Financial Topics Archives | Page 452 of 800

Sep

2023

What Happened During Tulip Mania?

By Ashley Kilroy | Growing Wealth, invest, Investing | Comments Off

One of the most famous instances of an asset bubble was the “Tulip Mania” that erupted in Holland during the 17th century. It was the first recorded major financial bubble, during which demand for tulips exploded, and prices for the flowers followed suit.

This led some investors to speculatively purchase tulips, resulting in losses when prices fell back down. Despite Tulip Mania occurring centuries ago, it can still be used as a history lesson for current traders and investors.

What Was Tulip Mania?

Tulip Mania was a speculative frenzy that erupted in Holland during the 17th century. The Dutch were newly independent of Spain and building themselves into prosperous traders. The mid-1600s was a period of wealth for them, as they benefited from rare imports brought through the Dutch East India Company.

Interest in exotic items was at an all-time high, and collectors became fascinated with not just tulips, but “broken” tulips. These tulips came from bulbs and grew into striped or multicolored patterns. As demand grew, more companies began selling bulbs.

The most famous tales about Tulip Mania sound like something out of a book. People of all walks of life bought the flowers in a frenzy at sometimes extremely high prices. They hoped for significant returns and to escape their social classes, but they met financial disaster. Those investors fell into ruin when the tulip bubble burst in 1637 – similar to the dotcom bubble in more recent times – and some of the stories even detail tragic endings; people losing everything and drowning themselves in the canals. All because a tulip-incited mass hysteria that created a financial crisis.

But, is it really true?

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

What Really Happened During Tulip Mania?

The “mania” in the story of Tulip Mania comes from an 1841 account by a Scottish author named Charles MacKay. His Memoirs of Extraordinary Popular Delusions and the Madness of Crowds detailed a “tulipomania” where people poured years of salaries into the speculative tulip trade. From farmers, to nobles, to chimney-sweeps, he documented every class buying in. Then, the memoir described mayhem following the market collapse in 1637. Ultimately, MacKay created a dramatic tale that was more fiction than fact.

There was a Dutch tulip bulb market during the Dutch Golden Age. However, traders were limited to buyers with the finances to invest in luxury items. Typically, this group included merchants, artisans, and the upper class.

Additionally, the price increase was not consistent. Between December 1636 and February 1637, some highly sought-after bulbs experienced a price spike. Some of the most expensive went for 5,000 guilders, which equaled the value of a nice home in 1637. Or, there is evidence that the highest bid totaled out to 5,200 guilders. That matched 20 times the yearly salary of a skilled worker. But these prices were the exception, not the rule.

That leaves the final part of the story: the fallout.

Tulip Mania Bubble Burst

Tulip Mania is the classic and most well-known historical example of a financial bubble.

Traders bought into the bulbs with the intent to resell and earn a profit. However, the flowers’ held no inherent value. Their status as a luxury item determined their prices and pushed demand. In fact, demand grew so high that professional traders began bidding on the product on the Stock Exchange of Amsterdam. People even used margined derivative contracts to increase the number of tulips they could buy despite their financial limits.

But before spring even hit, the bubble burst. The mania fell away after the tulips lost their value when the supply of tulips increased due to warmer weather. With so many of the crops, bulb traders realized the product wasn’t as rare as they thought. An auction in Haarlem in February of 1637 seemed to solidify the thought when the auctioneers failed to sell any bulbs.

When the prices dropped, traders had to sell their holdings for a lower value. However, this led to a few broken relationships and lost reputations, not any tragic deaths.

So, there was no morbid end when the Tulip Mania bubble burst. MacKay reported that Holland’s national economy fell apart due to the volatile market crash, but those claims appear exaggerated. The bubble only impacted those who were involved in the Tulip trade, and most investors were in an easily salvageable position. They financially recovered relatively quickly. On the other hand, growers did struggle to replace the lost buyers when certain contracts fell through.

