan over the course of a year after accounting for the interest rate as well as any extra costs, like origination fees.
When comparing loan offers, it’s generally better to compare APRs than interest rates, since this allows you to compare loan offers apples to apples.
Can APR and interest rate be the same?
Yes. If no fees are added to your loan amount, the interest rate and the annual percentage rate (APR) will be the same.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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.
Short-term financial goals are generally things you want to achieve within one to three years. They can be “one and done” in nature (say, “Save enough money for a Caribbean vacation”), or they might be incremental steps to much larger financial goals, such as beginning to save for a child’s college tuition).
Setting financial goals can be an important step toward achieving them. After all, it’s probably not enough to simply hope your dreams become reality. Making a plan can significantly increase the likelihood that you’ll meet the goal. It will focus you on what you want to attain and help guide you toward getting there.
Here are some common short-term financial goals you may want to adopt plus intel on how to achieve them.
Key Points
• Short-term financial goals are things you want to achieve within the next couple of years, such as paying off credit card debt or saving for a vacation or wedding.
• Building an emergency fund is an important short-term financial goal to cover unexpected expenses and avoid relying on high-interest credit cards.
• Budgeting can help you track your spending, prioritize your expenses, and work towards short-term financial goals.
• Paying down credit card debt is crucial as high-interest rates can hinder progress towards other financial goals.
• Contributing to your retirement fund, even in the short term, can have long-term benefits due to the power of compounding interest or dividends.
What Are Short-Term Financial Goals?
Short-term financial goals are typically objectives you want to attain within the next couple of years, unlike long-term financial goals (retirement, paying off a mortgage). Some examples of short-term financial goals include:
• Paying off credit card debt
• Saving for a vacation
• Saving for a wedding
• Stashing away money in an emergency fund.
Of course, goals will vary with your unique situation and . You might be totally focused on getting together enough money for the down payment on a new car, while your best friend might want to pay off their $10K in credit card debt.
Get up to $300 with eligible direct deposit when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 3.80% APY on savings balances.
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6 Short-Term Financial Goals
Take a closer look at some of the most common short-term financial goals.
1. Build an Emergency Fund
Often, a short-term financial goal involves saving for an emergency fund. This kind of fund usually contains enough cash to cover three to six months’ (or more in some cases) worth of living expenses. The idea is that, just in case something unexpected comes up — such as job loss or a major car repair — you can afford your bills without resorting to high-interest forms of funding, such as credit cards.
Not only can an emergency fund keep you out of debt, it can provide peace of mind. Knowing that it’s in place and that it’s growing can be an important form of financial security. Some tips:
• You can build an emergency fund by putting some money towards it every month. Consider setting up a recurring automatic transfer to send whatever you can spare (even $20 per paycheck) to the fund.
• It can be wise to set up a separate savings account for your emergency fund so you won’t be tempted to spend it. Look for a high-yield savings account to help your money grow faster.
• To build your emergency fund more quickly, funnel a large payment, such as tax refund or bonus, right into this account. A money windfall can really help plump up your savings.
Getting a sense of how much you are actually earning, spending, and saving each month is a critical step in working towards both short-term and long-term financial goals.
You can do this by tracking your income and expenses for a couple of months, to see what is flowing into and out of your checking account.
This will help you make a budget that helps keep your finances on track to meet your daily expenses and short-term savings goals. A few ways to accomplish this:
• Review and test-drive a couple of budgeting techniques. One popular method is the 50/30/20 budget rule, which can guide you to put 50% of your take-home pay towards needs, 30% toward wants, and 20% toward saving. See if one type of budget clicks for you.
• You might use a budgeting app to help you connect your accounts, categorize where your money is going, and see at a glance how you are progressing toward your short-term financial goals. A good place to start: See what kinds of financial insights tools your bank provides. You may find just what you are looking for.
• Consider third-party budgeting apps. You might search online or ask trusted friends if they are using one that they would recommend.
Once you see where your money is actually going, you may discover some surprises (such as $200 a month on lunches out) and also find places where you can easily cut back. You might decide to bring lunch from home a few more days per week, for example. Or you might want to cut back on streaming services or ditch the gym membership and work out at home.
This money you free up can then be redirected towards your savings goals, like creating an emergency fund, buying a house, or funding your retirement.
3. Pay Down Credit Card Debt
Another important financial goal example is paying down credit card debt. If you carry a balance, you may want to make paying it off one of your top short-term financial goals. The reason: Credit card debt is typically high-interest debt. The average annual percentage rate, or APR, charged by credit cards was above 20% in mid-2024, according to the Federal Reserve Bank of St. Louis. That means that items you buy with a credit card could potentially cost you a hefty amount more than if you pay with cash.
What’s more, because the interest on credit card debt can be so costly, it can make achieving any other financial goals much more difficult. Here’s how you might work toward paying off your credit card debt:
• You could try the debt avalanche method, which involves paying the minimum on all but your highest-rate debt. You then put all available extra funds toward the card with the highest interest debt. When that one is paid off, you would roll the extra payment to the card with the next-highest interest rate, and so on. By knocking out your highest-interest debt first, you may be able to save a chunk of money.
