Electric vehicles (EV) have become increasingly popular since the first Tesla (TSLA) Roadster hit the highways in 2008. And as the technology matures, many investors see opportunity. The EV market has expanded well beyond Tesla to become a core strategy for automakers worldwide.
The explosion of the EVs has also created new downstream technologies, such as new batteries, charging stations, and other infrastructure.
The History of Electric Vehicles
The concept of a battery-powered automobile goes back to the 1800s. But gasoline-powered cars, including the Ford (F) Model T gasoline-powered were cheaper, and won over drivers for all of the 20th century. The tide began to turn toward the end of the 20th century, as a result of heightened environmental concerns from both drivers and the federal government.
The government encouraged the development and purchase of EVs by instituting a series of generous tax breaks. The Energy Improvement and Extension Act of 2008 offered drivers tax credits for new plug-in electric vehicles. The American Clean Energy and Security Act of 2009 also had provisions calling for the improved infrastructure for EVs.
In 2011, President Barack Obama set a goal for the United States to have a million electric vehicles on the road by 2015, and pledged $2.4 billion in federal grants to pay for the development of new EVs and batteries. Subsequent tax breaks and grants over the next five years further increased the government’s investment in EVs, as well as the related technologies and infrastructure.
That windfall supported the research and development of companies like Tesla, which took in an estimated $2.4 billion via 109 separate government grants. Tesla used that money to create eye-popping, technologically advanced cars, as well as new battery technology that increased their horsepower and their range. Drivers clamored for the new vehicle, and Tesla’s stock boomed — going from $86 at the end of 2019 to $705 by the end of 2020. As of mid-July 2023, Tesla stock was $281.38.
This incredible success story has both institutional and retail investors looking for the next Tesla, as more drivers shift to EVs and companies dedicate resources to building them.
EV investment may be more of a long-term play, rather than a day trading strategy, since it can take up to five years for automakers to design, produce, and bring to market an electric vehicle. They’re also still generally more expensive than gasoline-powered vehicles and prices may need to fall further before widespread adoption occurs. Still, President Biden announced a goal of having 50% of new vehicles electric-powered by 2030.
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EV Stocks: Automakers Who Could Challenge Tesla
Tesla is a clear leader in the EV market. It has the brand name and the incredible sales figures, plus it only makes EVs. While Tesla made a large splash in the auto industry, that industry has massive resources with which to respond, and they’re spending billions in capital expenditures to catch up.
Here are just a few major competitors who could be strong EV investments in the future.
Volkswagen
The world’s largest automaker, Volkswagen (VLKAF), which also owns the Audi and Porsche brands, sold 572,100 EVs in 2022, an increase of 26% from the year before. And Volkswagen has big plans for the EV space. The company says that by 2030, every second car the Volkswagen Group delivers is expected to be all electric.
Ford
Ford is investing $50 billion globally in electric vehicles through 2026. It plans to manufacture 600,000 EVs by the end of 2023, and 2 million by 2026. In 2022, Ford was the number two EV brand in the U.S.
General Motors
Big Detroit competitor GM (GM) is going all in on EVs, publicly stating that it’s “on its way to an all-electric future.” GM also announced that it will invest $35 billion in EVs and autonomous vehicles by 2025.
Honda
In Japan, Honda Motor Co. (HMC) announced that it would invest at least $40 billion through 2030 in order to make EV and hybrid vehicles 40% of its sales. It’s worth noting that the company is also working with GM to bring two new EVs to market in 2024.
Toyota
Toyota (TM) has been more cautious about EVs. However, in 2023, the automaker announced that it would significantly boost EV production, including 1.5 million EV sales annually by 2026, and introduce 10 new models in the U.S. and China. Toyota also said it would invest an additional $7.5 billion in EV development and production by the end of 2030.
NIO
A pure-play EV manufacturer based in China, NIO (NIO) is small, but growing. In June 2023, the company announced that it had gotten $738.5 billion in capital from a fund owned by the government of Abu Dhabi. NIO has eight EVs on its advanced EV platform known as NIO Technology 2.0. The company plans to double its EV sales in 2023.
Apple
There are also persistent rumors that Apple (AAPL) has been working on an electric vehicle since 2014. In late 2022, there were reports that the launch of the EV might come in 2026. Given the company’s deep pockets, brand reputation, and its history of game-changing design, it could make a giant splash when and if it does launch its first EV.
