Dec
21
2024
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IRA Tax Deduction Rules

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on IRA Tax Deduction Rules

Broadly speaking, individual retirement accounts, or IRAs, offer some sort of tax benefit — either during the year that contributions are made or when distributions take place after retiring. But not all retirement accounts are taxed the same.

With a traditional IRA, it’s possible for certain individuals to both invest for their future and reduce their present tax liability. For tax year 2024, the maximum IRA deduction is $7,000 for people younger than 50, and $8,000 for those 50 and older. For tax year 2025, the maximum IRA deduction remains at $7,000 for people younger than 50, and $8,000 for those 50 and older.

To maximize deductions in a given year, the first step is understanding how IRA tax deductions work. A good place to start is learning the differences between common retirement accounts — and their taxation. And since each financial situation is different, an individual may also want to speak with a tax professional about their specific situation.

Read on to learn more about IRA tax deductions, including how both traditional and Roth IRA accounts are taxed in the U.S.

What Is a Tax Deduction?

First, here’s a quick refresher on tax deductions for income taxes — the tax owed/paid on a person’s paycheck, bonuses, tips, and any other wages earned through work. “Taxable income” also includes interest earned on bank accounts and some types of investments.

Tax deductions are subtracted from a person’s total taxable income. After deductions, taxes are paid on the amount of taxable income that remains. Eligible deductions can allow qualifying individuals to reduce their overall tax liability to the Internal Revenue Service (IRS).

For example, let’s say Person X earns $70,000 per year. They qualify for a total of $10,000 in income tax deductions. When calculating their income tax liability, the allowable deductions would be subtracted from their income — leaving $60,000 in taxable income. Person X then would need to pay income taxes on the remaining $60,000 — not the $70,000 in income that they originally earned.

For the 2024 tax year, 22% is the highest federal income tax rate for a person earning $70,000, according to the IRS. By deducting $10,000 from their taxable income, they are able to lower their federal total tax bill by $2,200, which is 22% of the $10,000 deduction. (There may be additional state income tax deductions.)

A tax deduction is not the same as a tax credit. Tax credits provide a dollar-for-dollar reduction on a person’s actual tax bill — not their taxable income. For example, a $3,000 tax credit would eliminate $3,000 in taxes owed.

💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

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Putting the IRA Tax Deduction to Use

Traditional IRA tax deductions are quite simple. If a qualifying individual under age 50 contributes the maximum allowed to a traditional IRA in a year — $7,000 for the 2024 and 2025 tax years — they can deduct the full amount of their contribution from their taxable income.

That said, you are not eligible to claim your IRA deduction if you are:

•   Single and covered by a workplace retirement account and your modified adjusted gross income (MAGI) is more than $87,000 for tax year 2024 ($89,000 or more for tax year 2025)

•   Married filing jointly and covered by a work 401(k) plan and your MAGI is more than $123,000 and less than $143,000 for tax year 2024 (more than $126,000 and less than $146,000 for tax year 2025)

•   Married, only your spouse is covered by a work 401(k) plan, and your MAGI is more than $230,000 and less than $240,000 for tax year 2024 (more than $236,000 and less than $246,000 for tax year 2025).

401(k), 403(b), and other non-Roth workplace retirement plans work in a similar way (when it comes to a Roth IRA vs a traditional IRA, contributions to a Roth IRAs are not tax deductible). For the 2024 tax year, the contribution maximum for a 401(k) is $23,000 with an additional $7,500 catchup contribution for employees 50 and older. For tax year 2025, the contribution maximum is $23,500 with an additional $7,500 catchup contribution for employees 50 and older. Also for 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

Thus, a person under 50 who contributes the full amount in 2024 could then deduct $23,000 from their taxable income ($23,500 in 2025), potentially lowering their tax bracket.

One common source of confusion: The tax deduction for an IRA will reduce the amount a person owes in federal and state income taxes, but will not circumvent payroll taxes, which fund Social Security and Medicare. Also known as Federal Insurance Contributions Act (FICA) taxes, these are assessed on a person’s gross income. Both the employer and the employee pay FICA taxes at a rate of 7.65% each.

Understanding Tax-Deferred Accounts

Traditional IRA, 401(k), and other non-Roth retirement accounts are deemed “tax-deferred.” Money that enters into one of these accounts is deducted from an eligible person’s total income tax bill. In this way, qualifying individuals do not pay income taxes on that invested income until later.

Because these taxes are simply deferred until a later time, the money in the account is usually taxed when it’s withdrawn.

Here’s an example of this: Having reached retirement age, a person chooses to withdraw $30,000 per year from a traditional IRA plan. As far as the IRS is concerned, this withdrawal is taxable income. The traditional IRA money will be taxed as the income.

So, what’s the point of deferring taxes? Generally speaking, people may be in a higher marginal tax bracket as a working person than they are as a retired person. Therefore, the idea is to defer taxes until a time when an individual may pay proportionally less in taxes.

Tax Brackets and IRA Deductions

Income tax brackets can work in a stair-step fashion. Each bracket reveals what a person owes at that level of income. Still, when a person is “in” a certain tax bracket, they do not pay that tax rate on their entire income.