What Tulip Mania Reveals About Financial Markets

While the story is more straightforward than MacKay made many believe, it is still a valuable moment in economic history. It became a parable that explains the nature of bubbles and the crashes that occurred throughout the history of the stock market.

Part of its value as a lesson stems from its moment in time. Multiple bubbles followed Tulip Mania, including the railroad mania bubble during the 1840s, where commentators encouraged investors to buy into U.K. railway stocks or in the early 2000s when Americans began speculating in residential housing before that bubble burst.

The dynamics behind each of these events is similar to the dynamics of the tulip bubble. Speculators drive up the price of an asset beyond its intrinsic value until the bubble eventually busts and those who bought at the top of the market end up losing money in the market downturn.

The Takeaway

Tulip Mania is perhaps the penultimate example of a market bubble, which still resonates today, even though it occurred in Holland centuries ago. Bubbles can also occur in the pricing of individual securities, sectors, or the broader stock market, eventually leading to a crash in prices.

A stock market crash is an alarming time that can send many investors into a panic. They see the drop and move immediately to selling. However, panic selling in the face of market volatility can have disastrous effects on a portfolio. Either you sell when the market is struggling and earn lower returns as a result, or you miss out on the market rebound.

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Sep

2023

What Is a Leverage Ratio?

By Laurel Tincher | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Leverage ratios are a collection of formulas commonly used to compare how much debt, or leverage, a company has relative to its assets and equity. It shows whether a company is using more equity or more debt to finance its operations. Understanding a company’s debt situation is a key part of fundamental analysis during stock research. Calculating its financial leverage ratio helps potential investors understand a company’s ability to pay off its debt.

A high leverage ratio could indicate that a company has taken on more debt than it can pay off with its current cash flows, potentially making the company a riskier investment.

How to Calculate Leverage

A company increases its leverage by taking on more debt, acquiring an asset through a lease, buying back its own stock using borrowed funds, or by acquiring another company using borrowed funds.

There are several types of leverage ratios, which compare a company’s or an individual’s debt levels to other financial indicators. Some commonly used ones are:

Debt-to-Assets Ratio

This ratio compares a company’s debt to its assets. It is calculated by dividing total debt by total assets. A higher ratio could indicate that the company has purchased the majority of its assets with debt. That could be a warning sign that the company doesn’t have enough cash or profits to pay off these debts.

Formula: Total debt / total assets

Debt-to-Equity Ratio (D/E)

The debt-to-equity ratio compares a company’s debt to its equity. It is calculated by dividing total debt by total equity. If this ratio is high, it could indicate that the company has been financing its growth using debt.

The appropriate D/E ratio will vary by company. Some industries require more capital and some companies may need to take on more debt. Comparing ratios of companies in the same industry can give you a sense of what the typical ranges are.

Formula: Total debt / total equity

Asset-to-Equity Ratio

This is similar to the D/E ratio, but uses assets instead of debt. Assets include debt, so debt is still included in the overall ratio. If this ratio is high, it means the company is funding its operations mostly with assets and debt rather than equity.

Formula: Total assets / total equity

Debt-to-Capital Ratio

Another popular ratio, this one looks at a company’s debt liabilities and its total capital. It includes both short- and long-term debt, as well as shareholder equity. If this ratio is high, this may be a sign that the company is a risky investment.

Formula: Debt-to-capital ratio: Total debt / (total debt + total shareholder equity)

Degree of Financial Leverage

This calculation shows how a company’s operating income or earnings before interest (EBIT) and taxes will impact its earnings per share (EPS). If a company takes on more debt, it may have less stable earnings. This can be a good thing if the debt helps the company earn more money, but if the company goes through a less profitable period it could have a harder time paying off the debt.

Formula: % change in earnings per share / % change in earnings before interest and taxes

Consumer Leverage Ratio

This ratio compares the average American consumer’s debt to their disposable income. If consumers go into more debt, their spending can help fuel the economy, but it can also lead to larger economic problems.

