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Students can apply for scholarships while they’re in college — this financial aid award isn’t just for incoming freshmen. Getting a scholarship at any point during your college years, whether you’re a sophomore or a senior, can help cover the cost of your education. Not only that, you don’t have to repay scholarships because they are a form of gift aid. Scholarships are essentially free money.

Learn more about how to get scholarships while in college, where to find them, and tips on applying for them.

Benefits of Applying While Already in College

Applying for scholarships while you’re in college can help bridge the gap between your college savings and the cost of your education.

The average cost of college, including tuition, books, supplies, and living expenses, is $38,270 per year, according to the Education Data Initiative. The average cost of tuition alone is $9,750 for in-state students and $27,457 for those out-of-state. Scholarships can help reduce the financial burden.

Not only that, applying for scholarships while you’re already in school could help cover unexpected expenses that pop up during the academic year. For instance, perhaps there are fees for materials needed for some of your classes that you didn’t know about or budget for.

Another perk of applying for scholarships while you’re in school is that you may qualify for more or different types of scholarships than you did as an incoming freshman. Maybe you declared or switched your major in your sophomore year — that could make you eligible for awards in your new area of study. Some scholarships are even specifically for upperclassmen, so you can explore those options as well.

Finding Scholarships for Current College Students

Many organizations and institutions offer scholarships, including merit scholarships, to students already in college. Check out these resources.

Your College or University

Your college financial aid office can often help you find scholarship opportunities. They can typically give you information about local, state, and national scholarships you might qualify for. Additionally, an advisor within your major can guide you to scholarships related to your field of study.

Scholarship Search Engines

Use free online scholarship search tools to discover scholarships tailored to your educational background, extracurricular activities, personal interests, and family history. There are a number of these tools, including Fast Web and College Board. Filter the results by your current year in school to find the ones that fit your criteria.

Associations, Businesses, and Organizations

Some big companies provide scholarships for employees and their children. Reach out to your parents’ employers to find out about any scholarship options they may offer.

You can also find scholarship opportunities through local businesses; libraries; churches; associations like the American Legion, NAACP, and Girl Scouts; or other organizations you are connected to.

There are even nonacademic scholarships you might qualify for, such as those based on talent, like dance or drawing, and sports. Cast a wide net to see what you might be eligible for.

And keep in mind that if you don’t get enough in scholarship funds, you can explore other types of financial aid, including grants and federal and private student loans.

How to Apply for Scholarships While in College

When applying for scholarships while in college you’ll need to balance your coursework with the scholarship application requirements and deadlines. Here’s how to stay organized and proceed.

•   Practice due diligence. Make sure you meet the basic eligibility requirements of the scholarship.

•   Read the application carefully. Review all the steps to apply. Find out what paperwork is needed, such as transcripts, and gather everything together.

•   Supply any special requests. For instance, a scholarship might require you to write an essay or include an example of your creative work.

•   Meet all deadlines. Make sure to send in your application before it’s due. Give yourself plenty of time so that you’re not rushing to submit it at the last minute.

How to Improve Your Scholarship Applications

Securing a scholarship takes time, work, and dedication. These tips may boost your chances of scholarship success.

Apply Year-Round

Develop a routine for consistently searching for and submitting scholarship applications throughout the year. For example, set aside an hour or two every Saturday afternoon to work on it. There are many unclaimed scholarships every year, so you may be able to find one of those.

Don’t Be Afraid to Apply Again

If you don’t win a scholarship that seems tailored to you, don’t give up. Reapply next year. Most scholarships allow you to apply multiple times, provided you continue to meet the requirements.

Watch Out for Mistakes

Pay strict attention to scholarship application rules and directions, and follow them closely to improve your chances of success. Re-read your application multiple times to check for typos and errors. Other common mistakes to avoid include failing to stick to the word count, not supplying requested materials, and submitting more references or recommendations than the number requested.

Make a Strong First Impression

Scholarship committees may be reviewing hundreds of submissions, so it’s crucial to make your application as strong as possible. For instance, when an essay is required, start yours in a compelling way that will grab the judges’ attention. Talk about the impact you hope to have once you complete your education.