For instance, in 2024, single filers pay a 12% federal income tax rate for the income earned between $11,601 and $47,150. Then, the tax rate “steps up,” and they pay a 22% tax on the income earned that falls in the range of $47,151 and $100,525. Even if a person is a high-earner and “in” the 37% tax bracket, they still pay the lower rates on their lower levels of income.

401(k) Withdrawals and Taxation

Now, let’s compare that with the taxation on a $30,000 withdrawal from a 401(k). Assuming 2024 income tax rates, a $12,000 withdrawal would be taxed at a 10% rate up to $11,600 and then a 12% rate for the remaining $18,400.

Taxes are assessed at a person’s “effective,” or average, tax rate. This is another reason that some folks prefer to defer their taxes until later, when they can pay a hypothetically lower effective tax rate on their withdrawals, rather than taxes at their highest marginal rate.

But, here’s why it’s not so simple: All of the above assumes that income tax rates remain the same over time. And, income tax rates (and eligible deductions) can change with federal legislation.

Still, plenty of earners opt to reduce their tax bill at their highest rate in the current year — and a tax deduction via an eligible retirement contribution can do just that.

For individual tax questions, it’s a good idea to consult a tax professional with questions about specific scenarios.

What About Roth IRAs and Taxes?

Simply put, there are no tax deductions for Roth retirement accounts. Both Roth IRA and Roth 401(k) account contributions are not tax-deductible.

The trade-off is that Roth money is not taxed when it is withdrawn in retirement, as is the case with tax-deferred accounts like a 401(k) and traditional IRA. In fact, this is the primary difference between Roth and non-Roth retirement accounts. With Roth accounts, taxes are already paid on money that is contributed, whereas income taxes on a non-Roth 401k are deferred until later.

So, then, what are some advantages of a Roth retirement account? All retirement accounts provide an additional type of tax benefit as compared to a non-retirement investment account: There are no taxes on interest or capital gains, which is money earned via the sale of an investment.

CFP® Brian Walsh explains, “With a Roth IRA, you’re going to pay taxes on your money and then you’re going to put after-tax money into the Roth IRA. That money is going to grow without paying any taxes. But when you take it out—ideally that money grew quite a bit—you’re not going to pay any taxes on the withdrawal.”

Someone might choose a Roth over a tax-deferred retirement account because they prefer to pay the income taxes up front, instead of in retirement. For example, imagine a person who earned $30,000 this year. They pay a relatively low income tax rate, so they simply may prefer to pay the income taxes now. That way, the taxes are potentially less of a burden come retirement age.

Not everyone qualifies for a Roth IRA. There are limits to how much a person can earn. For a single filer, the ability to contribute to a Roth IRA for tax year 2024 begins to phase out when a person earns more than $146,00 ($150,000 for tax year 2025), and is completely phased out at an income level of $161,000 in 2024 ($165,000 for tax year 2025). For a person that is married and filing jointly, the phase-out begins at $230,000 in 2024 ($236,000 for tax year 2025), ending at $240,000 in 2024 ($246,000 for 2025).

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Deduction and Contribution Limits

The maximum amount a person is able to deduct from their taxes by contributing to a retirement account may correspond to an account’s contribution limits.

Here are the maximum contributions for the 2024 tax year:

•   Traditional IRA Limits: $7,000 ($8,000 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan

•   401(k): $23,000 (additional $7,500 if age 50 or older)

•   403(b): $23,000 (additional $7,500 if age 50 or older)

•   457(b): $23,000 (additional $7,500 if age 50 or older)

•   Thrift Savings Plan (TSP): $23,000 (additional $7,500 if age 50 or older)

•   Simple IRA or 401(K): $15,500 (additional $3,500 if age 50 or older)

•   SEP IRA: The lower of 25% of an employee’s income, or $69,000

•   Simple IRA or 401(K): $16,000 (additional $3,500 if age 50 or older)

Here are the maximum contributions for the 2025 tax year:

•   Traditional IRA: $7,000 ($8,000 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan

•   401(k): $23,500 (additional $7,500 if age 50 or older; for 2025, those aged 60 to 63 can contribute an extra $11,250)

•   403(b): $23,500 (additional $7,500 if age 50 or older; for 2025, those aged 60 to 63 can contribute an extra $11,250)

•   457(b): $23,500 (additional $7,500 if age 50 or older; for 2025, those aged 60 to 63 can contribute an extra $11,250)

•   Thrift Savings Plan (TSP): $23,500 (additional $7,500 if age 50 or older; for 2025, those aged 60 to 63 can contribute an extra $11,250)

•   SEP IRA: The lower of 25% of an employee’s income, or $70,000

•   Simple IRA or 401(K): $16,500 (additional $3,500 if age 50 or older)

The above lists are only meant as a guide and do not take into account all factors that could impact contribution or deduction limits — such as catch-up contributions. Anyone with questions about what accounts they qualify for should consult a tax professional.

Investing for Retirement

Different types of retirement accounts come with distinct tax benefits and, for eligible investors, IRA tax deductions. Opening a retirement account and contributing to certain tax-deferred accounts may affect how much a person owes in income taxes in a given year. Roth accounts may provide tax-free withdrawals later on.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

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

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

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

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Dec
20
2024
31 Facts About FAFSA

31 Facts About FAFSA for Parents

By | Going to College, Student Loans, student_loan | Comments Off on 31 Facts About FAFSA for Parents
Editor’s Note: The new FAFSA form for the 2025-2026 academic year is available. Based on early testing by students and families, the process seems to be improved from the 2024-2025 form. Still, it’s best to get started on the form and aim to submit your application as soon as possible.