Formula: Total household debt / disposable personal income

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

Ways to Use Leverage Ratio Calculations

Understanding the definition of leverage ratio and the formulas for various types, is the first step toward using the measurement to make investing decisions. Investors use leverage ratios as a tool to measure the risk of investing in a company.

Simply put, they show how much borrowed money a company is using. Each industry is different, and the amount of debt a company has may differ depending on who its competitors are and other factors, such as its historical profits. In a very competitive industry or one that requires significant capital investment, it may be riskier to invest in or lend to a company with a high leverage ratio.

The interest rates companies are paying matters also, since debt at a lower rate has a smaller impact on the bottom line.

Regardless of industry, If a company can not pay back its debts, it may end up going bankrupt, and the investor could lose their money. On the other hand, if a company is using some leverage to fuel growth, this can be a good sign for investors. This means shareholders can see a greater return on equity when the company profits off of that growth. If a company can’t or chooses not to borrow any money, that could signal that they have tight margins, which may also be a warning sign for investors.

Investors can also use leverage ratios to understand how a potential change in expenses or income might affect the company.

How Lenders Use Leverage Ratios

In addition to investors, potential lenders calculate leverage ratios to figure out how much they are willing to lend to a company. These calculations are completed in addition to other calculations to provide a comprehensive picture of the company’s financial situation.

Overall, leverage ratio is one calculation amongst many that are used to evaluate a company for potential investment or lending.

How Leverage is Created

There are several different ways companies or individuals create leverage These include:

• A company may borrow money to fund the acquisition of another business by issuing bonds

• Large companies can take out “cash flow loans” based on their credit status

• A company may purchase assets such as equipment or property using “asset-backed lending”

• A company or private equity firm may do a leveraged buyout

• Individuals take out a mortgage to purchase a house

• Individual investors who trade options, futures, and margins may use leverage to increase their position

• Investors may borrow money against their investment portfolio

The Takeaway

All leverage ratios are a measure of a company’s risk. Understanding basic formulas for fundamental analysis is an important strategy when starting to invest in stocks. Such formulas can help investors weigh the risks of a particular asset investment and compare assets to one another.

There are numerous ways to use leverage ratios, and lenders can use them as well. In all, knowing the basics about them can help broaden your knowledge and understanding of the financial industry.

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Sep

2023

Is Stock Market Timing a Smart Investment Strategy?

By Inyoung Hwang | Growing Wealth, invest, Investing | No Comments

Timing the market, as it relates to trading and investing, requires a whole lot of luck. In effect, it means waiting for ideal market conditions, and then making a move to try and capitalize on the best market outcome. But nobody can predict the future, and it’s a high-risk strategy.

When seeing stock market charts and business news headlines, it can be tempting to imagine striking it rich by timing investments perfectly. In reality, figuring out when to buy or sell stocks is extremely difficult. Both professional and at-home investors make serious mistakes when trying to time their market entrance or exit.

Why Timing the Stock Market Doesn’t Work

Waiting to start investing could cost an individual thousands of dollars over their lifetime. It’s also important to know that by leaving money in a checking or savings account, a person is not protecting their money from inflation risk. That’s because the value of that cash in a checking or savings account erodes if the prices of goods and services increase.

Meanwhile, stock market timing is incredibly complex. Stock prices can be influenced by global macroeconomic events, political events in a country, developments in specific industries or companies, as well as the sentiment of investors as a collective.

Even professional investors struggle to “beat the market,” which often means simplifying trying to outperform a benchmark stock index. In fact, most investors can’t beat the market, and are likely better off sticking to index investing.

Fear and Greed in Investing

When investing, it’s also important not to let two key emotions – fear and greed – drive decisions. That means if the stock market is plummeting, investors may be fearful, but they can’t let those feelings push them toward a decision to sell. That could cause them to “lock in” losses. There’s even a Fear and Greed Index that investors sometimes use to make contrarian decisions.