For instance, if you’re earning your degree in chemistry, you might talk about how you plan to use your education to focus on the environment by helping companies develop more sustainable business practices. This kind of information helps the judges understand your goals and gives them context for how the scholarship funds will be put to good use.

Small Scholarships Can Still Make a Difference

You’ll likely want to apply for scholarships with large awards — and you should — but at the same time, don’t overlook smaller scholarships. Apply to them along with the bigger scholarships. If you can win several smaller awards, they can add up substantially.

Refine Your References

When reviewing scholarship applications, judges may look for what makes each student unique. If a scholarship requires a reference letter, consider it a prime opportunity to let the scholarship committee know who you are and what you can do.

Faculty members like professors can be excellent sources for recommendation letters. If you’ve taken several courses with a certain professor and they can attest to the quality of your work, ask if they would be a scholarship reference for you.

The Takeaway

Applying for scholarships while you’re in college can be a smart strategy to help cover your education costs. There are a variety of scholarships available, and numerous online tools to help you find the ones you may be eligible for.

Regularly searching and applying for scholarships throughout your college years, along with other types of financial aid, could help you get the college funds you need and reduce the amount you have to borrow. And even if you do graduate with student loan debt, keep in mind that it’s possible to refinance student loans for better rates and terms if you qualify for them.

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

How many scholarships can a current student get?

In general, students can get any number of scholarships — there is no defined limit. But check your college’s rules regarding scholarships. For instance, some schools may not allow students to combine scholarships awarded by the college itself. And remember that your total financial aid usually can’t be more than your school’s cost of attendance.

What does “stacking scholarships” mean?

Stacking scholarships refers to combining different scholarships to help pay for college expenses. Some schools don’t allow scholarship stacking. Check with the financial aid office to find out about your school’s policy on stacking.

Can you get a scholarship in the middle of the year?

Yes, you can get a scholarship in the middle of the school year. Scholarships are available year-round, so you can generally apply for them at any time as long as you meet the scholarship deadline.

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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. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

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.

SOSLR-Q324-006

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Tuition reciprocity agreements allow students from one state to attend a public college or university in another state for reduced or in-state tuition rates. Tuition reciprocity can be a great option for students who want to cross state lines to attend college but can’t afford expensive out-of-state tuition prices.

Learn how tuition reciprocity works, the states that have reciprocity agreements, and how to qualify.

What Is Tuition Reciprocity?

Tuition reciprocity is an agreement that lets students in participating states attend college or university in other participating states for a discounted tuition or the in-state tuition rate rather than the out-of-state tuition fee.

This can be a significant savings because out-of-state tuition is typically far higher than in-state tuition. In 2023-2024, the average in-state tuition rate at four-year public institutions was $11,260, while the average out-of-state tuition was $29,150 — or 159% more expensive. Tuition reciprocity can be a valuable way to make college more affordable.

With a lower tuition rate, an individual may end up with less student loan debt since theoretically they wouldn’t need to take out as much in federal or private student loans.

How Does Tuition Reciprocity Work?

Tuition reciprocity agreements are offered by states throughout the country, though not every state has them. Generally, states with these agreements border each other or are located in the same geographic region. Students who are residents of one of the participating states and go to school in another participating state may be eligible for these programs, which can make it easier to cover the cost of attendance.

Tuition reciprocity isn’t automatic, however. It depends on factors like the type of school you’re applying to, the degree program you’re interested in, and whether you can qualify for tuition reciprocity through that degree program. For instance, to qualify, you might need to pursue a major that’s not offered by colleges in your home state.

Contact the schools you’re considering to learn more about their in-state tuition information and how their tuition reciprocity process works.

Recommended: Scholarship Search Tool

Public vs. Private Colleges

Tuition reciprocity is more common at public institutions than it is at private colleges. While some private schools do have reciprocity agreements, the reduced or discounted tuition rate they offer is typically much less than it is at public colleges.

Which States Have Tuition Reciprocity Agreements?

Many states have tuition reciprocity agreements, and there are networks of these programs in different regions of the country. Here are some of them.

Midwest Student Exchange Program (MSEP)

The Midwest Student Exchange Program offers reduced tuition at more than 70 public colleges and universities for students from the following Midwestern states:

•   Indiana

•   Kansas

•   Minnesota

•   Missouri

•   Nebraska

•   North Dakota

•   Ohio

•   Wisconsin

Students who are able to take advantage of MSEP save an average of $7,000 a year on tuition.

