Jul
21
2023

A Guide to Delta Neutral Trading Strategies

By | Growing Wealth, invest, Investing | Comments Off on A Guide to Delta Neutral Trading Strategies

The typical options investor is trying to leverage options trading to speculate on directional moves in the prices of underlying assets. However, there are more sophisticated traders who would like to profit from other characteristics of options.

To pursue these trading strategies, investors need to minimize the effect of price changes and create portfolios that profit from and are more sensitive to these other factors. Delta neutral approaches allow investors to create these portfolios.

What Is Delta?

Delta is one of the Option Greeks and measures how much an option will change in price, given a $1 change in the price of the underlying asset. By definition, the delta of the underlying asset is always 1.

What Does Delta Neutral Mean?

Delta neutral means that a position’s value will not change when there are small market price changes. By holding a combination of assets and options, or combinations of various call and put options, a trader can create a portfolio with an overall delta of zero (in actual practice, very close to zero).

Traders use delta neutral strategies to minimize the effect of price changes while aiming to profit from shifts in implied volatility, the time decay of options, or simply to hedge against price movements.

How Does Delta Neutral Function?

A portfolio’s overall delta is determined by the sum of the deltas of its individual positions. Let’s take a closer look at the delta in options and securities.

Basic Mechanics

A trader holding shares (“going long”) benefits one-for-one from increases in the stock price. The delta for long shares is 1.

Investors short a stock will experience losses one-for-one as the share price rises, but they will benefit in the same amount when it falls. The delta for short shares is -1.

In the options trading world, a long call option has a delta of 0 to 1, while a long put option has a delta of –1 to 0.

Deep in the money long call options are most likely to feature a delta near 1. Deep out of the money long call options will have a delta near 0. At the money long call options typically have a delta near 0.5.

Deep in the money long put options typically have deltas near -1. Deep out of the money long puts have deltas near 0 and at the money long puts have deltas near -0.5.

Deltas values are for each individual security held and need to be adjusted based on your actual holdings. If you own 200 shares of stock, the delta for this position is 200. If you own an at the money call options contract, the delta for this position would be 100 x 0.5 or 50 due to options representing 100 shares of the underlying asset.

If you are writing (“going short”) options, the deltas values are reversed. If you write a call option with a delta of 0.75, then the delta for the position would be -75. Similarly, the delta for shares sold short is -1 per share.

The investor must also be aware that any delta neutral portfolio will only be neutral over a range of asset prices. An option’s delta is always in flux as it moves in and out of the money. A portfolio must be constantly adjusted to maintain delta neutrality – many delta neutral trades must be executed.

An Example of Delta-Neutral in Use

A trader might employ a delta neutral trading strategy when they are long shares of stock but are concerned about a near-term pullback in its price. Assume the trader owns 100 shares of XYZ stock at $100 per share. A long stock position has a delta of 1. Multiplied by 100 shares, the position has a total delta of 100.

The goal of a delta neutral strategy is to use a combination of calls and puts to bring the portfolio’s net delta to 0. One possibility is to purchase at the money put options that have a delta of -0.5. Two of these put option contracts have a total delta of -100 (-0.5 multiplied by 200 options). Recall that an options contract represents 100 shares of stock.

Here, the $100 strike is the delta neutral strike. As the underlying price moves away from $100, the delta of the portfolio will move.

Combining the deltas of 100 shares together with 2 long put option contracts with a -0.5 delta yields a delta neutral portfolio.

Stock position delta = 100 shares x delta of 1 = 100

Long put position delta = 2 contracts x 100 shares/option x delta of -0.5 = -100

Portfolio delta = stock position delta + long put position delta

Portfolio delta = 100 + -100 = 0 or delta neutral

The net position is protected from losses by being long put options while still having exposure to upside from the long stock position. Of course, there is a cost to purchasing put options.

A diagram might help illustrate what is delta neutral.

Profit & Loss Diagram Using the Above Example (Not Including the Put Option Cost)

Profit & Loss Diagram Using the Above Example (Not Including the Put Option Cost)

Profiting From Delta-Neutral Trading

It is possible to profit from changes other than price movements in the underlying stock. For example, an options trader can use delta neutral strategies to benefit from declining or rising volatility. Vega is the Options Greek that tells a trader how much the price of an option will move in response to changes in volatility.