💡 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.
Downstream Technologies
Electric car companies aren’t the only way to invest in EV technology. Having so many new EVs on the road also opens up new investment opportunities from EV battery stocks to charging stations.
For one thing, drivers will have to charge their vehicles somewhere. And those investors will have some help from the federal government, with President Joseph Biden publicly committing to building a national network of 500,000 charging stations by 2030, including a $5 billion initiative to build charging stations on major highways from coast to coast.
Blink Charging
One charging station investment is Blink Charging (BLNK), which already has thousands of its EV chargers up and running across the United States. Its chargers are typically located near airports, hotels and healthcare facilities, where it rents space from the host locations.
ChargePoint
ChargePoint (CHPT) has been in business since 2007, and made a splash in 2017, when it took over General Electric’s 9,800 electric vehicle charging spots. It now manages more than 174,000 charging stations around the world. It also boasts a large patent portfolio.
Royal Dutch Shell
Oil company Royal Dutch Shell (RDS.A) may even deserve a look, as it plans to have around 200,000 EV charging stations globally by 2030.
Because it is such a fast-growing field, there are also a number of shell companies and special purpose acquisition companies (SPACs) devoted to companies that create and manage EV-charging technology.
As the automotive industry transforms, there are a host of new opportunities for major companies, new startups — and also for investors. To consider investing in EV companies you’ll need to do your own research to decide which stocks fit into your portfolio strategy. You can also get exposure to electric vehicles without investing in individual stocks by investing in mutual funds or exchange-traded funds that focus on EVs.
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The U.S. dollar index, also called the USDX, tracks the value of the dollar compared with six major world currencies — specifically those of the United States’ most significant trading partners.
The USDX fluctuates based on the exchange rates that the dollar maintains with those currencies. Investors and traders use the USDX as a quick way to track the relative value of the dollar and to manage potential currency risks in their portfolio.
There are also several futures and options strategies trading on the New York Board of Trade that allow sophisticated investors to bet that the USDX will go up or down. For investors who want to hedge their currency risks, or just speculate, they can invest in the U.S. dollar index through mutual funds, exchange-traded funds (ETFs), or options.
How the US Dollar Index Is Calculated
Currently, the U.S. dollar index is calculated using the exchange rates of six currencies: the Euro (EUR), the Japanese yen (JPY), the Canadian dollar (CAD), the British pound (GBP), the Swedish krona (SEK), and the Swiss franc (CHF). Given that 19 countries in the European Union use the euro, EUR is the most significant component of the index, representing 57.6% of the basket.
By contrast the yen comprises 13.6% of the index, followed by the British pound (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2%), and finally the Swiss franc (3.6%).
The U.S. dollar has long been considered the world’s reserve currency, and the index tracks where five of those six currencies stood in relation to the U.S. dollar in 1973 (the euro was added to the index in 1999). At its inception, the U.S. dollar index was set at 100. When the index is over 100, then the dollar is considered strong, and it may be considered weak depending on how far below 100 it falls.
The strength or weakness of a dollar impacts many aspects of the economy. A weak dollar increases the prices that companies pay for globally traded commodities, which contributes to inflation by raising the prices consumers pay for everyday items. A strong dollar makes the goods produced in the U.S. more expensive to overseas consumers, and can hurt exports over time.
💡 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.
The History of the US Dollar Index
When World War II ended in 1945, the United States found itself in a position of unusual strength. Like many countries, the U.S. had suffered enormous casualties, yet its industries, cities, and overall economy had survived the war more or less intact. So it was that in July of 1944, over 700 delegates from 44 countries met in Bretton Woods, NH, to create a roadmap for a more efficient foreign exchange system that would help establish a resilient post-war global economy.
The Bretton Woods Agreement that emerged from this historic conference created a system whereby gold became the basis for the U.S. dollar, and other currencies were pegged to the value of the dollar. The International Monetary Fund and the World Bank were also established as a result of Bretton Woods.
The new global currency system included a promise from the participating countries that their central banks would establish fixed exchange rates between their own currencies and the U.S. dollar. Each agreed that if their currency weakened, they would order their central bank to buy up the currency until its value stabilized relative to the dollar. And if their currency grew too strong compared with the dollar, their central bank would issue more currency until the value dropped and its relationship with the dollar stabilized.