New England Board of Higher Education (NEBHE) Tuition Break Program

Permanent residents of the states listed below who are enrolled in an eligible degree program at a two- or four-year public college or university in New England may be able to save an average of $8,600 a year in tuition through the New England Board of Higher Education (NEBHE) Tuition Break Program.

•   Connecticut

•   Maine

•   Massachusetts

•   New Hampshire

•   Rhode Island

•   Vermont

Academic Common Market (ACM)

The Academic Common Market of the Southern Regional Education Board (SREB) offers in-state tuition rates at more than 2,200 undergraduate and graduate programs at over 100 public institutions across the southeast. ACM typically saves students more than $14,000 per year.

The participating states are:

•   Alabama

•   Arkansas

•   Delaware

•   Florida (only participates at the graduate level)

•   Georgia

•   Kentucky

•   Louisiana

•   Maryland

•   Mississippi

•   Oklahoma

•   South Carolina

•   Tennessee

•   Texas (only participates at the graduate level)

•   Virginia

•   West Virginia

Regional Contract Program

•   Arkansas

•   Delaware

•   Georgia

•   Kentucky

•   Louisiana

•   Mississippi

•   South Carolina

Western Undergraduate Exchange (WUE)

More than 160 public colleges and universities in the states below participate in this program. On average, students save $11,000 a year through WUE.

•   Alaska

•   Arizona

•   California

•   Colorado

•   Commonwealth of the Northern Mariana Islands

•   Guam

•   Hawaii

•   Idaho

•   Montana

•   Nevada

•   New Mexico

•   North Dakota

•   Oregon

•   South Dakota

•   Utah

•   Washington

•   Wyoming

Western Regional Graduate Program (WRGP)

Those going to grad school at a public university in one of the following states may be able to take advantage of a graduate student reciprocity agreement through the The Western Regional Graduate Program. Students who are eligible for WRGP can save an average of $14,000 a year.

•   Alaska

•   Arizona

•   California

•   Colorado

•   U.S. Pacific Territories and Freely Associated States

•   Hawaii

•   Idaho

•   Montana

•   Nevada

•   New Mexico

•   North Dakota

•   Oregon

•   South Dakota

•   Utah

•   Washington

•   Wyoming

Professional Student Exchange Program (PSEP)

Aimed at students pursuing careers in health fields, this program may help them save between $8,900 to $35,700 per year on tuition. The following states and territories participate in PSEP:

•   Alaska

•   Arizona

•   Commonwealth of Northern Mariana Islands

•   Colorado

•   Guam

•   Hawaii

•   Montana

•   Nevada

•   New Mexico

•   North Dakota

•   Utah

•   Wyoming

Recommended: How to Save Money in College

What Are the Advantages of Tuition Reciprocity?

By qualifying for tuition reciprocity, you can reap a number of benefits, namely substantial savings on your college education. The advantages of tuition reciprocity include:

•   A tuition rate that could be half of what you’d pay as an out-of-state student. Over four years, that may result in tens of thousands of dollars saved.

•   The opportunity to pursue an academic degree you might otherwise not be able to afford. Some tuition reciprocity programs can even put graduate school within reach.

•   Less college debt to repay. With a significantly lower tuition rate, you likely won’t have to take out as much in student loans to help fill the gap. And once you graduate, you could consider student loan refinancing for your private student loans to potentially save even more money if you can qualify for a lower interest rate or better terms.

Applying for Tuition Reciprocity

To take advantage of a tuition reciprocity program, you’ll need to be a resident of one of the participating states and planning to go to school in another participating state. There may be other eligibility criteria as well, such as living in your state of residence for a certain number of years. Check with the program to see what the specific requirements are.

Next, find out if tuition reciprocity is available at the school(s) you’re interested in. If it is, learn how the process works. The application process may differ from school to school. For instance, you might need to be accepted to a school first and then separately apply for the tuition reciprocity program. Ask your school’s admissions or financial aid office about the details.