Delta neutral strategies can also be used to profit from time decay or – as in the earlier example – to hedge an existing long stock position. Writing options allows you to benefit from the effect of time decay, but there is a risk of assignment. If the underlying stock price moves significantly, the contracts could be assigned to you.

Shorting Vega

Shorting vega is a more advanced options trading strategy. A delta neutral approach can be used to benefit from collapsing volatility.

You might look to short volatility after a period of extreme movements in the market or a single stock. The key is to short vega when implied volatility is still high and you expect it to come back down.

When implied volatility is high, you pay a significant premium to be long options. You can take advantage of expensive options when implied volatility is high by selling options while still being delta neutral. The risk is that implied volatility levels continue to jump, which can lead to losses on a short vega play.

Waiting for Collapse in Volatility

A short vega position relies on the implied volatility on the underlying security to drop in order to turn a profit. It might take patience for implied volatility to drop to historical norms. To remain delta neutral, other positions might have to be put on to mitigate the risk of a change in the underlying stock price.

Pros and Cons of Delta Neutral Positions

Some of the pros of crafting a delta neutral portfolio have been highlighted, but there are downsides as well. Having to closely monitor your portfolio can be a burden, while trading costs mount as you constantly layer on or reduce hedges to keep near delta neutral.

Pros

 Cons
Profit from variables other than the price movement of the underlying asset Requires frequent trades, which could be costly, to maintain a delta near 0
Traders hold stock for the long run while protecting against near-term declines Deltas are constantly changing resulting in being over- or under-hedged

Delta Neutral Straddle

A delta neutral straddle uses a combination of puts and calls to keep the position’s delta near zero while having exposure to volatility changes.

For example, if XYZ stock trades at $100, and it’s at the money call has a delta of 0.5 and it’s at the money put has a delta of -0.5, you can buy the put and call with the goal of selling them after implied volatility jumps. With this delta neutral long straddle strategy, your delta is effectively 0 but you are long volatility.

A delta neutral short straddle is an options trade that seeks to profit from minimal changes in the underlying stock price and a large drop in implied volatility. So, the reverse of a long straddle can be used when you believe implied volatility will drop.

Other options trading strategies used to profit from changes in volatility and time decay are calendar spreads, diagonal spreads, iron butterflies, iron condors, among others.

The Takeaway

Building and maintaining a delta neutral portfolio can be a challenging task, but profiting from time decay and changes in volatility can make it worthwhile and profitable.

Delta neutral trading can also hedge your portfolio from short-term declines while continuing to hold stock for the long-term.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

With SoFi, user-friendly options trading is finally here.

FAQ

How do you make money with a delta neutral strategy?

You profit from a delta neutral option strategy when there are changes in a stock’s variables other than its share price. Changes in implied volatility create opportunities to go long or short volatility while being agnostic to the stock price’s change. You can also benefit from time decay by selling options while being delta neutral.

What is a delta neutral strike?

A delta neutral strike marks the price at which a portfolio is precisely delta neutral. In practice, it is more of a theoretical price rather than an exact level. When the underlying asset price moves up or down from the delta neutral strike, its delta will stray from zero; it will take additional hedging trades to get back to delta neutral.

How can you calculate the value of your delta neutral position?

To calculate your position’s delta, simply multiply each security’s delta by your position size. For example, one call option contract with a delta of 0.75 has a delta of 75 (0.75 x 100 options per contract). While being long 100 shares of stock with a delta of 1 has a delta of 100 (1 x 100 shares).

You combine the deltas of all positions in your portfolio to determine your overall delta. At that point, you can trade options to make your portfolio delta neutral.

Photo credit: iStock/Delmaine Donson

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Jul
21
2023
What Diagonal Spreads Are & How They Work

What Is a Diagonal Spread and How Does It Work?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Diagonal Spread and How Does It Work?

A diagonal spread is an options trading strategy that involves taking a long and short position on the same stock with different strike prices and different expiration dates. It’s a combination of a vertical spread and calendar spread.

Using this strategy can allow the trader to get an early payday if the stock moves in a direction that’s in their favor. The way it works is the trader makes two options trades — either call options or put options simultaneously, with different strike prices and expiration takes.

Diagonal Spreads Defined

Diagonal spreads combine a two-step options trading strategy and are considered an advanced trading tactic. It’s a combination of a calendar spread and a short call or put spread. These positions have different expirations and different strikes which spread off diagonally, hence the name of the strategy.