Applying for federal aid is a crucial step most high school students take while transitioning to college life. Parents going through the college admissions process for the first time, though, may not realize that they also play a huge role in helping their children apply for grants and scholarships through the Free Application for Federal Student Aid or FAFSA.

Applications for the 2025-2026 FAFSA opened on November 21, 2024, and will remain open until June 30, 2026. If you’re looking for facts about FAFSA that will help your child apply for college aid for the 2025-2026 academic year, we’ve compiled some of the most important information on how you can help your child during the FAFSA process.

FAFSA Facts and Tips

Filling out FAFSA for the first time? These facts and FAFSA tips can help you prepare for the application process and offer suggestions for getting the most aid.

1. FAFSA Is Required to Receive Government Student Loans

For those who may be new to the financial aid process, FAFSA is the form students fill out to apply for federal financial aid, including federal student loans. More than 17 million students fill out the FAFSA each year. Your child won’t be eligible for government-funded college aid, such as federal loans or grants if they don’t apply.

Recommended: 12 Steps to Filling Out the FAFSA Form for School Year 2025-2026

2. Your Child Could Qualify for Grants by Filling Out FAFSA

While you can get subsidized or unsubsidized loans through FAFSA, your child may also be eligible for grants. One common federal grant is the Pell grant, which is awarded to first-time undergraduate students who show exceptional financial need, such as coming from a low-income family.

3. It Determines Work-Study Eligibility

Federal work-study is a way for students to earn income at a part-time job while in college. These jobs can be on or off-campus and vary by school, although not all schools participate in the program. You have to fill out FAFSA to determine if you’re eligible for work-study programs.

4. Some Schools Use FAFSA to Determine What Aid They Offer

If the schools your child applies to offer their own aid, such as need-based scholarships, they may use FAFSA to determine eligibility. You may want to check with the schools your child is applying to and ask if they have a separate application for internal scholarships and grants.

Recommended: FAFSA Guide

5. Most Applicants Under Age 24 Are Considered Dependents

Most students under the age of 24 who are neither married nor parents themselves won’t be able to apply as an independent student . As a result, for most incoming freshmen, their parents’ income is counted in the determination of financial need.

6. Your Child Needs Your Information to Apply

If your child is filing as a dependent, then they’ll need some basic information about your finances, such as your income and paid taxes. You may also elect to apply for a Parent PLUS loan at some point, which can help cover your child’s educational expenses if they don’t receive enough in loans and grants to cover costs. Note that you may need to provide additional information to apply for a Parent PLUS loan.

7. High-Income Families May Want to Still Apply

If your family is middle- or upper-class, you may wonder if your child will receive any FAFSA aid. However, applying is free, and family income is just one of many factors considered during the application process. Additionally, your child’s school still may require the FAFSA to consider them for institutional aid, such as non-need based scholarships, so it may be worth applying for even if you don’t think your child will need or receive aid.

8. Grades Don’t Affect FAFSA Eligibility

FAFSA does not have a GPA requirement to apply. However, your child may want to keep in mind that they could lose any aid given to them through FAFSA if they have poor grades for multiple semesters after they receive the aid.

9. Deadlines May Differ by State and School

While the FAFSA doesn’t close until June 30, 2026 for the 2025-2026 academic year, FAFSA application deadlines vary by state and school. State and school deadlines may close prior to the federal deadlines. If you’re not sure what deadlines apply to your student, consider checking with the financial aid office of each school your child applies to and asking what their FAFSA deadlines are.

10. Having Multiple Kids in College No Longer Affects Financial Aid Awards

In January 2024, a new law went into effect that removes the number of family members in college from the financial aid calculation. Before, families with multiple children in college may have qualified to receive more aid. That is no longer the case. However, at the same time, the Pell Grant opportunity has been expanded so that students who might not have gotten a Pell Grant before may now get one. These are two of many changes created through the FAFSA Simplification Act, which aims to simplify the FAFSA form and therefore encourage more families to fill it out.

11. Expected Family Contribution Is Also Changing

Expected family contribution (EFC) is an estimate of how much FAFSA believes families can contribute to the cost of a student’s education. However, as part of the FAFSA Simplification Act, EFC was replaced with the Student Aid Index (SAI), which went into effect for the 2024-2025 academic year.

12. FAFSA Is Changing the Process for Children of Divorce

Before the new simplified FAFSA, in the case when a child’s parents are separated, the custodial parent’s information was included on the form. However, with the new changes, the parent who provides the most financial support to the student is responsible for filling out the FAFSA.

13. Your Child Will Need Their Social Security or Alien Registration Number

As your child prepares to fill out the FAFSA, they’ll need their Social Security or Alien Registration number if they are not a U.S. citizen.

14. Have Certain Nontaxable Income Information at the Ready

On the 2025-2026 FAFSA, there are far fewer questions about nontaxable income for parents than there used to be. What you will still need to provide are such things as the amount of the untaxed portion of any IRAs and pensions you may have, and deductions and contributions to self-employed SEP IRA, SIMPLE IRA, and qualified plans.