The terms of the Bretton Woods Agreement were so far-reaching that it took until 1958 to be fully implemented. Still, the decision to keep the dollar pegged to gold proved challenging for the U.S. In 1971, when the gold owned by the U.S. government could no longer cover the number of dollars in circulation, President Richard M. Nixon was forced to reduce the dollar’s value relative to gold. The Bretton Woods System collapsed in 1973.
With the end of the Bretton Woods System, countries and their central banks took a wide range of approaches to how they valued their currency. After 1973, each country’s currency had its own value, adjusted through trade, government interventions, and the policies of central banks. To track the value of the dollar against this backdrop of currency valuations, the U.S. dollar index came into being.
When it launched, it had a base of 100, representing the dollar’s value versus the currencies of its major trading partners. Since then, the index has fluctuated relative to that base. Over the last five years, for example, the U.S. dollar index reached a high of 102.39 on December 1, 2016, and a low of 89.13 on January 1, 2018. The value of the index is considered a fair indication of the dollar’s position in global markets. And investors can also use it to trade.
💡 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.
How to Trade the US Dollar Index
Investors who want to bet on the rise or fall of the dollar’s value, or who simply want to hedge it as part of a broader strategy, can trade the U.S. dollar index the same way they trade an equity index like the S&P 500. The U.S. dollar index is popular among foreign exchange (FX) traders who don’t have the time or resources to monitor the movements between the dollar and the other currencies in the index.
Anyone who tracks global trade will notice that two major currencies are missing from the index: Neither the Chinese yuan (CNY) or the Mexican peso (MXN) are in the USDX. Historically the USDX has only been adjusted once since its inception — in 1999 when the euro was added, and certain of the currencies the euro had replaced were then removed from the index. Still, it’s likely that at some point the USDX could be adjusted a second time to include CNY and MXN, given their status as significant trading partners with the United States.
Investing with SoFi
Most investors know that a bond index or equity index is typically comprised of many constituent companies; similarly, the U.S. dollar index is comprised of six global currencies. It tracks the value of the dollar relative to those currencies, and fluctuates based on the exchange rates that the dollar maintains with those currencies. You can use the USDX as a way to track the relative value of the dollar, to manage potential currency risks in a portfolio, and to trade.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
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.
Have you noticed that as you earn more, you may not seem to have more in terms of growing your wealth, including your retirement account or that fund for the down payment on a house?
You might be experiencing lifestyle creep, which means that as you earn more, you spend more. It may well be human nature that, when you get a salary hike, you decide to splash out on a fancier car lease, a bigger home, or a luxurious vacation.
However, your spending may actually be outpacing your salary and even ringing up more credit card debt.
That’s lifestyle creep in action: Spending on “fun” non-essentials instead of putting that money to work for a more stable financial future. Learn more about it and how to rein it in while still enjoying the things money can buy.
What Is Lifestyle Creep?
Lifestyle creep can be a common phenomenon experienced as one progresses through their career. Lifestyle creep, sometimes known as lifestyle inflation, is the process by which discretionary expenses increase as disposable income increases.
Disposable income is income that isn’t already budgeted for necessities like housing, transportation, and food.
It could include anything from concert tickets to morning lattes to book buying sprees — basically anything that is likely to fall more into a “want” category rather than something strictly “needed.”
Lifestyle creep can put you squarely behind the 8-ball when it comes to getting out of debt, saving for retirement, or meeting other big financial goals. And it’s one reason people can’t escape the vortex of living paycheck-to-paycheck.
It might seem counterintuitive at first, but here’s a simplified example using a clothing budget. If you make $100 a month and set aside 5% for a shopping allowance, that’s $5 a month. If you earn a promotion at work and are now making $150 a month, that 5% now equates to $7.50 a month.
Lifestyle creep happens when you up your clothes budget to match the percentage, instead of putting the extra $2.50 toward savings or investments. Over time, those numbers can add up. And earning more isn’t all fun and games. It can also mean more expenses, and larger retirement goals.
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What Causes Lifestyle Creep?
Graduating from the penny-pinching college life to your first full-time job is only one instance that can trigger lifestyle creep. It also can happen with any type of bump in cash flow that’s not part of your monthly budget, such as a raise, bonus, tax refund, gift, or winning a scratch-off ticket.
There are also psychological factors at play here, including the sometimes compulsive urge to keep up with the Joneses.