A calendar spread is when a trader buys a contract with a longer expiration date while going short on an option with a near-term expiration date with the same strike price. But if two different strike prices are used, this is a diagonal spread.

A diagonal spread includes a calendar spread, also referred to as a horizontal spread or a time spread, combined with a vertical spread, because different strike prices are involved.

How Diagonal Spreads Work

A long put diagonal spread involves purchasing a put for some time in the future while selling a put in the short-term. Purchasing an option in the later term tends to be more expensive due to the embedded value of time. On the other hand, the trader sells the nearer term option to lower the cost of the other option. Traders usually use diagonal spreads when they have conviction on a stock’s movement while minimizing the effects of time.

A diagonal bull spread becomes a valuable trade when the price of the stock increases, while a diagonal bear spread increases in value when the stock price decreases.

Diagonal spreads require experience because traders have to account for volatility and have a good sense of timing.

Setting Up a Diagonal Spread

When traders are bullish on a stock, they generally use call options vs. using put options when they’re bearish on a stock.

The most common way to set up a diagonal spread is to buy a back month option that is in the money, which is a futures contract whose delivery dates are further into the future. Then, you sell a front month option with a strike price that is out of the money, which is a contract that has a near-term expiration date.

Setting up a diagonal spread in this manner would constitute a debit spread, though credit spread structures can also be used.

Maximum Loss

When a stock’s price rises, the maximum loss is equal to the premium paid when buying a call. If the stock falls, the maximum loss is the difference between the strike prices plus or minus the option premium paid or received.

Maximum Profit

It can be difficult to anticipate what the maximum gain may be since traders can’t know what the back-month option will be trading at when the front-month option expires as a result of shifting volatility expectations. In a long diagonal spread, the stock price must be near the short strike for a trade to go in the market participant’s favor.

The max profit potential for a short diagonal call spread is the net credit received minus commissions. If the strike price plummets below the short call, the value of the spread will be close to zero and the credit received is profit.

On the other hand, the max profit scenario of a short diagonal put spread is when the stock price soars above the strike price of the sold higher strike put option, as the value of the spread nears zero and the credit received is profit.

Breakeven Point

The breakeven point cannot be calculated, rather it can be estimated. The breakeven price at expiration for a long call is below the strike price of the short call. During expiration of a long call, the breakeven point is the stock price at which the price of the short call is the net credit received for the spread.

Traders are not able to predict what the breakeven stock price will be because it depends on market volatility, which can impact the price of the short call.

Diagonal Spread Examples

In one example, a trader is bullish on ABC stock, currently priced at $300. If the front month is January and the back month is February, the trader may want to purchase a $298 strike call with February expiry, which is in the money. Then the trader sells a $302 strike call with January expiry, which would be out of the money. This would give the trader a four-dollar wide diagonal spread.

In another scenario, a trader is bearish on XYZ stock at a current market price of $129. To set up a diagonal spread, the trader could buy a $132 February put, which would be several dollars in the money. Next, the trader could sell a $126 January put, which would be a few dollars out of the money. This trade would be a six-dollar wide diagonal spread.

Types of Diagonal Spreads

There are different types of diagonal spread strategies traders can use to get their desired outcome. Here are several diagonal spreads traders can try:

1. Long Call Diagonal Spreads

To execute on a long call diagonal spread, traders must buy an in the money call option with a longer term expiration date and then sell an out of the money call option with a nearer term expiration date. Traders can use this advanced options strategy if they are mildly bullish on a stock in the near term and very bullish in the longer term. An ideal set up for a long call diagonal spread is during times of low volatility as you do not want your trade to be disrupted by sharp price swings.

2. Long Put Diagonal Spreads

To execute on a long put diagonal spread, traders must buy an in the money put option with a longer term expiration date and then sell an out of the money put option with a nearer term expiration date that has an out the money strike. Traders typically use long put diagonal spreads to mimic a covered put position.

3. Short Call Diagonal Spreads

A short call diagonal spread is when traders sell a long-term call with a lower strike price and buy a shorter-term call with a higher strike price. A trader benefits from a short call option when the price of the underlying asset falls, thus making this a bearish strategy.