The Takeaway

Tuition reciprocity can significantly reduce college costs by giving eligible students access to reduced or in-state tuition rates. Check to see what programs are available in your state or region, what the eligibility criteria are, and if the schools you are interested in participate in the program.

By taking advantage of tuition reciprocity, you may have less student loan debt to repay when you graduate. And there’s the possibility to refinance your student loans in the future for better rates and terms if you choose to, which may also help you save money on your education.

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 states have reciprocity for in-state tuition?

Many states across the country offer tuition reciprocity. Check with your state as well as any school you’re considering to see if they participate in such a program. Public colleges and universities are more likely to offer tuition reciprocity than private schools are.

How do tuition reciprocity agreements work?

Tuition reciprocity agreements allow students to get reduced or in-state tuition rates at public colleges and universities in another state for significant savings. Students who are residents of one of the participating states and go to school in another participating state may be eligible.

What is reciprocity as it relates to tuition?

Tuition reciprocity is an agreement that allows students who live in one participating state to attend a college or university in another participating state for reduced or in-state tuition rates, which are typically substantially lower than out-of-state rates.

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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. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

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.

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Earning your Master of Business Administration (MBA) requires a major investment of time, money, and energy, so it can be wise to choose an accredited program. Having accreditation means that a business school meets rigorous standards for a high-quality education.

Accrediting organizations examine a program’s curricula, faculty, career outcomes, and more, all of which can give you vital intel on the quality, value, and marketability of the degree. Earning accreditation isn’t a one-time event, either — schools must undergo the process on a regular basis to ensure they continue to meet accreditation standards.

Learn more about MBA accreditation so you can pick a program that will set you up for academic and career success.

Understanding MBA Accreditation

Demand for MBA degrees is high, and for good reason: Approximately 40% of the Fortune 1000’s C-suite holds the degree.

There are many MBA programs out there to choose among (one recent count found 579 across the U.S.; other figures go higher still). However, not all of them are accredited. Here’s what it means for an MBA program to have accreditation.

Definition and Purpose

Accreditation means that a program or school has met high standards for educational quality and student success. You might come across institutional accreditation, which means that the entire school is accredited, or programmatic accreditation, which applies solely to the MBA program itself.

More specifically:

•   Official accreditation agencies require MBA programs to meet high standards (more on that below). During an accreditation review, an agency will consider the program’s curricula, faculty qualifications, learning and career outcomes, student achievement, and other factors.

•   MBA accreditation suggests that a program will provide the training you need to succeed in the business world, as well as appeal to future employers. Plus, an MBA program must be accredited to qualify for federal financial aid, including federal student loans and grants.

This is not to say that you couldn’t get a good education and achieve a high-flying career in business from an unaccredited MBA program. Accreditation, however, adds a layer of confidence about where you might pursue this graduate degree, one that tens of thousands of American students pursue annually.

Accrediting Bodies and Standards

There are a number of accrediting bodies out there, but look for one that’s officially recognized by the U.S. Department of Education (DOE) or the Council for Higher Education Accreditation (CHEA). The DOE maintains a list of agencies here, or check out the CHEA directory.

You might come across both national and regional accrediting agencies, but there’s no distinction between the two since a change in DOE regulations in 2020. Now, MBA schools can apply for accreditation from any of these agencies, regardless of their location.

Accrediting bodies, which are comprised of educational professionals, establish operating standards for schools and programs. They also determine if a school meets those standards. After the review process, the agency will publicly announce its findings by issuing an accreditation.

Benefits of Attending an Accredited MBA Program

Attending an accredited MBA program isn’t necessary, but there are several benefits to doing so.

Quality Assurance and Rigor

Accreditation indicates that an MBA program has a strong curriculum with qualified faculty members. It shows that it consistently aligns with educational standards and will provide rigorous training to its students that prepares them for a career in business.

Employer Recognition and Reputation

Accredited programs also tend to have a better reputation in the eyes of future employers than non-accredited ones, making it easier to get hired following graduation. (That can also help you pay off your student debt, whether federal or private student loans, refinanced or otherwise, when you join the working world.) If you’re already working and hoping to use a tuition reimbursement benefit, your employer may require that you attend an accredited MBA program.