Take for instance what happened during the 2008 financial crisis. After Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008, the stock market entered a tumultuous stretch. The S&P 500 finally bottomed on March 9, 2009. However, the index eventually regained all its losses in the course of roughly the next four years. Investors who had hung on likely may have recovered their losses.

Meanwhile, greed can cause investors to make poor decisions as well. For instance, during the dotcom bubble, investors bought into many newly public Internet companies without always doing the research. Some of these stocks weren’t even turning a profit, making their businesses vulnerable to going belly up. Ultimately, many at-home investors suffered losses when the dot-com bubble burst.

Of course there are no guarantees when it comes to investing. There’s always risk and volatility involved. However, one of the most tried and true methods for building wealth has been a buy-and-hold strategy when it comes to stock investing.

💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

Why It May Be a Good Idea to Invest Immediately

One of the most important predictors of your returns is the length of time you’ve invested in the stock market. While it’s difficult to predict what the market will do in the near future, an investor can get a better sense over the long term.

When an investor lets their money grow, it has the chance to weather short-term ups and downs and grow over time. On average, the S&P 500, often used as a market benchmark, has grown 7% a year after adjusting for inflation. That doesn’t mean a person can predict what will happen this year, or even in the next 10 years, but looking at long term trends can give them a better sense of market dynamics.

An individual might put off investing because they want to pay off all debts first or achieve other goals, like buying a house. In some cases, that might be true, like paying off high-interest credit cards or saving for a short-term goal, such as a three to six-month emergency fund.

But once a person has an emergency fund and is out of credit card debt, they should consider investing, even if they have a mortgage or student loan debt. Even if they’re only investing for retirement, it’s a good idea to start as soon as possible.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Consider Investing as Early as Possible

The younger you are when you invest, the better the chances are that you’ll reach your financial goals. For example, imagine Person A invests $200 a month in a retirement account starting at age 25.

Person B invests the same amount starting at age 35. They both continue to add $200 a month to their account. When they both retire at age 65, Person A will have almost twice as much as Person B: $306,689, compared to $167,550, assuming a 6% rate of return, 2% inflation rate, and 15% tax rate.

That’s true even though Person A only contributed 33% more to her account. This is how compound interest grows investments, or the power of how earnings from one’s investments can continue to build wealth.

Percentage of Retail Investors in Stock Market

As mentioned, after the 2008 financial crisis, many people were reluctant to invest in the stock market. But in recent years, that’s changed. Retail investor participation in the U.S. stock market increased considerably in 2020 and 2021, for a variety of reasons.

As of 2023, retail inventors comprise about a quarter of all total trading volume in the stock market. That may change in the future, too, as younger investors – with quicker, easier access to investing tools, in many cases – look at getting into the markets.

The Takeaway

Timing the market is difficult, if not impossible, and involves trying to “time” trading or investing moves to coincide with an increase or decrease in the stock market. Nobody can tell what the future holds, so it’s generally hard to accurately pick the right investments at the right time. That’s not to say that some investors don’t get it right from time to time, but as an overall strategy, it’s likely not advisable.

If an individual is skittish about investing, their anxiety makes sense in light of the dramatic market ups and downs many have witnessed in the past two decades. But trying to time the market doesn’t work. Instead, investing in a diversified portfolio can be a good step toward building individual wealth.

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

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Sep

2023

How to Invest in Opportunity Zone Funds

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

The Qualified Opportunity Zone program is an initiative aimed at incentivizing investors to allocate cash to economically distressed communities who could benefit from the capital.

The Qualified Opportunity Zone program, highlighted by the Community Development Financial Institutions Fund, was rolled out as part of the 2017 Tax Cuts and Jobs Act. The program allows some U.S. investors to offset capital gains taxes under certain conditions by investing in some communities.

What Is an Opportunity Zone Fund?