And before you blow it off as just envy with a lack of willpower, consider this: One examination of a lottery winner’s effect on the neighborhood found that the larger reward the lucky gambler collected, the more likely their neighbors were to incur more debt and even file for bankruptcy.
Say what?!
The social pressure to keep up with the consumption habits of family and friends, even when it’s conspicuous, can cause real and serious financial stress.
Social media can make matters even worse, with studies showing that post envy could be causing people to live beyond their means just so their feeds can reflect their acquaintances’.
But how do you resist the urge to upgrade your 2010-era sedan when your neighbor rolls up in a shiny new SUV? The answers might be simple on paper, but switching your mindset from “Should I spend this on a shopping spree or a vacation?” to “Should I put this money into savings or invest it?” can be easier said than done.
Discerning Needs Versus Wants
It’s normal to want to celebrate a new raise, but to avoid lifestyle creep, it can be important to make sure not to celebrate with something that will increase costs to the point of making the raise irrelevant.
For example, a person gets a raise that increases their income by $200 a month and then immediately trades in a fully paid-off car for a newer, fancier car (want), which results in a $300 monthly car payment.
Not only is the raise spent, but the amount of money available each month has also actually diminished. Sure, that person might have a car worthy of bragging about, but they may not be any healthier financially, even though they’re making more money.
On the other hand, for someone scraping by month to month, there might not be much of a choice but to fund some lifestyle upgrades with a raise. Lifestyle creep is not always a bad thing for someone working on being financially independent and secure.
Using the same example of the $200 monthly raise above, the recipient of the raise uses that money to buy a car needed to get to work to replace a lengthy public transportation commute each day, or perhaps invests in a professional development class to gain career advancement.
Either of those decisions might be perfectly worthwhile lifestyle changes that someone might be happy to pay for with a new raise. After all, part of financial wellness is investing in oneself when possible to achieve goals.
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Tips for Avoiding Lifestyle Creep
Giving every extra penny of a cash windfall to a credit-card company doesn’t sound like much fun. But just knowing that lifestyle creep exists, and recognizing it in your own life, can put you ahead of the game when it comes to making better decisions with your money.
Here are a few possible ways you can avoid lifestyle creep while still enjoying the good things in life.
Celebrating Small
If you earn a raise, you should absolutely celebrate — especially if it’s higher than the average 2.9%. But to outsmart lifestyle creep, you may want to take a deep breath and resist the urge to run to the store for that expensive thing you’ve had your eye on. (What would Marie Kondo do?) Instead, consider a small way to congratulate yourself, like a dinner with friends.
Creating a Budget
One way to avoid lifestyle creep may be to give all income a job to do. Yep, that extra $200 a month shouldn’t just be chilling in a checking account with no purpose, like a freeloading cousin camping out on the couch.
Letting that extra money hang out in the checking account too long with nothing to do might lead to unplanned spending on a weekend trip or that budget-busting espresso maker that would be a tempting purchase. Putting that money to work might allow protection against impulse spending.
What exactly is “putting money to work”? It all comes down to budgeting. But don’t panic — gone are the days of lengthy kitchen-table sessions with bills and statements fanned out and calculations done by hand.
With the advent of online banking, most people are likely equipped with everything needed to make a budget right on your phone or computer.
Don’t have a basic budget already? Getting a raise can be a great time to crunch the numbers and be financially stable and responsible with that money. If there’s already a budget in place, a new raise is a great time to reconfigure the budget to make sure it still ticks all the financial boxes.
Avoiding Mindless Spending
Mindless or pointless spending might happen when there is unexpected extra cash sitting in the bank account. Much like the itch to spend that crisp, new $20 bill included in a childhood birthday card, there may be psychological and emotional temptation to spend money in the bank account without considering whether or not those new, modern table lamps or that brand new gaming system is really needed.
Casually buying unnecessary items could indicate compulsive or impulsive spending. This in turn could mean missing an opportunity to put money to work for the future, sustainably upgrading a lifestyle by planning ahead for financial growth.
Tracking Your Spending
When it comes to managing money, one question you don’t want to ask yourself is “Where did that money go?” Losing track of expenses could not only lead to a blown budget, but also overdraft fees, returned checks, or other unnecessary fees that could put you even further behind.
If you really struggle with this one, there’s an app for that. A large number of them, as a matter of fact. SoFi, for example, lets you see all of your accounts in one place to help you categorize and track your spending, set goals, and look for ways to streamline. It also can serve as the central hub for automatic payments to your bills, savings, and investment accounts.