• Another option for paying off debt is the debt snowball method. With this technique, you pay the minimum on all cards, but use extra money to pay off the debt with the smallest balance. When that’s paid off, you move to the next smallest debt and so on. This can give you a sense of accomplishment as you get rid of debt which in turn can help keep you motivated.
• You might consider consolidating your debt by taking out a personal loan to pay off all of your cards. These usually offer a lump sum of cash to be paid off in two to seven years at a lower interest rate than credit cards. Having only one payment each month can help simplify the payoff process.
If you feel your debt burden is too great to be resolved with these options, you might want to speak to a certified credit counselor for advice.
4. Pay Off Student Loans
Student loans can be a drag on your monthly budget. Paying down student loans, and eventually getting rid of these loans, can free up cash that will make it easier to save for retirement and other goals.
One strategy that might help is refinancing your student loans into a new loan with a lower interest rate. You can check your balances and interest rates across your federal and private loans, and then plug them into a student loan refinancing calculator to see if refinancing offers an advantage.
Keep in mind, however, that if you refinance federal student loans with a private loan, you will lose access to such benefits as deferment and forgiveness. Also, if you refinance your loans into one with a longer term, you could wind up paying more in interest over the life of the loan.
Also note that not all refinancing options are created equal. There are bad actors out there who might promise to get rid of all your debt but will only damage your credit score. If you do refinance your student loans, you’ll want to make sure you’re working with a reputable lender.
5. Focus on Your Retirement Fund
Yes, saving for retirement is typically a long-term goal, but if you’re not yet saving for retirement, a great short-term financial goal may be to start doing so. Or, if you’re putting in very little each month, you may want to work on upping the amount. Here are a couple of specific ideas:
• If your employer offers a 401(k) and gives matching funds, for example, it’s normally wise to contribute at least up to your employer’s match. You can then start increasing your contributions bit by bit each year.
• If you don’t have access to a 401(k), consider an individual retirement account, or IRA. You may be able to set up an IRA online and start funding your retirement there. (Keep in mind that there are limits to how much you can contribute to a retirement plan per year that will depend on your age and other factors.)
While retirement is a long-term vs. short-term financial goal, taking advantage of this savings vehicle can reduce your taxes starting this year. Here’s why: Money you put into a retirement fund likely offers tax advantages, such as lowering your taxable income.
Even more importantly, starting early can pay off dramatically down the line. Thanks to the power of compounding returns (when the money you invest earns returns, and that then gets reinvested and earns returns as well), monthly contributions to a retirement fund can net significant gains over time.
6. Begin to Build Wealth
If you already have an emergency fund, you may want to start thinking about what you are hoping to buy or achieve within the next several years, and also building your wealth in general. As you save money, think about where to keep it to help it grow. The power of compounding returns, as mentioned above, or compounding interest in the case of a bank account, can really help in this pursuit.
• For financial goals you want to reach in the next few months or years, consider putting this money in an online bank account that offers a high interest rate vs. a traditional savings account, but allows access when you need it. Options may include a HYSA (high-yield savings account, often found at online banks) or a money market account.
• For longer-term savings, you may want to look into opening a brokerage account. This is an investment account that allows you to buy and sell investments like stocks, bonds, and mutual funds. A taxable brokerage account does not offer the same tax incentives as a 401(k) or an IRA, but it is probably much more flexible in terms of when the money can be accessed.
Just keep in mind that there’s risk here: These funds will not be insured as accounts at a bank or credit union usually are. Bank or credit union accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per depositor, per account ownership category, per insured institution.
How Do You Create a Short-Term Financial Goal?
To create a short-term financial goal, identify what you want and how much money you need. Then, looking at your budget and seeing what cash you have available, see how long it will take to save up enough money. For instance, if you want to have $2,400 in a travel fund a year from now, you will need to put $200 a month aside. Check your cash flow and see where you can free up funds (maybe reduce takeout food and fancy coffees, for starters) to meet this goal.
How to Set SMART Financial Goals
In addition to the short-term financial goals examples and guidance above, there’s another way to think about this topic: using the acronym S.M.A.R.T. This system can help you both with identifying and achieving your goals. Here’s what this stands for and how considering your financial aspirations through this lens can be helpful:
• Specific: A goal should identify exactly what you are saving for, whether that’s paying off credit-card debt or buying a used car.
• Measurable: How much is your goal? How much do you need to save? Perhaps your credit card balance is $5,673. That would be your measurable goal.
• Attainable: Make sure your goal is realistic (you may not be able to pay off your entire credit card debt in a month or even a few months) and develop strategies to achieve it, such as working on alternate Saturdays to bring in more money (a benefit of a side hustle).
• Relevant: Check that your goal really matters to you and isn’t just something you’re doing to, say, keep up with your friend group. Do you really need to save towards a potentially budget-busting vacation?
• Time-bound: Set “by when” dates for your goals. This helps to keep you accountable. If you want to save $3,600 for an emergency fund within a year, figure out how you will come up with the $300 per month to put aside.
Using the SMART method can help you crystallize and achieve your short-term financial goals.