Opportunity Zone (OZ) Investment Funds are a type of alternative investment fund that offers capital gains tax relief for some investments aimed at revitalizing communities. Opportunity Zones represent what the Internal Revenue Service calls an “economic development tool,” designed to accelerate economic development and job creation in economically struggling U.S. communities.

The Treasury Department determines eligible Opportunity Zones, of which there are thousands spread across the United States. Corporations or partners establish an Opportunity Zone Fund and use it to invest in properties located in a recognized opportunity zone.

💡 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.

How to Invest in a Qualified Opportunity Zone Fund

To take advantage of the tax-efficient investment benefits of OZ investing, interested partners must first register as a corporation or partnership, complete IRS form 8996, and file the form along with their federal tax returns. After gaining approval by the IRS, the fund must commit at least 90% of its assets to a specific Opportunity Zone. Once that threshold is cleared, the QOF is eligible for capital gains tax relief.

Qualified Opportunity Fund Investment Requirements

The money that Qualified Funds invest in distressed communities must also fit the Treasury Department’s criteria of an Opportunity Zone investor.

• The Fund must make significant upgrades to the community properties they invest in with fund dollars.

• The investment must be made within 30 months of becoming eligible as a Qualified Opportunity Fund.

• The investment must meet specific Treasury Department financial investment standards. In other words, the investments made in community properties must be equal or superior to the original value paid by the Opportunity Zone investment fund. For instance, if an Opportunity Zone Fund purchased a distressed property for $500,000, that investor has the 30-month window to steer at least $500,000 into the Opportunity Zone property improvements.

• Some Opportunity Zone properties qualify for opportunity funds (private and multi-family homes, business settings and non-profit properties) and some don’t. For example, golf and country clubs, liquor stores, massage parlors, and gambling facilities do not qualify as Opportunity Zone investments.

• The investor must commit to a timely investment in Qualified Opportunity Funds – the longer the time, the bigger the capital gain deferral. The IRS says the tax deferral may last until the exact date on which the Qualified Opportunity Fund is sold or exchanged, or by December 31, 2026. By law, the investor has 180 days from a capital gains sales event to turn those gains into an Opportunity Zone investment.

• The funding program is tiered, with a 10% tax exclusion offered to investors who hold a Qualified Investment Fund investment for at least five years. If the investor holds the investment for seven years, the tax exclusion rises to 15%. If the investor stays in for 10 years or more, the IRS allows for an adjustment based on the amount of the QOF investment based on its fair market value on the exact date the investment is sold or exchanged. Any appreciation in the fund investment isn’t taxed at all, according to the IRS.

• Opportunity Zone investors don’t have to physically reside in the communities they financially support, nor do they have to hold a place of business in that community. The only criteria for eligibility is making a qualified financial investment in an eligible, economically distressed community and the ability to defer the tax on investment gains.

Opportunity Zone Investment Considerations

Investors looking to defer capital gains taxes may view Qualified Opportunity Funds as an attractive proposition. Before signing off on any Opportunity Zone commitments, however, investors may want to review some key facts and investment risks worth keeping in mind when investing in OZs.

Real Estate as an Investment

Since Opportunity Zone funding focuses on distressed communities, most investments are real estate oriented, making it an alternative investment that may be part of a balanced portfolio. Typical Opportunity Zone investments include multi-family housing, apartment buildings, parking garages, small business dwellings/strip malls, and storage sheds, among other structures.

Recognize the Up-Front Cost Realities

Opportunity Zones are a high priority for public policy administrators, which is one reason QOFs require high minimum investments. Up front minimums of $1 million aren’t uncommon with Opportunity Zone Funds, and investors should know that going into any funding situation. In most cases, that means that accredited investors are more likely than other individuals investors to take advantage of OZ investing.

Your Cash May Be Tied up for a Long Time

To optimize the capital gains tax break, Opportunity Zone investors should count on their money being tied up for 10 years. Funds need that time to collect and disseminate cash, choose the appropriate potential properties for investment, and conduct the actual remodeling or upgrades needed to turn those properties into profitable enterprises. Thus, lock-up timetables can go on for a decade or longer.