15. Your Child May Need to Report Grants and Scholarships

Most first-time college students won’t need to report any grants or scholarships they received. However, they may have to include them on the FAFSA if they had to report them on their taxes, such as:

•   AmeriCorps benefits living allowances and education awards

•   Taxable work-studies, assistantships or fellowships

•   Other grants or scholarships reported to the IRS

If you have any doubts about what types of grants may be taxable, consider consulting a tax professional.

16. Have Bank Statements Available

To fill out FAFSA, you’ll need bank statements for both you and your child. This information helps determine how much aid your child will be eligible for.

17. You Don’t Have to Have a Social Security Number to Sign the Form

If you’re filing the FAFSA online and you don’t have a Social Security number, you can create a federal student aid (FSA) ID without it. Your FSA ID is your login and password. Then you can proceed with filling out your portion of the form.

18. You Don’t Need to File Taxes Before Submitting the FAFSA

If you filed for an extension for your tax return, you can use your W-2 or 1099 statements. But you will need to update the FAFSA once you file. This is because which tax bracket you’re in can impact how much aid your child is eligible for.

19. You’ll Need to Have a List of Assets Ready

FAFSA uses parental assets to help determine aid eligibility. You’ll need to know how much in assets you have, which include (but are not limited to):

•   Money in cash, savings, and checking accounts

•   Non-retirement investments (such as stocks and mutual funds)

•   Businesses

•   Investment farms (in other words, you don’t live on and operate the farm)

•   Other investments, such as real estate and stock options

20. Some 529 Plans Are Also Considered Assets

When filling out information about assets, you’ll also need to provide the value of the 529 College Savings Plans you own. Also, if your dependent child owns a 529 plan, you will need to report it as a parental asset — and not as the student’s asset. However, a 529 owned by anyone else, such as the student’s grandparents, is no longer reported as an asset on the FAFSA.

21. Your Primary Home Doesn’t Need to Be Listed as an Asset

One common FAFSA mistake is listing your primary home as an asset. However, FAFSA does not require you to do so. In fact, listing it as an asset can decrease the amount of aid your child receives.

22. You Don’t Need Your Retirement Information

FAFSA also doesn’t count the value of retirement accounts as assets. Again, including them can inflate the number of assets you have and therefore may decrease the amount of aid your child is offered. However, as mentioned above, you will need to report the untaxed contributions and withdrawals from these accounts on the FAFSA.

23. You’ll Need to Include Each School Your Child Is Applying To

When you and your child fill out the FAFSA, you’ll want to have a list of all the schools your child may be interested in applying to. You’ll need each school’s federal school code to add them to the list of schools you want your FAFSA information sent to, although you can also search for this information on the form itself if you can’t find it on the school’s website. It may be wise to include schools your child isn’t sure they want to apply to yet since it’s easier to simply add the school to the list now than having to send the school your FAFSA information later.

24. Schools, Not the Government, Will Give You Financial Aid Updates

Part of the reason you’ll need to send your FAFSA to schools your child is considering applying to is because schools, not the government, send out financial aid packages. As such, each school your child applies to may offer a different financial aid package.

25. Skipping Information Can Be Costly

Before hitting submit, you might want to double check that every section of the FAFSA is filled out (and accurate). Skipping FAFSA sections may result in delays in your application being processed, errors that prevent you from submitting, or even a decrease in the amount of financial aid you may get.

26. Your Child Will Need to Take Student Loan Entrance and Exit Counseling

Students who receive Direct Subsized or Unsubsidized loans or Direct PLUS loans for graduate students are required to take student loan entrance counseling. If a student is a first-time student loan borrower or a graduate student who has not previously received a Direct PLUS loan, they will need to take entrance counseling before their loans are disbursed. The counseling informs student borrowers about the terms and conditions of their loans, including interest rates, repayment options, and how to avoid default or delinquency.

Your child can take entrance counseling by logging into their account on StudentAid.gov. The session must be completed in one session. It’s important to note that some schools have different entrance counseling requirements, so check with the financial aid office to make sure nothing else is needed.

Similarly, after graduation, federal student loan borrowers need to take mandatory student loan exit counseling to help them navigate how the student loan repayment process works. A reminder will be sent to your child’s email in their last year of school about when this exit counseling is due. However, you and your child may want to consider reviewing student loan exit repayment options before the counseling is due to ensure they pick the best option based on their financial situation.

27. File Early to Get the Most Aid

While it may seem like you have a ton of time to fill out the FAFSA, it may be best to complete it sooner rather than later. Delaying can mean financial aid for your state or school dries up before your child can even be considered for it. Additionally, knowing how much aid each school is offering your child may help them when deciding on which school to attend.

28. You Could Be Selected for FAFSA Verification

After your child receives their student aid report, they may get a message saying they were selected for verification. FAFSA verification is used by some schools to simply verify that students’ FAFSA information is accurate. Some schools randomly select people to be verified, some verify all students, and some may elect not to verify any students.

29. You Can Appeal Your Aid Package

Once your child has their financial aid packages, they may find that they were offered less than they expected or hoped for. If your child’s dream college didn’t offer enough aid (or perhaps even didn’t offer them any aid), they may be able to appeal for more financial aid. This process may be especially important if your financial situation has changed since you and your child first applied for FAFSA. While schools may deny the request, it doesn’t cost you or your child anything but time to ask for more aid.