Turn on the Auto-Pilot
One of the easiest ways to ensure that you’re only spending what’s in the budget is to automate as many payments and contributions as possible. After all, money you don’t have is a lot easier to not spend.
This strategy can start at work. If you get a raise, you might elect to increase your 401(k) contribution (or start one if you haven’t yet). And while it means that your take-home pay may not change, your retirement account can painlessly grow.
You also can automate bill payments and savings and investment contributions, all with the intention of getting the money out of your tempted hands ASAP.
Outlining Clear Goals
What’s your endgame? Do you want to retire early with a million dollars or more in the bank? Is owning a home a part of your plan? One key to avoiding lifestyle creep is to set long-term financial goals and keep your eye on the prize.
Two financial goals that can be beneficial to almost everyone include growing a short-term emergency fund and longer-term savings plan. But from there, the sky’s the limit and your goals are entirely up to you.
Avoiding New Debt
This might seem like a no-brainer, but you aren’t likely to get out of debt if you keep adding new debt to the pile. A recent report revealed that consumers are willing to spend up to 83% more using a credit card than they would with cash.
Ditching the credit cards is entirely possible — your parents and grandparents lived without them every day. Modern credit cards weren’t introduced in the U.S. until around 1958, which means that Boomers and their parents were raised on the philosophy that if you can’t afford it right now in full, you wait until you can.
And as the old saying goes, they turned out just fine.
Getting Your Head in the Game
Lifestyle creep likely isn’t impossible to reverse, but one could argue that the further you’ve allowed yourself to fall into the luxury lifestyle, the harder it could be to pull yourself out.
One way to get your head in the game is to make lists, starting with your needs (electricity) vs. wants (electric car.) From there, you could prioritize your “wants” and start to cut from the bottom.
Are there things in your life that just exist because they can? Consider eliminating them completely, or finding crafty ways to keep them around in more affordable ways, such as shopping consignment vs. retail or eating lunch out one day a week vs. all five.
And the jealousy that can mess with your head? All that glitters isn’t gold.
Choosing Your Friends Wisely
Peer pressure is a powerful motivator, but the perceived wealth of your friends, neighbors and acquaintances can be a far cry from the actual state of their finances.
If you seem to find yourself in situations where there’s pressure to overspend, including kids sports activities, nights out on the town, or an invite to a destination wedding, you may want to consider finding a circle of friends who share the same financial goals as you.
After all, it’s a lot easier to say “Let’s just cook at home to save money” to a friend who won’t pressure you to try the trendy new restaurant in town.
💡 Quick Tip: If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt, so try to eliminate that ASAP.
Spending a Raise
So what exactly should someone do with extra money after a raise? Paying more into a retirement account, paying off debts, or just putting some extra dollars towards a specific savings goal are some approaches to take.
A checking and savings account might be one helpful way to manage a raise and stay on top of a budget.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
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SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
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A pass/fail grading system allows a student to receive either a grade of “P” (pass) or “F” (fail) for a particular class instead of the usual letter grading system. Many colleges offer this option in order to encourage students to explore new academic areas without having to worry about it affecting their transcripts.
However, the pass/fail grading system comes with some limitations, including restrictions on which and how many classes you can take pass/fail each year. And, in some cases, taking a class pass/fail can still have an impact on your academic record.
Read on to learn exactly what pass/fail means, what a passing (and failing) grade is, and when to consider a pass/fail option.
How Pass/Fail Grading Works
The traditional grading system was initially established centuries ago by English universities like Oxford and Cambridge as a way of encouraging students to work harder. While letter grades may still be the dominant system in American universities, some schools have deviated from this structure, establishing their own ways of evaluating students largely based on the pass/fail system.
Reed College in Portland, Oregon has a unique style of grading that encourages students to “focus on learning, not on grades.” While students are still assigned grades for each course, these grades are not distributed to students. Instead, students are given lengthy comments and reports on their academic performance. Reed does not have a dean’s list or honor roll either.
At Brown University students can take an unlimited number of classes “satisfactory/no credit (S/NC),” and GPAs are not calculated. They also do not name student’s to a Dean’s list.
Some schools, including Swarthmore College and MIT, have students take all classes pass/fail in the first semester of their freshman years. Swarthmore’s policy is meant to encourage students to stretch themselves and take risks, and is aligned with their policy of collaboration as opposed to competition with classmates, while MIT’s policy is designed to help students adjust to increased workloads and variations in academic preparation and teaching methods.