Transferable Credits and Mobility

If you decide to transfer schools, it may be easier to transfer credits from an accredited MBA program than a non-accredited one. Plus, earning your degree from an accredited business program may be necessary if you want to advance your education even further with a doctoral-level degree.

Recommended: Student Loan Refinancing Calculator

Top MBA Accrediting Organizations

There are several agencies that review and accredit MBA programs specifically. Here are three of the top organizations determining MBA accredited schools. It’s worth noting that some online MBA programs are also accredited.

Association to Advance Collegiate Schools of Business (AACSB)

Founded in 1916, the AACSB is the oldest accreditation organization for business and accounting programs. This nonprofit has a rigorous accreditation process, and schools must undergo review every five years to maintain their accreditation. The AACSB looks for teaching excellence, curriculum development, research quality, and student success, among other standards.

Accreditation Council for Business Schools and Programs (ACBSP)

The ACBSP is an international nonprofit organization that accredits business programs across the globe. Its process takes around three years, and it has accredited business programs at 1,200 member campuses since its formation in 1988. You can check out the ACBSP’s directory to see if your MBA program holds ACBSP accreditation.

International Accreditation Council for Business Education (IACBE)

The IACBE has been accrediting business and accounting programs since 1997. The process takes two to four years, and schools must meet high standards for teaching processes and educational outcomes. You can search the IACBE site to find accredited programs.

Recommended: Student Loan Refinancing Guide

Choosing an Accredited MBA Program

Choosing an accredited MBA program can help ensure you receive a high-quality education and make a good impression on potential future employers. Plus, you may not qualify for federal financial aid if you attend a non-accredited school, which means you’d miss out on federal student loans, grants, and work-study. (You can also access private MBA loans; it can be smart to shop around and see what MBA loan rates are from at least a few lenders.)

Research Accreditation Status

You can typically find a school’s accreditation status on its website, but reach out to the school directly if you can’t locate this information. As noted above, some popular MBA accrediting agencies, such as the ACBSP, also maintain a directory of schools for you to reference.

Evaluate Program Curriculum and Faculty

While accreditation is a good sign, make sure to do your own research on an MBA program’s curriculum and faculty. Check out what classes are available, who the faculty are, and any research projects or other opportunities that may help you achieve your goals. You might also speak to current students or recent alumni to learn about their experiences and make sure the MBA is worth it.

Align with Career Goals

For most, an MBA program is only worthwhile if it helps them achieve their career goals. Many students often need MBA loans to undertake their studies. Before making that commitment, consider what your career goals are and how the program can equip you with the skills and experiences to accomplish them. Along with speaking to faculty and administrators at the school, you could also connect with people in your target industry for education and career advice.

The Takeaway

MBA accreditation is a voluntary and comprehensive process that schools may undertake to demonstrate the quality of their offerings and maintain eligibility for federal financial aid. There are several organizations that accredit these programs, meaning that they have met high standards for curriculum, faculty, and student outcomes. Plus, they undergo review every few years to maintain accreditation and meet evolving educational guidelines.

If, during your educational journey, you are looking for ways to refinance student loans, see what SoFi offers.

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

Are online MBA programs accredited?

An online MBA program may or may not be accredited. Look for the program’s accreditation status on its website. You can also reach out to the school directly to gather this information.

Do employers prefer accredited or non-accredited MBAs?

Employers generally prefer accredited MBA programs. Accreditation indicates that a program provides rigorous instruction and training and prepares its students for post-graduation success.

How often are MBA programs reviewed for accreditation?

The frequency of accreditation review for MBA programs can vary by accrediting agency. For AACSB, one of the most prestigious accreditors for MBA programs, schools must undergo the review process every five years to maintain their accreditation.

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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.

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.

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.

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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A due-on-sale clause — also known as an alienation clause — is wording commonly found in the fine print of a mortgage agreement. It allows lenders to enforce being repaid for the balance of a home loan when the property is either sold or, in some instances, transferred to another owner. That’s a simple explanation, but there is more to it so let’s dig a bit deeper.

What Is a Due-on-Sale Clause?