Difference Between Short-Term and Long-Term Financial Goals
In discussing short-term financial goals, it’s likely that you might wonder how these differ from long-term goals. Here are a few examples that can help clarify the aspirations above from those that require a longer timeline.
Examples of Long-Term Goals
• Save for retirement
• Pay off a mortgage
• Buy a second home or investment property
• Save for a child’s (or grandchild’s) college education
• Fund a business idea
• Take out life insurance and/or long-term care policies
Of course, long-term goals will vary from person to person. One individual might be focused on being able to retire at age 50 while another might aspire to make a significant charitable contribution.
The Takeaway
Short-term financial goals are the things you want to do with your money within the next few years. Some typical (and important) short-term goals include setting a budget, starting an emergency fund, and paying off debt. In addition, opening a retirement account and otherwise building wealth can be valuable goals, too.
Having the right banking partner can help you reach your near-term money goals. See what SoFi offers.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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 up to 3.80% APY on SoFi Checking and Savings.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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Whether your current shower is outdated or too small, remodeling it can improve your everyday routine, give your bathroom a high-end look, and increase the value of your home. The question is, how much will it cost?
Prices vary depending on the amount of work involved and the finishes you choose, but you can expect to pay anywhere from $3,100 and $10,100 for a shower remodel. Here’s a closer look at the specific costs involved, some ways to save money on a shower remodel, plus how to get started.
The Process to Remodel a Shower
The first decision you’ll need to make is whether you’re going to hire a professional or do the remodel yourself. If you have experience with home remodeling, you could potentially save a lot of money by taking on the job, since labor can make up as much as 50% of your total remodel costs. However, if this is your first remodel, you could end up spending a lot more fixing your mistakes.
Once you determine if you’re going to hire a professional or not, you’ll need to come up with shower remodel ideas, including the color scheme, shape, shower type (full or shower-tub combo), fixtures you’re going to get, lights, fans or radios you’ll install, and any doors you’ll replace.
If you aren’t sure how to design your new shower, you can ask your contractor for help or hire a designer, but this will add to your costs.
Once you have an idea of what you want to do, your contractor will come up with a plan for your shower remodel and give you an estimate for materials and labor. You can work with them to see if there are cheaper alternatives, like shopping for materials online or choosing less expensive fixtures and finishes.
If you’re going the DIY route, you’ll have to shop around for the materials and pick them up. You’ll also need tools, such as a safety mask and goggles, tape measure, spackle knife, power drill, extension cord, hammer, and stud finder, just to name a few.
An easy way to DIY a shower remodel is to shop for a complete shower system that includes coordinating fixtures. After removing the existing shower walls, flooring, and fixtures, the new materials can be installed. You might choose an all-in-one shower surround, or a shower pan (the base) with tiled walls.
Typically, it can cost from $3,100 to $10,100 to remodel a shower, with the average cost coming in around $6,500. Your actual costs will depend on how large the shower is, what kinds of fixtures you’re installing, and the finishes you’re using. Here’s a look at some of the factors that affect the cost of a shower remodel.
Shower Type
A walk-in shower adds a high-end look to a bathroom and is easy to get in and out of. With this option, there’s a lot of wiggle room on budget — you could spend as little as $400 or as much as $8,500 depending on the materials you choose.
You might be able to spend less if you go with a prefabricated shower, which comes with the entire shower surround and fixtures. You can find prefabricated shower inserts in a variety of styles and price points and spend anywhere from $200 to $8,000.
A tub-and-shower combination is one of the most popular choices, since they use up less space than having a separate shower and bathtub. You can also customize the look with your tile and fixture choices. On average, a tub-and-shower combo runs around $3,000.
The costs involved in remodeling a shower can add up quickly. And once you get into the project, there is always the potential for unwanted — and expensive — surprises. Fortunately, there are ways to keep costs in check while still ending up with a clean, updated look. Here are some to consider.
• Maintaining the layout If you use the current layout, you won’t need to make changes to the plumbing and electrical. This cuts costs, as well as the chance for costly surprises.
• Keeping the same drywall If the drywall behind your shower is in good shape, you may be able to avoid tearing it out and starting fresh. If there is some damage, your contractor may be able to simply replace those sections rather than tear the entire wall out.
• Saving your tub If your bathtub is in decent shape, you might simply give your shower a face-lift by changing the surrounding tile and shower fixtures and reglazing the tub to match.
• Buying a prefab shower These units can cost significantly less than a custom build and are now available in a range of designs that look luxurious and don’t scream “prefab.”
If you’re eager to remodel your shower but don’t have funds to cover the cost up front, you may be able to finance the project using a home improvement loan.
A home improvement loan is essentially a personal loan used to pay for home upgrades and renovations. These loans are available through banks, online lenders, and credit unions, and are typically unsecured (meaning you don’t have to provide collateral). Once approved, you receive a lump sum of cash up front you can then use to cover the cost of remodeling your shower. You repay the loan (plus interest) in regular installments over the term of the loan, which can range from five to seven years.
If you think a personal loan might be a good choice for your shower remodel, SoFi ccould help. SoFi’s home improvement loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score, and it takes just one minute.
Pay for your shower remodel, without sinking into high-interest debt.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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