4. Short Put Diagonal Spreads

A short put diagonal spread involves selling a longer-term put with a higher strike price and buying a shorter-term put with a lower strike price. This is a bullish strategy, as the trader benefits if the underlying asset goes up in price, making both options expire worthless and netting the investor the net credit earned at the beginning of the trade.

5. Double Diagonal Spread

A double diagonal spread is when a trader buys a longer-term straddle and sells a shorter-term strangle, a trade that benefits from time decay and an increase in volatility. Traders setting up a double diagonal are long the middle strike calls and puts, which expire further in the future, and short out of the money call and put options with sooner expiries. The ideal outcome for double diagonals is to stay between the two OTM strike prices as they approach expiration.

Risks of Diagonal Spreads

The biggest risk traders have in diagonal spreads is overpaying for the diagonal spread. That said, the maximum risk is the debt a trader incurred to enter the position. If traders pay too much for their diagonal spreads they can remain unprofitable.

Market volatility can be used to the trader’s advantage when using diagonal spreads, although it can also pose a risk to such trades. Depending on the level of volatility, it can substantially change the price of the option and impact the trader’s profit potential. Diagonal spreads are an advanced trading strategy so traders who are experienced in dealing with volatility are best suited to incorporating diagonal spreads in their investment strategy.

The Takeaway

Setting up a diagonal spread correctly is an important part of the profit potential of the strategy, otherwise traders are at risk of losing money. This advanced options trading strategy requires traders to make both long and short trades, either with calls or puts, that have different expiration dates and strike prices. Traders should know these option trades are lined up diagonally from one another.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

With SoFi, user-friendly options trading is finally here.

Photo credit: iStock/percds

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.

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Jul
21
2023
4 Student Loan Repayment Options—and How to Choose the Right One for You

4 Student Loan Repayment Options — and How to Choose the Right One for You

By | Debt Payoff, Financial Independence, Fresh Out of School, Student Loans, student_loan | No Comments

It’s never too early to think about student loan repayment. Whether you’re still in college, or you recently graduated and are in the ‘grace period’ before repayment begins, strategizing now can help you weigh the options.

If you’ve graduated and are already working and making payments, it can be a good idea to re-evaluate your repayment plan over time. As your financial circumstances change, the way you’d like to manage your student loans may also shift.

Before considering your options, take inventory of all your student loans. Be sure to list the principal, the interest rate, the repayment period, and the servicer for each loan.

All federal student loans issued in recent years have fixed interest rates, but private student loans or older federal student loans may have variable rates. If the rate is variable, be sure to note that as well.

Different Student Loan Repayment Options

Once you understand the details of your student loans, it’s time to think about your repayment options. The simple choice if you have federal student loans is the Standard Repayment Plan. It’s the “default” repayment plan, so unless you sign up for another option, this is the plan you’ll have. Under the Standard plan, you typically pay a fixed amount every month for up to 10 years.

There is no “standard repayment plan” for private student loans; the interest rate may vary based on market factors, and your repayment term might be shorter or longer.

The federal government also offers graduated and extended repayment plans for borrowers. With the Graduated Repayment Plan, payments start smaller and grow over time, while the Extended Repayment Plan stretches repayment over a period of up to 25 years and payments may be either fixed or graduated.

Opting for the Standard Repayment Plan may work for you, but for some borrowers, it’s not the most cost-effective choice. These borrowers may be eligible for special federal programs that can reduce the amount they owe monthly based on financial circumstances, and in some cases, forgive balances if they meet certain requirements.

Or some borrowers might be able to find a more competitive interest rate by refinancing their loans through private lenders.

💡 Quick Tip: Often, the main goal of refinancing is to lower the interest rate on your student loans — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.

Here’s an overview of some student loan repayment options that may help if you are choosing a repayment plan:

1. Student Loan Consolidation

Federal student loan consolidation allows you to combine multiple federal student loans into a single new loan. You can’t consolidate private student loans using this federal program.

When you consolidate your federal student loans into a Direct Consolidation Loan, your new loan’s interest rate will be the weighted average of all your old student loans’ interest rates, rounded up to the nearest eighth of a percent. This means your interest rate won’t necessarily be lower than the rate you were paying before consolidation on some of your student loans.

When you consolidate, you’ll also have the option to select a new repayment plan. The standard plan would still be available, but consolidation can also be a first step toward other plans of action, like student loan forgiveness or income-driven repayment.