30. You Can List Unusual Circumstances That Affect Your Finances

Another way to try and increase your financial aid package is by listing unusual financial circumstances both on your FAFSA and in an appeal letter to schools you’re applying to. Some common unusual circumstances include (but are not limited to):

•   Having tuition expenses in elementary and/or secondary schools

•   Experiencing unusual medical or dental expenses not covered by insurance

•   Having a family member become unemployed recently

•   Experiencing changes in income and/or assets that could affect aid eligibility

31. You’ll Have to Reapply Every Year

Once you’ve filed your FAFSA, you may want to keep your login information in a safe place. You’ll need that information to file for FAFSA every year your child is in school, and losing your FSA login information may delay your ability to apply next year. You may also want to set a reminder on your phone or calendar to apply next year, although FAFSA will send you an email reminder when next year’s FAFSA is open.

The Takeaway

Filling out and submitting the FAFSA is an important first step in helping your child pay for college. Knowing how the FAFSA works and how to optimize the amount of aid your child receives can help increase the amount of federal aid they’re offered.

However, if your child’s financial aid package isn’t enough to cover college costs, they may want to consider private student loans. It’s important to note, however, that private student loans don’t offer the same borrower protections as federal student loans. That’s why it’s wise to consider all the options to make the best choice to help pay for your child’s education.

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/wagnerokasaki

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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.

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

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

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

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Dec
20
2024
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Private Student Loan Forgiveness: What Is It & How Does It Work?

By | Fresh Out of School, Student Loans, student_loan | No Comments

Although the Biden-Harris Administration’s plan for widespread student loan forgiveness was ultimately struck down by the Supreme Court in 2023, all has not been lost for the millions of borrowers hoping to have their loans canceled.

Under the Higher Education Act, the administration made changes to existing relief and forgiveness programs to forgive millions of dollars of federal student debt. As of October 2024, 4.8 million student loan borrowers have received debt relief.

That said, student loan forgiveness options may be more limited for borrowers with private loans, who owe an average of $54,921 each.

Key Points

•   Private student loan forgiveness is rare, with limited options compared to federal loans.

•   Deferment or forbearance options are typically available for financial hardship, though interest usually accrues during these periods.

•   Negotiating with lenders may lead to loan modifications, such as a lower interest rate or extended payment term.

•   Employer assistance programs may help with loan repayment, especially in certain professions.

•   For some student loan borrowers, refinancing private student loans may result in a lower interest rate or better terms.

Student Loan Breaks for Many but Not All

As mentioned above, the Biden administration and the U.S. Department of Education have forgiven a large amount of student loan debt via targeted relief efforts. The administration provided $74 billion to more than one million students through the Public Service Loan Forgiveness program, $28.7 billion to the more than 1.6 million borrowers who were defrauded by their schools or saw them suddenly close, and 16.2 billion for more than half a million individuals who have total and permanent disabilities.

During his term, President Joe Biden announced several other measures for student loan debt relief, including an initiative to forgive up to $20,000 in federal student loans for those who met certain income requirements. However, the Supreme Court deemed that the President didn’t have constitutional power to implement such a plan. Another initiative by the administration, the income-driven repayment plan called Saving on a Valuable Education (SAVE) aimed at helping struggling federal student loan borrowers, was blocked by the courts.

These programs pertained only to federal loans. Private student loan borrowers were not included in any of the relief.

Recommended: A Guide to Private Student Loans

Can Private Student Loans Be Forgiven?

Do lenders forgive private student loans? Unfortunately, that almost never happens.

However, many do offer student loan deferment or forbearance options for private student loan borrowers facing financial hardship. Interest typically accrues during these periods, regardless of whether the borrower is making payments.

Read your loan contract or disclosure statement, which contains information about terms, rates, fees, and penalties. Here, you’ll find information related to any hardship programs offered by the lender. You can also reach out directly and ask about your options.

Whatever you do, don’t miss a payment. Contact your lender immediately if you’re facing a hardship that will prevent you from making payments on time and in full. After a default on a private student loan, which can happen quickly, private lenders may hire a collection agency or file a lawsuit.

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Private Student Loan Debt Relief Options

Refinancing your student loans can offer several benefits. If you have a good credit history and solid income, or a cosigner on the loan, you may be able to qualify for a lower interest rate, reducing your monthly payments and the total interest you pay over the life of the loan.

Or you might be able to lengthen the term of your loan and decrease your monthly payments (but elongating the repayment term will usually increase the total interest paid). Use this student loan refinancing calculator to see how refinancing could affect your payment.

When you refinance, the lender will pay off your old loans and issue you a new loan with a new rate and terms and with one payment.

You can typically refinance both federal and private loans. You’ll also be given a choice of a fixed or variable rate.

If you are thinking about refinancing your student loans, do your homework:

•  Be sure you’re getting the lowest rate possible with terms that fit your short- and long-term needs.

•  Although student loan refinancing rarely comes with any closing costs, it’s a good idea to find out if there are any fees involved. Keep in mind that you can refinance more than once.

•  If you plan to refinance any federal student loans, know that doing so will permanently forfeit all federal benefits and protections, including income-driven repayment plans, federal deferment and forbearance options, and forgiveness programs such as Public Service Loan Forgiveness (PSLF).