In both cases, taking the emphasis off grades is meant to improve students’ experiences of higher education, helping them to take full advantage of their time on campus.
Of course, most schools emphasize letter grades more than Brown and Reed, as it allows them to distinguish high achievers and highlight specific areas where students excel or may need to improve.
It’s common, however, for colleges to allow students to take one class pass/fail per semester. Typically, this is only offered for elective (not core) classes. Often, a grade of “P” is equal to a grade of D- or higher, but has no impact on the student’s overall grade point average. A grade of “F,” however, will usually have the same effect on the grade point average as a traditional failure.
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What Are The Benefits of Pass/Fail?
While college can be a rewarding and stimulating time for students, it also has its challenges, including constant pressure to keep up your grades. The beauty of taking a class pass/fail is the sense of freedom it gives you — once the stress of getting a perfect grade is removed, you are at liberty to fully embrace the kind of intellectual curiosity that should be at the heart of a college experience.
Maybe you’re a pre-med student and want to take a painting class, or perhaps you’re majoring in sociology and want to dabble in art history. These options can lead you down unexpected paths, opening creative doors you might have avoided if you were solely focusing on your GPA.
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The Limits to Pass/Fail
The pass/fail system also has some potential downsides. One is that should you end up doing really well in the class, you generally can’t change your mind and ask to take the class for a grade rather than pass/fail. By the same token, if you do poorly in a class, you can’t make a belated request for a pass/fail.
In addition, pass/fail grades generally don’t count toward a major or minor, which limits your options when deciding whether or not to go this route.
While it’s hard to know for sure, some students feel that taking a higher number of pass/fail classes could reflect poorly on their college academic record and be a strike against them when applying for a job or to graduate school. However, it’s also possible that a potential employer or an admissions officer might be impressed by a student’s breadth of study and sense of initiative in studying “outside the box.”
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The Takeaway
Taking a few of your classes pass/fail can be a great way to explore new academic areas of interest during college, and is unlikely to adversely impact your post-grad opportunities, including summer internships, employment, and graduate school.
While employers and graduate school admissions officers generally prefer to see quality grades over pass/fail grades, they will typically review applications holistically, and grades are just one of many ways you can show your skills, knowledge, and leadership potential. Indeed, taking a few pass/fail classes that are outside your major can show intellectual curiosity.
Whether you take a class pass/fail or for a letter grade won’t have any impact on how many credits you get from the course — or the cost of tuition. If you’re concerned about how you’ll cover the cost of your education, keep in mind that you have a range of options — including savings, scholarships, grants, work-study programs, and federal or private student loans.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
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The Secured Overnight Financing Rate (SOFR) is the benchmark interest rate that has replaced the London Interbank Offered Rate (LIBOR) in the U.S. In fact, for the past several years, lenders have been gradually switching from using LIBOR to determine rates for consumer loans, such as student loans, to using SOFR.
Here’s what you need to know about SOFR, including how it differs from LIBOR, and how you might be impacted by the change.
Key Points
• The Secured Overnight Financing Rate (SOFR) serves as the primary benchmark for interest rates on loans in the U.S., replacing the previously used LIBOR.
• SOFR is based on actual secured transactions, making it more reliable and less susceptible to manipulation compared to LIBOR’s hypothetical rates.
• The Federal Reserve Bank of New York publishes the SOFR daily, reflecting the rates financial institutions pay for overnight loans backed by Treasury securities.
• The transition from LIBOR to SOFR has been gradual, with minimal impact on borrowers, especially those with fixed-rate loans.
• Understanding the differences between SOFR and LIBOR is crucial for borrowers, as variable-rate loans may see adjustments based on the new benchmark.
What Is the Secured Overnight Financing Rate (SOFR)?
Financial institutions now use Secured Overnight Financing Rate, or SOFR, as a tool for pricing corporate and consumer loans, including business loans, student loans, mortgages, and credit cards. SOFR sets rates based on the rates that financial institutions pay one another for overnight loans (hence the name). The SOFR rate is published daily by the Federal Reserve Bank of New York.