2. Student Loan Forgiveness

While President Biden’s federal student loan forgiveness program — which would have canceled up to $20,000 in student loan debt for eligible borrowers — was blocked by the Supreme Court in late June 2023, there are other available forgiveness plans that certain borrowers may be able to take advantage of. For instance, some federal student loans and Direct Consolidation Loans are eligible for modified payment plans that forgive outstanding student loan balances.

Health care professionals, teachers, military service members, and those employed full-time by qualifying nonprofit or public service organizations may be eligible for certain federal student loan forgiveness programs.

For instance, under the Public Service Loan Forgiveness (PSLF) program, those who have worked for qualified employers, such as the government or some nonprofit agencies and have made 10 years of payments on a qualified income-driven repayment plan, can apply for forgiveness of all of their remaining federal student loan balances. That forgiveness is not considered taxable income.

The Federal Student Aid website has additional information on which federal student loans qualify for which types of forgiveness, cancellation, and/or discharge.

3. Income-Based Repayment

Editor's Note: The SAVE Plan is still in limbo after being blocked in federal court. SAVE enrollees are in interest-free forbearance until at least April 2025. Two closed repayment plans — Income-Contingent Repayment (ICR) and PayAs You Earn (PAYE) — are reopened to those who want to leave forbearance. We will update this page as information becomes available.

If the payments under the Standard Repayment Plan seem too high, federal student loans offer two income-based repayment plans, which tie the amount you pay to your discretionary income.

Income-driven repayment plans may help lower your monthly payments. In some cases, however, you might end up paying more over the life of the loan than you would have on the Standard Repayment Plan. That’s because with low monthly payments that stretch out over more years, you could be paying more in interest over time.

However, under the new Saving on a Valuable Education (SAVE) income-driven repayment plan introduced by the Biden Administration at the end of June 2023, any unpaid interest would be covered by the government (meaning the interest would not accrue) as long as you make your monthly payments. This plan also aims to reduce a borrower’s monthly payments by half.

Additionally, with income-driven repayment plans, you may be eligible for some student loan forgiveness programs if the remainder of your student loans aren’t paid off after 20 to 25 years (and in some cases under the new SAVE plan, after 10 years) of consistent, on-time payments.

4. Student Loan Refinancing

Refinancing student loans through a private lender offers the opportunity to consolidate multiple student loans into a single payment and potentially decrease your interest rate or lower your monthly payment.

Loan repayment terms vary based on the lender, and borrowers with better credit and earning potential (among other financial factors that vary by lender) may qualify for better terms and interest rates.

One important thing to know about refinancing, however, is that once you refinance a federal student loan into a private loan, you can’t undo that transaction and later consolidate back into a federal Direct Consolidation Loan.

This can be relevant for professionals in health care or education where federal student loan forgiveness plans are offered, or for those considering long-term employment in the public sector.

In addition, refinancing federal student loans with a private lender renders them ineligible for important borrower benefits and protections, like income-driven repayment and deferment.

💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Can You Change Your Student Loan Repayment Plan?

If you have federal student loans, it is possible to change your repayment plan at any time, without any fees. You’ll have the option to choose from any of the federal repayment plan options, including income-driven repayment plans.

There is less flexibility to change the terms of a private student loan. Some private lenders may offer alternative payment plans for borrowers. Check with your lender directly to see what options may be available to you.

SoFi Student Loan Refinancing

Refinancing is another avenue that can result in a new repayment plan. An important consideration, however, is that refinancing federal student loans will remove them from any federal programs or protections, so this won’t be the right choice for everyone.

The Takeaway

Federal student loan borrowers have the ability to change their repayment plan at any time, without being charged any fees. There are different plans to choose from and you can look for one that suits your situation and needs.

Changing your repayment plan is a bit more challenging for private student loans, though some private lenders may offer alternative options for borrowers. Refinancing is another option that could allow some borrowers to adjust their repayment terms.

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 student loan repayment options are available to me?

Borrowers with federal student loans can choose from any of the federal repayment plans, including the standard 10-year repayment plan, or income-driven repayment options, including the new SAVE plan introduced by the Biden Administration at the end of June 2023, which is designed to make student loan debt more manageable.

For private student loans, repayment options will be determined by the lender.

What is a standard repayment plan for student loans?

The Standard Repayment Plan for federal student loans is fixed monthly payments over a period of 10 years. For consolidation loans, repayment may extend up to 30 years.