•  Consider lenders that initially do a soft credit pull before you actually apply with them to refinance your student loan. That way, shopping for interest rates will not affect your credit.

Recommended: Soft vs Hard Credit Inquiry: What You Need to Know

2. Talk to Your Lender

Speak to your lender about your options to repay your student debt. You aren’t the first (and you won’t be the last) to ask for help, and many private lenders offer some type of loan modification for borrowers who are financially struggling.

You may be able to negotiate a lower interest rate or a lower payment over a longer term, or set up a period during which you can make interest-only payments.

Be ready to answer questions about why you’ve fallen behind, what other debts you’re paying, and about your income prospects.

Always communicate with your lender to avoid student loan forgiveness scams. Some private companies that falsely offer debt relief may try to get you to pay monthly costs or upfront fees, ask you for your identification, or promise immediate loan forgiveness.

If you think you’re the victim of suspicious activity, contact the Federal Trade Commission.

3. Consider a Payment Pause

Some private lenders offer deferment or forbearance, which will allow you to postpone payments.

•  Deferment is sometimes available to borrowers who are planning to go back to school or who are entering military service.

•  Forbearance is typically available for those who have had an unexpected hardship that makes repayment difficult, such as an illness or a job loss.

Interest will still accrue during these private loan payment breaks.

As with federal loans, your employer may assist you with your private loans, especially if your skills are in demand. Also, many industries and professional associations offer student loan repayment assistance for firefighters, teachers, lawyers, and health care workers.

The Takeaway

Private student loan forgiveness is rare and has not been included in any sweeping moves to cancel student loan debt or provide relief. Borrowers of private student loans may be able to refinance and get a better rate or work with their lender if they’re struggling.

SoFi refinances both federal and private student loans. There are no prepayment or late fees. Deferment and forbearance options are available.

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.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


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).

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

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

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

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

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

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What Is a Trust Fund?

By | Growing Wealth, Investing | Comments Off on What Is a Trust Fund?

A trust fund can help shelter your assets and determine how they are managed now or in the future. Generally a part of estate planning, trust funds can help minimize estate taxes, provide financial support to your loved ones, or even donate money to your favorite charitable cause.

There are numerous types of trust funds out there, and there likely isn’t a one-size-fits-all option. The trust you select will depend on your goals and unique circumstances, so it’s important to know the ins and outs of trust funds before deciding which option is right for you.

🛈 SoFi currently does not offer trust funds.

Trust Fund Definition

A trust fund is a legal tool or arrangement in which individuals can choose to place assets of various types into a special account. They’re often used to hold those assets, like stocks or real estate, for a beneficiary, like a family member, or even a company.

The purpose of a trust is to hold assets for the beneficiary without giving them direct control over the funds or property — the control remains with a third party designated by the individual creating the trust.

As an example, say a high-net-worth philanthropist desires to leave a legacy to his favorite cause when he dies. He creates a charitable trust that will add the charity as a beneficiary when he passes away. At that time, the predetermined assets move into the trust. A third party, otherwise known as the trustee, will manage the money or assets in the trust and make distributions to the charity following the trust’s terms.

How Do Trust Funds Work?

There are a few key parties involved in a trust fund agreement. They include:

•   Grantor. This person is the creator of the trust. The grantor outlines the trust guidelines, designating the funds or other assets that will go into a trust as well as the rules that govern it.

•   Trustee. The grantor will name a third party the trustee. This person is responsible for managing trust assets, completing any trust obligations such as distributions, and upholding the fiduciary standard (employed by fiduciary advisors), or, always acting in the best interest of all beneficiaries. A trustee is anyone the grantor deems appropriate for handling the terms of the trust.

•   Beneficiary. The beneficiary is the one who will reap the benefits of the assets or property in the trust.

The grantor determines the terms of the trust, choosing how and when the resources are given to the beneficiary.

Say, for example, a grantor wants to establish a trust fund for their grandchild with the stipulation that the funds can only go toward college expenses. In this case, the grantor can write the trust’s terms to reflect these wishes rather than let the beneficiary spend a financial windfall however they please.

Through use of the “spendthrift clause,” a grantor can also prevent a beneficiary from spending the trust’s assets in a particular manner, such as to pay off credit card debt.

Additionally, when the grantor passes away, trust assets are often guarded against creditors, and can bypass the extensive and sometimes costly probate process. Of course, whether that happens depends on the type of trust the grantor sets up.

Different Types of Trust Funds

The needs of the grantor will determine which trust is suitable for their situation. A financial professional or attorney can help outline the features of each trust and help find a suitable solution for the grantor’s trust needs. Some of the most common types of trust funds include:

•   Irrevocable trust: Once established, this trust cannot be changed or revoked in any way — not even by the grantor.

•   Revocable trusts: Also known as living trusts, revocable trusts permit the grantor to make modifications at will or cancel the trust altogether.

•   Charitable trust: Grantors can establish a trust with a charitable organization as the beneficiary. Typically, charitable trusts can help minimize the grantor’s tax obligation, such as reducing estate taxes.

•   Constructive trust: This type of trust is an indirect trust that the court creates, believing that there was intention on the part of a property owner to disperse it in a precise manner.

•   Special needs trust: Those who have children with special needs may use this type of trust to create support for their child well after their passing. Any asset transferred to the trust will not prohibit the beneficiary from any government funding or benefits they would receive otherwise.