Management Fees Can Eat into Portfolio Profits

Like any professionally managed financial vehicle, Qualified Opportunity Funds come with investment fees and expenses that can cut into profits. While many investors opt for Opportunity Zone investments for the tax breaks, those investors may also expect their investment to generate healthy returns. To get those returns, they can expect to pay the fees and expenses associated with any professional managed investment fund.

The Takeaway

Investing in Opportunity Zone funds allows some U.S. investors to offset capital gains taxes under certain conditions by investing in some communities. These funds are a type of alternative investment that may be an attractive addition to a portfolio.

Above all else, Opportunity Zone funds come with a healthy measure of risk, including investment risk, liquidity risk, market risk, and business risk. While the promise of a tax break and the opportunity to boost worn-down U.S. communities are appealing, any decision to invest in Opportunity Zones should be made with the consultation of a trusted financial advisor –- ideally one well-versed in tax shelters and real estate investing.

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Sep

2023

Student Loan Disability Discharge Eligibility

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

A debilitating sickness or injury can be life-changing and make it challenging or impossible to pay back student loans. Because of this, borrowers who are considered “totally and permanently disabled” may qualify to have their student loans discharged through a federal forgiveness program known as Total and Permanent Disability Discharge.

Since this is a federal program, it only applies to federal student debt and not private student loans. Here’s what to know about student loan disability discharge, what disabilities qualify for student loan forgiveness, and who is eligible for the program.

Disability Discharge of Student Loans

Student loan disability discharge relieves borrowers of their student loan responsibilities in the event of total and permanent disability. Receiving a Total and Permanent Disability (TPD) Discharge from the U.S. Department of Education means that a qualifying borrower does not need to pay back federal student loans or complete a TEACH Grant service obligation.

Can Student Loans Be Forgiven Due to Disability?

Federal student loans can be forgiven due to disability. Borrowers interested in a disability discharge need to apply for the program and provide documentation to show that they are considered “totally and permanently disabled.” The Department of Education will review the application to determine if an applicant qualifies.

In some instances, the Department of Education may receive information from the Social Security Administration (SSA) or the U.S. Department of Veterans Affairs (VA) that an individual may qualify for a disability discharge of student loans. In these cases, the Department of Education may contact a borrower to provide information about requesting a TPD discharge.

Again, the student loan disability discharge program only applies to federal loans, such as Direct Loans, FFEL Program Loans, or Perkins Loans. This program doesn’t apply to private student loans.

💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

What Is Student Loan Total and Permanent Disability Discharge?

A Total and Permanent Disability Discharge means that a qualifying borrower will not be required to pay back federal student loans or complete a TEACH Grant service obligation.

Loans included in the program are those issued by the William D. Ford Federal Direct Loan Program (Direct Loans, also known as Stafford Loans), the Federal Family Education Loan Program (FFEL), and the Federal Perkins Loans. Borrowers in a TEACH Grant service program may also be relieved from having to complete whatever service obligation remains in their program.

Applying for Student Loan Disability Discharge

If you would like to apply for a disability discharge of student loans, the first step is to fill out a TPD discharge application. The U.S. Department of Education works with Nelnet, a service provider, to process the applications. All correspondence will come from Nelnet, not the DoED.

You’ll also need to gather together documentation showing that you meet the Department of Education’s requirements for being “totally and completely disabled.” There are three ways to provide the necessary documentation:

1. Through the VA

If you are a veteran, you can work with the U.S. Department of Veteran Affairs (VA) to provide the documentation needed to prove that you are permanently disabled from a service-related injury.

2. Through the Social Security Administration

If you are already receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits, you can use documentation from the Social Security Administration (SSA).