How long is a typical student loan repayment?

The typical student loan repayment period may vary from individual to individual. The Standard Repayment Plan for federal loans is 10 years, but income-driven repayment plans or Direct Consolidation loans may have a term of up to 25 to 30 years.

The repayment terms for private student loans vary by 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.

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.

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

SoFi 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.


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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21
2023
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Paying for College Without Parents Help

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

Paying for college without support from parents may seem like an overwhelming proposition, but it often is possible. Making college affordable often starts before you even choose a college, by reviewing tuition and financial aid available to you at the colleges and universities you are interested in attending. Choosing the right college for you can go a long way in helping you pay for your education.

Other strategies include applying for scholarships and working through college. Each student is in a unique financial situation, and you may find a combination of these strategies can provide the help you need in order to pay for college. These strategies could also be used by students who do have parental assistance.

Strategies to Help Pay for College Without Parental Support

Finding the resources to pay for college can be a challenge, and if you’re embarking on this journey alone, it can be stressful. Here are some tips that can help you navigate the process and make it feel less overwhelming.

Choosing the Right College

The best college for your situation will likely be one that provides the programs you need to achieve your career goals and has a price tag that you can afford.

Decisions you’ll need to make include:

•   Living at home or in a dormitory or other housing by the college

•   Choosing between a public or private college

•   Picking between in-state and out-of-state colleges

Living at Home

If you can live near the college rent-free, or at low cost, then this is likely the most cost-effective choice. Perhaps you have family members who live near a college and will allow you to live with them while you pursue your education. Or, maybe you could rent a low-cost apartment near a community college or other school that doesn’t require freshmen to live in a dorm.

Considering Private vs Public Colleges

Public colleges are, generally speaking, less expensive than private colleges. Tuition and fees for the 2022-2023 academic year averaged $39,400 at private colleges and $28,240 at public colleges (for out-of-state residents). Prices get even more reasonable if you attend school in your home state and receive in-state tuition — the average cost of in-state tuition and fees was $10,940.

Generally, in-state universities are more affordable than going out of state. But the difference between tuition for out-of-state and in-state students can vary widely, so check into your colleges of choice for confirmation. You’ll also want to factor in traveling costs for out-of-state options and consider online college programs where you can take classes no matter where you are located.

Starting at a Community College

Completing your first two years of study at a community college is another option that could dramatically reduce the overall cost of college. In addition to less expensive courses, it may be possible for you to live at home, which can cut costs even more. You might then transfer to a four-year college, allowing you to get a degree from that school without paying for the cost for all four years.

💡 Quick Tip: Fund your education with a low-rate, no-fee SoFi private student loan that covers all school-certified costs.

Applying for Relevant Scholarships

Because scholarships don’t typically need to be repaid, they are a valuable tool to help fund your college education. If you’re finishing high school, talk to your guidance counselor about possibilities. There are often local scholarships provided by businesses and civic groups that you can apply for.

These days, you can also find a lot of scholarship opportunities online. There are often major-specific opportunities and more general offerings. It’s worth investing a bit of time in researching and applying for scholarships — a couple hours could really be worth it when those scholarship offers start rolling in.

As you’re researching scholarships, you’ll want to be sure to find quality opportunities and be wary of scams. Also, don’t shy away from smaller scholarships. While it would be nice to have one large scholarship to cover your cost of college, smaller scholarships can add up, incrementally chipping away at what you need to afford college. Some scholarships may be location-based. Check out SoFi’s state-by-state financial aid guides for more information on scholarships local to your home state.

When you find a college scholarship of interest, check the guidelines carefully to ensure you qualify. Also be sure to follow the application instructions carefully, and submit your forms as early as possible within the timeline. Although you can often reuse parts of one scholarship application to complete another, each opportunity typically has unique requirements, formats, and deadlines.

Recommended: What Is a Merit Scholarship & How to Get One

Need to fund your education?
Learn more about SoFi private student loans.

Obtaining Grants to Help Pay for College

Grant funding can come from multiple sources, including state agencies, local organizations, corporations, and more. And as with scholarships, this is money you don’t typically need to pay back. The biggest source of college grant funding comes from the federal government, and one of the best known is the Pell Grant .