How to Establish a Trust Fund

When creating a trust, it’s important to seek knowledgeable and responsible people or professionals to help create and manage it. For starters, even though it’s not technically necessary to hire a trust attorney, it’s probably a good idea to do so to ensure all legal requirements are upheld and the terms of the trust are solidified.

A trust attorney should be able to identify different trusts that can meet the unique needs of the grantor. From lowering a tax bill to securing assets, trust attorneys understand the intricacies of each type of trust’s advantages, which can help the grantor meet their trust fund objectives.

Depending on the grantor’s circumstances and state of residence, attorney fees can amount to several thousand dollars. To find a trusted attorney, you can start by asking friends and family members for referrals. You can also browse the internet for reviews and cost estimates.

It’s also essential to select a responsible trustee to manage the funds. Since it’s the trustee’s responsibility to manage and distribute the assets, they must be trustworthy and understand the magnitude of the role. After all, the grantor is putting their hard-earned money into the hands of someone else. Using a third-party trustee may help the family avoid scuffles about how assets are divided up.

Why Set Up a Trust Fund?

With the benefits trust funds provide, there are many reasons why a trust fund may make sense for your estate-planning efforts. When asking “Is a trust fund right me?“, consider a few topics:

•   Tax reduction. Depending on the size of an estate, some states may levy an estate or inheritance tax. For 2023, an estate tax return is required for estates that exceed $12,920,000. To avoid taxation, a trust may make sense.

•   Control over asset distribution. A trust gives a grantor greater power over their wealth, since they can set the terms for how the trustee manages the assets.

•   Bypassing probate. When someone passes away, by law, their will must complete the probate process. The creation of a trust can help the estate owner bypass this often costly and extensive process.

•   Safeguarding assets. Depending on the trust, assets can be guarded against creditors and/or asset misuse by the beneficiaries. A trust can also protect a beneficiary with special needs so that they can continue to receive both the financial support from the trust and any other government benefits after their caretaker passes away.

•   Philanthropic efforts. Trusts give individuals who are passionate about a cause a way to support the mission long after they are gone.

Trusts are worth considering for those concerned with how their assets, property, or life insurance benefits will be managed after their passing. Although everyone has a unique situation that may require an array of estate planning tools, a trust fund can be a valuable addition to the mix if the creator can capitalize on trust benefits.

The Takeaway

A trust fund is a special legal arrangement that allows for the protection of certain assets for beneficiaries. Creating a trust may be advantageous for people who have built some wealth and want to control what happens to it once they are gone. There are a number of different types of trusts, each tailored to the needs of the grantor, and sometimes the beneficiary as well.

About the author

Rebecca Lake

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

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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.

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

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How to Create a Home Budget: Step-by-Step Guide

By | Budgeting & Goals, Financial Independence, money | No Comments

Managing your everyday expenses as part of a household can sometimes get complicated. Your finances have been on track, say, but then a frigid winter arrives and sends your heating bill soaring. Or you suddenly have to account for a new sofa purchase and realize you’re perilously close to overdrafting.

Wrangling one’s cash flow and meeting financial goals can be simpler (and often less stressful) if you have a home budget, which is a method of tracking and managing your money as it comes in and goes out. Creating a realistic household budget can help you find the right balance. Learn the ropes of creating your own home budget here.

Key Points

•   A household budget helps manage money by tracking income and expenses, aiding in financial goal achievement.

•   There are different budgeting methods to choose among, such as the 50/30/20 rule or envelope method.

•   One of the first steps is to identify all household expenses, including housing, food, utilities, and transportation, to create an accurate budget.

•   Tools like bank dashboards or apps to track spending and adjust the budget can be used as needed.

•   It’s wise to regularly review and tweak the home budget to accommodate changes in expenses or financial goals.

How to Create a Household Budget

A household or home budget is a plan for how you will utilize the money coming in to cover expenses and savings goals. It typically covers one month at a time, but it can be smart to tweak it to reflect how spending varies over the year. Here are the steps that can help you create a flexible, helpful household budget.

Have a partner? Collaborate on your household budget together so you can be aligned on your financial management, which may mean keeping some aspects of your money separate (say, you might have one shared pool of money and also each have your own checking account as well). And if you have roommates, a household budget can help you identify and divvy up shared expenses appropriately.

1. Choose an Ideal Budget for the Household

A vital first step for creating a household budget is picking a good system. There are many ways to budget, and the right one is the one that works for your personal money style and financial goals. It can be helpful to review some of the options such as:

•   The 50/30/20 budget rule: With this popular system, you divide your take-home earnings as follows. Half or 50% is allocated for the needs in life; food, shelter, health care, minimum debt payments, and the like. Then, 30% goes toward wants: dining out, vanilla lattes to go, entertainment, travel, and fun purchases. The last 20%? That’s for savings or additional debt payments.

•   The envelope budgeting method: With this technique, you think about the different categories of spending in your household and create an envelope for each with the amount of money needed per month in it. Then, each month, you use those funds to pay your bills. So if you have an envelope with $100 in it for dining out and use it all up on the 15th of the month, that’s it! You stop spending in that category or else borrow from a different envelope that has excess funds.