SOFR is a popular benchmark because it is risk-free and transparent. It is based on more than $1 trillion in cleared marketplace transactions. This in contrast to the index it has replaced, the London Interbank Offered Rate, better known as LIBOR. LIBOR was based on hypothetical short-term loan rates. This has historically made LIBOR less reliable and more vulnerable to insider manipulation.
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How Does the SOFR Work?
When large financial institutions lend money to one another, they must adhere to reserve and liquidity requirements. They do this by using Treasury bond repurchase agreements, known as “repos”. Using repo agreements, Treasurys are used as collateral and banks are able to make overnight loans.
The SOFR interest rate index is made up of the weighted averages of the interest rates used in real, finalized repo transactions. Every morning, the New York Federal Reserve Bank publishes the SOFR rate it has calculated for repo transactions on the previous business day.
Current SOFR Rates
The New York Federal Reserve publishes the SOFR rate every business day. The latest rate is:
5.06% on July 25, 2023
The History of SOFR
Financial institutions, banks, and lenders rely on certain indexes to determine interest rates. Before the 1980s, there wasn’t one particular index that was used internationally. However, during the 1980s, increased complexity in the market resulted in the need for more standardized use of a benchmark tool for determining adjustable rates.
The international financial industry adopted LIBOR as the standard because it was viewed as a trusted, accurate, and reliable index. Other indexes were still used, but the majority of institutions used LIBOR. LIBOR rates were once the basis for about $300 trillion in assets around the world.
Fast forward to around 2008, and certain large financial institutions were manipulating interest rates illegally in order to increase their profits. This was possible in part because LIBOR is based on hypothetical rates. Manipulation of rates was one factor that led to the financial crisis.
Once that manipulation was discovered, there was a global demand for a new rate benchmark and a call to end the use of LIBOR. As a result of the 2008 financial crisis, banking regulations led to less borrowing and a lessening of trading activity. Less trading made LIBOR even less reliable.
In 2017, the Federal Reserve formed a group of large financial institutions known as the Alternative Reference Rate Committee (ARRC) to work on finding an alternative to LIBOR. They ultimately chose SOFR.
Both LIBOR and SOFR were being used by banks and lenders until June 2023, when SOFR became the standard in the U.S.
How SOFR Is Different From LIBOR
There are some key differences between SOFR and LIBOR, which help explain the shift towards SOFR and away from LIBOR. Here’s a look at some of the biggest.
• SOFR is based on completed transactions, whereas LIBOR is based on the rates that financial institutions said they would offer each other for short-term loans. Because it’s based on hypotheticals, LIBOR is more vulnerable to manipulation.
• Lending based on LIBOR doesn’t use collateral, making it unsecured. Loans using LIBOR include a premium due to credit risk. SOFR, on the other hand, is secured, as it is based on transactions backed with Treasurys. Therefore, there is no premium included in the interest rates.
• SOFR is a daily (overnight) rate, while LIBOR has seven variable rates.
There has been some concern that the shift away from LIBOR would cause great market disruption. However, the changeover was designed to be slow and gradual and, generally, hasn’t caused any sudden changes for borrowers.
In fact, if you have a federal student loan or a private student loan with a fixed-rate, the change from LIBOR to SOFR has not — and will not — have any impact on your loan, since the rate is fixed for the life of the loan. If you are entering into a new loan, SOFR rates are already being used.
If you have a student loan (or any other type of loan) with a variable rate, the shift from LIBOR to SOFR may have impacted your loan — but likely not in any noticeable way. Switching from one index (LIBOR) to another, largely similar index (SOFR) — in the absence of any other market changes — won’t have much impact on a loan’s interest rate, according to the Consumer Financial Protection Bureau .
The rate on an adjustable-rate loan can go up and down over time. These changes, however, are largely due to general ups and downs in interest rates across the economy. Loan rates have been going up across the board, but that is not due to the shift from LIBOR to SOFR. Rather, it’s the result of efforts by the Federal Reserve to tamp down inflation.
If you have a student loan, you may have received a notice from your lender or servicer about a change in the index rate for your loan. Instead of LIBOR, lenders in the U.S. are now using SOFR. The indexes work in a similar way and it should not have a major impact on your loan. If you’re in the market for a new loan, you won’t be affected by the switch, since U.S. lenders have already made the shift to SOFR.
Keep in mind, though, that interest rates on loans are based on numerous factors, including general market conditions and your (or your cosigner’s) qualifications as a borrower.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
Photo credit: iStock/Nicholas Ahonen
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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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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.