Understanding how home loans work is an important part of the home-buying process. Here’s what to know about a due-on-sale clause before you sell or purchase a home:

Definition and Purpose

A mortgage due-on-sale clause or alienation clause requires that the loan be paid in full when the home is sold. You may have heard about assumable mortgages becoming more popular as a way for buyers to sidestep higher interest rates by taking over a seller’s mortgage at a lower-than-typical rate. The due-on-sale clause prevents one buyer’s mortgage from being assumed by whoever purchases the house next.

Lenders began using due-on-sale clauses in the 1970s as interest rates spiked and buyers assumed the seller’s loan instead of applying for a new one with a higher rate. While homeowners won several court battles against this rule during the time, the U.S. Supreme Court ultimately ruled in favor of the banks. Congress formally legalized the due-on-sale clause for mortgages with the Garn-St. Germain Federal Depository Institutions Act in 1982.

Where It’s Found in Mortgage Documents

A due-on-sale clause should be located in your loan agreement. If you can’t find it in your paperwork, it’s worth calling your lender, especially if you plan to sell your house soon. Most, if not all, conventional loans are not assumable, meaning there should be a due-on-sale clause in place.

Some mortgages are assumable, and don’t have this type of clause in the loan agreement. Assumable loans include:

•   FHA loans backed by the Federal Housing Administration

•   VA loans backed by the U.S. Department of Veterans Affairs

•   U.S. Department of Agriculture loans

Remember, though, that even if a loan is assumable, the new borrower still needs to qualify for the loan. In many situations, however, they don’t have to go through the whole mortgage process. They simply get to assume the existing mortgage from the original owner. Also note that there are unique FHA flipping rules that you may need to be aware of if purchasing a home that has been owned by the seller for a brief time is a part of your plan.

Recommended: Choosing a Mortgage Term

How the Due-on-Sale Clause Works

Now that you understand what an alienation clause or due-on-sale clause is, find out how it works so you can avoid lenders invoking this portion of your loan agreement.

Triggering Events

Lenders are notified when ownership of a property securing a loan is transferred. If the seller doesn’t automatically pay off the loan balance at closing, the lender may choose to invoke the due-on-sale clause.

There are a few other situations that would cause a lender to invoke the due-on-sale clause. These include:

•  Transferring the property to a family member without a death or divorce

•  Transferring the property into an irrevocable trust

•  Transferring the property into a lease of more than three years

•  Changing ownership from a personal property to an LLC or vice-versa

•  Creating a junior lien that would lower the lender’s stake in a property

Lender Rights and Actions

In these cases, the lender could require the recipient of the property to transfer the title back to the original owner. The recipient usually has a set amount of time to do this, such as 30 days.

Another option for lenders, however, is to foreclose on the home if the original borrower is unable to provide the remaining mortgage balance. In these situations, refinancing the property or possibly modifying the original loan are also possibilities. (To see how much your monthly payment would likely be after a refinance, use a mortgage calculator.)

Impact on Property Transfers

The due-on-sale clause makes it more difficult to transfer properties to new owners. After the Supreme Court ruling, those recipients must meet certain criteria. Plus, even if they do meet the criteria, they must still qualify for the loan.

Exceptions to the Due-on-Sale Clause

There are exceptions that cause the due-on-sale clause to not take effect. Those exceptions are:

•  Divorce: If the original borrower loses the house in a divorce settlement, the due-on-sale clause should not go into effect.

•  Inheritance: Should the primary borrower die, then their children or surviving spouse can inherit the house without triggering the due-on-sale clause. With the average mortgage length being 30 years, it’s understandable that unique rules had to be put in place to account for buyers dying before their mortgage was fully paid.

•  Joint tenancy: If two or more people jointly own a property, then the death of one owner doesn’t trigger the due-on-sale clause. Instead, whatever portion of the property was owned by the deceased borrower is transferred to the other remaining borrowers.

•  Living trust: When a property is transferred to a living trust, there are no legal ramifications. A living trust is when a trustee is designated by a property owner to manage an estate.

Implications for Buyers and Sellers

If you’re the seller, the due-on-sale clause simply means that whatever money you make in the sale of your house must be adequate to satisfy your remaining loan balance. If it doesn’t, you have to be able to pay off your remaining mortgage obligations with other funds.