•   The zero-sum budget: With this budget, every dollar has a job to do. The goal is to spend each dollar (and that can mean applying some to, say, building an emergency fund in a savings account.

It’s often wise to review a few different budget methods (you can likely find more online), and pick what looks like the right fit. It may be great, or you may want to pivot and try something else. Or create your own home budget method that uses the best of various techniques. Trial and error can be a valuable part of the process as you find a system that works for you.

2. Identify All Household Expenses

An integral part of almost any household budget will be accounting for your expenses. Many people are well aware of exactly how much money they earn (which is also an important component of a budget), but expenses can be variable and somewhat hard to capture.

While not an exhaustive list, here are some typical ones to note. You can tally up how each category tracks for a few months, and then divide by the number of months to get an appropriate sum for your budget.

•   Housing: This category can include rent or mortgage payments and property taxes. If you are a homeowner, you may have various infrastructure expenses, such as annual HVAC inspections and the like. Don’t forget about your renters or homeowners insurance either. Need a new mattress? That can land in this category, too.

•   Food: It can make sense here to consider how much you spend on groceries in one bucket and dining out (which includes things like wine with colleagues after work) in another.

•   Entertainment: This can include books, movie tickets, streaming platforms, sports events, concerts, plays, downloaded music or e-books, and the like.

•   Utilities: Here’s where you account for heating and cooling costs, phone, wifi, and other expenses that keep your household connected and comfortable.

•   Transportation: This may include a mix of car payments, auto insurance, gas costs, public transportation, rideshare payments, and other expenses.

•   Clothing: With this category, you may want to divide expenses up into necessary expenditures (a new winter coat) and fun purchases, such as an outfit to wear to a holiday party. This can help you determine how much to spend on needs vs. wants.

•   Debt payments: Make sure to include such expenses as credit card payments, student loans, car payments, and the like.

As you consider your spending, don’t forget about those annual or somewhat random expenses that crop up, such as money for the holiday party you always host or gutter cleaning every year.

You’ll want to do your best to accommodate those expenses. If you don’t budget for them, you could wind up dipping into savings or adding to any credit card debt you are carrying.

3. Get the Right Tools to Track Your Expenses

Budgets involve accounting for expenses vs. your income. After reviewing at least a few months’ worth of expenses, you’ll be creating guidelines for spending vs. your income. You can chart different expenditure categories and see how much you can allocate toward them and where you can make some cuts. You might focus on lowering spending on, say, dining out so you can put more money toward debt repayment or rising property taxes.

To help you with this, you may also want to select the right tools to help you track your expenses as monthly variations can impact on your financial standing. A few options:

•   A good place to start can be to check out the tools your financial institution offers. Many traditional and online banks have dashboards, trackers, alerts, and other ways to monitor (and then adjust) your spending.

•   Another option is to try third-party tools available online and as apps. These can be free or may involve a fee for premium features.

•   For some people, setting up a budget in Excel works well. This can involve logging your expenses regularly to see how you’re tracking.

•   For others, the right tools could simply be a dedicated notebook and colored pens or an accordion folder to keep receipts.

These tools can help motivate you to dive in, similar to the way buying back-to-school supplies used to get you psyched up for the start of classes. They can keep you engaged as you work with the guardrails your budget provides.

Recommended: 50/30/20 Budget Calculator

4. Monitor and Change Your Budget As Needed

Setting up a budget is all about having a framework for managing your money. It helps you keep spending in check and achieve your financial goals. A few points to note as you live with a household budget:

•   It often takes tweaking to get your budget balanced. For instance, when inflation is surging, you may find expenses like groceries, gas, and utilities rising. You might have to trim elsewhere to keep your budget humming nicely along. Or life happens: Your sister gets engaged, and you run out and buy her a great gift that requires some budget retooling.

•   It can be wise to check in with your budget every week or so to see how you’re tracking and make any changes needed. For instance, if your rent goes up when you renew your lease, you might find a lower-priced health insurance and be able to rebalance your household budget.

•   If you discover that you’ve made your home budget too intricate and are avoiding it for any reason, switch to a different system.

At the end of the day, how to set up a household budget is about making your money work for you, so that you can spend it on the things (and people) you love. Make changes as you see fit. Flexibility in a budget is important to its success. If you find that you are having a hard time sticking to your budget, you might decide to work with a financial counselor to help you with professional advice.

Recommended: 10 Most Common Budgeting Mistakes

The Takeaway

Creating a household budget can be a good way to monitor your earnings and expenses. The process typically involves picking a budgeting method, accounting for expenses (such as utilities and food costs), using tools to track your spending, and then adjusting your budget as needed. Developing a household budget can be a path to managing your money better and meeting your financial goals.

FAQ

What is the 50/30/20 budget rule?

This popular budget technique involves allocating 50% of one’s take-home pay to the needs of life (such as food, shelter, transportation), 30% to the wants of life (fun spending on dining out, entertainment, and more), and 20% to savings or additional debt payments.

How do you start a household budget?

To start a household budget, a person can pick a budgeting method and then allocate their earnings toward expenses each month. Tracking one’s spending and working toward goals (such as an emergency fund) can be an important part of the process.

What is usually the biggest household expense?

For most Americans, the biggest household expense is housing. Research shows that this can typically account for 33% or more of the average person’s spending, and that figure can soar higher in certain areas, such as major cities.

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

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

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