3. Through a Physician

You also can have a physician (an MD or DO) certify that you are unable to earn money in any substantial way due to a physical or mental impairment. If you want to take this route, you’ll need to complete your application within 90 days of the physician signing your TPD. Here are the current official qualifications:

• The impairment could result in death.

• The impairment has lasted for a continuous period of at least 60 months.

• The impairment can be expected to last for a continuous period of at least 60 months.

What Happens if I’m Approved for Student Loan Disability Discharge?

It depends on whether you were approved for a disability discharge through the VA, the SSA, or your physician.

If you provided documentation from the VA, the following will happen upon approval:

• You’ll be notified of the discharge

• Your loan holders will be instructed to return any loan payments received on or after the effective date of the disability determination

If you provide documentation from the Social Security Administration or from your physician, there will be an additional step if you qualify: You’ll be notified that you are subject to a three-year monitoring period. Your loans or TEACH work obligation could be reinstated if you don’t meet certain requirements at any time.

During the monitoring period, your obligations may be reinstated in the event that:

• Your annual earnings from employment exceed the poverty guideline amount for a family of two in your state, regardless of your actual family size.

• You receive a new federal student loan under the Direct Loan Program or a new TEACH Grant.

• You receive another payment of a Direct Loan or a TEACH Grant that was first disbursed before your discharge was approved, and the new disbursement has not been returned to the loan holder within 120 days of the disbursement date.

• You receive a notice from the SSA stating that you are no longer disabled.

It’s important to understand that the DOE and Nelnet will monitor your ability to earn an income during this time. Your loans will resume in the event that you can earn an income above the poverty line, you receive new federal loans, or the SSA determines that you’re no longer disabled.

What Is Student Loan Refinancing?

If you don’t qualify for a TPD discharge, there are other options for lowering student loan costs. You can contact your loan servicer to find out if you’re eligible for deferment or forbearance — or to see if you’re eligible for an income-driven payment plan. You may be able to extend your loan term to lower your monthly payments (though you’ll end up paying more in interest over the life of the loan.)

Refinancing your student loans can also help you lower your repayment costs. Some lenders, like SoFi, can refinance both federal and private loans.

Because you’re using a new loan to pay off an existing loan, it’s also possible to change the terms of the loan, such as securing a lower interest rate or shortening the loan term (both of which mean saving interest over the life of the loan). You could also lengthen the loan term (which, again, can lower your monthly payments, but potentially result in paying more interest over the life of the loan).

Keep in mind that if you refinance federal loans, you’ll lose access to federal benefits and protections, including eligibility for TPD, income-driven repayment, or other federal loan programs such as deferment or forbearance. If you think you might want to pursue a disability discharge or other federal loan programs in the future, refinancing your federal loans may not be a good choice for you. If you have private loans, however, it may be worth exploring.

Refinancing Student Loans With SoFi

Refinancing could save you money over the life of the loan, especially if you can qualify for a lower interest rate. But it’s important to understand that refinancing is done with a private company, and therefore, the new loan is a private loan without access to federal benefits and protections, such as a TPD discharge.

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

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

FAQ

What disabilities qualify for student loan forgiveness?

To receive federal loan forgiveness under the Total and Permanent Disability Discharge program, you must have a mental or physical disability that severely limits your ability to work now and in the future. You’ll need to provide documentation of this total and permanent disability through the VA, the SSA, or a healthcare provider.

Can you get student loan forgiveness if you become disabled?

A borrower can apply for a student loan disability discharge only if they become totally and permanently disabled. An individual who qualifies for a TPD discharge is not required to pay back their student loan or complete their TEACH Grant service obligation.

Do you have to pay back student loans if you are on disability?

If a person is receiving SSDI or SSI benefits from the Social Security Administration and their next disability review is not for another five to seven years, then a person is considered totally and permanently disabled and eligible to apply for a TPD discharge. A three-year monitoring period follows a TPD discharge that is based on documentation from either the SSA or a doctor.

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 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.

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.

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.

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