For the buyer, the implication of the due-on-sale clause is that the seller will have a minimum price that needs to be met in order for them to sell the home. The original lender must receive the amount it is due, or the house will not be free and clear for sale.

Fortunately, the desire to transfer an existing mortgage to a new borrower who is unrelated to the seller doesn’t happen very often.

Legal Aspects and Enforcement

It’s important to remember that there are situations where the due-on-sale clause cannot be invoked. As noted above, a title transfer that occurs because of a divorce or death usually forbids lenders from seeking immediate repayment. And even if lenders are within their rights, they still must provide ample notification before invoking the due-on-sale clause.

Recommended: Active Contingent in Real Estate: What You Need to Know

The Takeaway

The due-on-sale clause (or alienation clause) limits who can take over an existing mortgage from a homeowner, and it essentially establishes a minimum sales price that a buyer would have to meet in order for a seller to be able to agree to a contract. This is because lenders must always receive any remaining money owed on a mortgage when a home is sold.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can I transfer my property without triggering the due-on-sale clause?

It depends on the situation, but there are some situations where it can be done, depending on the original loan agreement. For example, it’s often possible to transfer a property during a divorce, and it’s also possible to transfer the property to an immediate family member after the death of the primary borrower.

What happens if I violate the due-on-sale clause?

If you violate the due-on-sale clause, the biggest thing that can happen is that your lender can demand immediate full repayment of your outstanding loan balance. If you are unable to pay, then you are at risk of foreclosure, which can damage your credit score for seven years.

Are there any mortgages without a due-on-sale clause?

It’s rare to find a conventional mortgage without a due-on-sale clause because it’s in the lender’s best interest. However FHA, VA, and USDA loans typically don’t have this clause.

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Photo credit: iStock/Perawit Boonchu

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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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^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency. This article is not intended to be legal advice. Please consult an attorney for advice.

SOHL-Q324-026

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Whether you’re thinking about paying off a debt or mulling over how to increase your credit score — or both — it’s reasonable to ask if paying off debt helps your credit rating. The answer, though, is more complex than a simple yes or no.

Let’s unpack how paying off a debt can either raise or reduce your credit score, depending on the circumstance; how credit scores are calculated; and how managing your credit utilization can give you some control over your credit score.

How Paying Off a Debt Is Connected to Your Credit Score

What affects your credit score is on a lot of people’s mind. Your credit score is determined by five factors, some of which are weighted more than others. Paying off a debt can affect each of these factors in different ways, causing your score to rise or dip. Sometimes changes in two factors can even cancel each other out, leaving your score unchanged. This is why it’s hard to predict how paying off a debt will affect your credit.

A good first step is to find out your credit score. You may be able to get it for free through your bank, credit card issuer, or lender; through Experian; or by signing up for a free money tracker app.

Credit Score Calculation Factors

According to FICO®, a credit rating company, these are the five factors commonly used to calculate your FICO Score:

•   Payment history (timely payments): 35%

•   Amounts owed (credit utilization): 30%

•   Length of credit history: 15%

•   New credit requests: 10%

•   Credit mix (installment versus revolving): 10%

Once FICO’s algorithm calculates your score, a credit score rating scale assigns it a category ranging from Poor to Exceptional. A higher number indicates to lenders that a person is a lower risk for default:

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

As you can see, a Fair credit score falls between 580 and 669. A Poor or bad credit score falls between 300 and 579. The minimum credit score required to qualify for a loan is around 610 to 640, depending on the lender — meaning not everyone with a Fair score would qualify.

Recommended: Do Personal Loans Build Credit?

Why a Credit Score Can Go Down After Paying Off a Debt

Paying off debt feels good and improves your financial situation. But it could also cause your credit score to drop. This negative impact can be due to changes in one or more factors, including:

•   credit utilization

•   credit mix

•   overall credit age

When you pay off a credit card and then close the account, you reduce your available credit and increase your credit utilization. Similarly, if you pay off your only car loan and close that account, you have one fewer type of account in your credit mix. Finally, paying off and closing an older account may reduce the average age of your overall credit history. (We’ll explore these scenarios in more detail below.)

While none of these things is “bad” in financial terms, it could temporarily count against you in the world of credit scores.

What Is Credit Utilization?

Now for a little more background on credit utilization. Credit utilization is a factor with revolving forms of credit, such as credit cards and lines of credit, where you can reuse the account up to your limit.

Your credit utilization rate, or ratio, is determined by dividing the sum of your credit limits by the sum of your current balances. So if someone has a $5,000 limit and is using $2,500, that’s a 50% credit utilization rate. Your rate should be kept below 30% to avoid a negative affect on your credit score.

What Is a Credit Mix?

Lenders like to see that an applicant can successfully handle different kinds of credit. This includes installment loans like mortgages, car loans, and personal loans, as well as revolving credit such as credit cards and lines of credit. If a person can manage both types of credit well, a lender will likely consider them less of a risk.

Recommended: Should I Sell My House Now or Wait?

How Credit Age Factors In

The length of your credit history demonstrates your experience in using credit. To lenders, the longer the better. When payments to an older account are on time, this combo reassures lenders that you will likely continue to make timely payments going forward.

New credit accounts can also lower your credit age. More important, opening or even applying for many new accounts in a short period of time may be a red flag to lenders that you could be in financial trouble. The application process also involves a hard credit inquiry, which can lower your credit score.

Sample Scenarios

Here are two examples of someone paying off a credit card. In one case, the credit score goes up. In another, it goes down.

Credit Utilization Goes Down / Credit Score Goes Up

Let’s say that someone has a credit utilization rate of 40%, which is negatively impacting their credit score. (Remember, below 30% is best.) When they make enough payments to bring their utilization rate down to 25%, this can boost their credit score.

Credit Mix and Age Go Down / Credit Score Goes Down

Now, let’s imagine that someone pays off the balance of their first and only credit card. This should help their utilization score! But wait: Then they close the account, and their average credit age drops. And since this is their only form of revolving credit, their credit mix has lost out, too.

Counterintuitively, paying off the card may make their credit score go down — at least in the short term.

Recommended: What Credit Score is Needed to Buy a Car?

Paying Off a Loan Early vs Paying It on Schedule

People often wonder if it’s better to pay off a loan early, if you can. In the case of a personal loan, early payoff can lower the average age of someone’s credit history, possibly lowering their credit score.

But in reality, the impact will depend upon their overall credit situation. Paying the loan off according to the schedule will keep it open longer, which can help with their credit age. On the other hand, they’ll pay more in interest because the loan is still open.

If you’re in this situation, weigh the pros and cons before making the decision that’s best for you.

How Long Can It Take To See Your Credit Score Change?

According to the credit report agency TransUnion, credit reports are updated when lenders send them new information. In general, this happens every 30-45 days, though some lenders update more frequently.

If you’re concerned about your numbers, consider signing up for a credit score monitoring service. What qualifies as credit monitoring varies from company to company. Look for a one that sends alerts whenever your score changes for better or worse.

Recommended: What Is a Tri-Merge Credit Report?

The Takeaway

How paying off a debt affects someone’s credit score depends on the person’s overall credit profile. Paying off a credit card typically helps your credit score because the account remains open, lowering your credit utilization. Paying off a loan can hurt your score because the loan is then closed, potentially reducing your credit mix and age. Generally, though, borrowers shouldn’t let credit score concerns prevent them from taking actions that are in their financial interest.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

SoFi helps you stay on top of your finances.

FAQ

How fast does your credit score increase after paying off a debt?

In fact, your credit score may dip for a short period after a debt is paid off. Lenders report new information to credit reporting agencies every 30-45 days, though some lenders update more frequently. Generally, you shouldn’t let concerns about your credit score prevent you from taking action that is in your best financial interest.

Is it best to pay off all debt before buying a house?

According to credit report agency Experian, it generally makes sense to pay off credit card debt before buying a home. Just know that in some circumstances, paying off a debt may temporarily reduce your credit score, which can affect the loan terms you qualify for. If you do pay off a credit card, consider keeping the account open until after you qualify for a loan.

How do you get an 800 credit score?

Pay bills on time, maintain a credit utilization rate under 30%, and effectively manage your credit history length, new credit requests, and credit mix. Although this won’t guarantee a score of 800, it can help you maximize yours.

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Photo credit: iStock/Patcharapong Sriwichai

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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

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

SORL-Q324-036

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