Federal grants come in different categories, including:

•   Need-based grants which are based upon financial hardship

•   Merit-based grants awarded to students who exhibit exceptional scholarship and/or community involvement

•   Grants awarded to specific groups, including students with disabilities, those from underrepresented groups, veterans, National Guard members, foster care youth, and those who select certain careers

Obtaining federal grant funding without help from your parents can be challenging, though. That’s because most federal grants require students to fill out the Free Application for Federal Student Aid (FAFSA), which, if you are a dependent student, will be considered incomplete without parental information. In the event that your parents are unable to fill out their portion of the FAFSA , you’ll have to contact your college’s financial aid office and show appropriate documentation that verifies that your parents cannot fill out the form.

In certain circumstances, you can obtain independent student status and complete the FAFSA yourself, but parental refusal to help with FAFSA completion might not be enough to gain this status.

Even if you fully support yourself financially and are no longer claimed as a dependent on your parents’ tax forms, this status may not necessarily be granted. See your guidance counselor if you want to explore obtaining this status.

💡 Quick Tip: Even if you don’t think you qualify for financial aid, you should fill out the FAFSA form. Many schools require it for merit-based scholarships, too. You can submit it as early as Oct. 1.

Applying for Student Loans

As mentioned, students that fund their college educations without assistance from their parents often need to craft a financial aid plan that consists of funding from multiple sources. This may include funding from both the federal government and private lenders.

Applying for Federal Student Loans

Federal and private student loans are available, but most federal loans require a portion of your FAFSA to be completed with parental information, unless you have independent student status.

Effective with the Higher Education Opportunity Act of 2008 , college financial aid departments can offer students unsubsidized Stafford loans even if their parental section on their FAFSA isn’t completed, as long as they confirm that parents are not willing to financially help the student or fill out the FAFSA.

Applying for Private Student Loans

You can also apply for private student loans, although, if you don’t have much or any credit history, you may need a cosigner. Private lenders generally evaluate a potential borrower’s credit history, among other factors, as they make their lending decisions. Adding a cosigner with a strong credit history could potentially help secure a more competitive interest rate. If you aren’t able to find a cosigner, it is possible to apply for a student loan without a cosigner.

Another important note is that private student loans may not offer borrower protections like those offered to federal student loan borrowers, such as the option to apply for Public Services Loan Forgiveness. For this reason, private student loans are generally borrowed as a last resort option.

With determination and a willingness to seek out and accept help, students do find ways to fund their college educations without assistance from their parents.

Recommended: What Percentage of Parents Pay for College?

Cutting Costs While Attending College

Smart budgeting and careful spending can help you stay in line with your means as you pay for college. Cutting costs when possible could allow you to save or funnel more money toward college tuition.

If, for example, you plan to rent a room in a house near your college of choice, you can furnish it in funky, eclectic ways using stylish and affordable finds from thrift stores and garage sales. ​If you’re handy, you can even build your own loft bed and other furniture, with plenty of instructions available online.

Food gets expensive quickly. If you’ll be on a college meal plan, choose one that doesn’t include waste. Or if you’re living somewhere where you can cook your own food, plan thrifty meals in advance and shop in bulk. Watch for a slow cooker at rummage sales, and you can cook plenty of delicious soups and more.

To cut costs on textbooks, shop around to see if there are any used options you can purchase at a discounted rate. If the book you are buying is directly related to your college major, and you plan on saving it for reference in the future, it could be worthwhile to buy the book. If it’s a textbook for an elective class, you could consider renting the textbook which can often be cheaper than buying it brand new.

Working While Attending School

In addition to potentially helping you qualify for financial aid, your FAFSA may qualify you for federal work-study programs. Of course, finding a part-time job that isn’t associated with work-study is also an option.

You will need to determine how many hours per week you can work and still do well in school. And you’ll also need to find a job that is willing to accommodate the work-school balance you require. For example, it’s important to find an employer who will offer flexibility in scheduling during, for example, midterms and final exams.

The Takeaway

Students who are planning on paying for college without their parents’ help can start by choosing an affordable college option, applying for scholarships, getting a part-time job, and applying for federal student aid. As a dependent student, applying for federal aid may be challenging without your parent’s support, because the FAFSA may be considered incomplete without their information.

In the event that other avenues of funding have been depleted, students may consider private student loans, keeping in mind that private student loans don’t always have the same borrower protections as federal 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.

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

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. 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.

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.

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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2023
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How to Get a Student Loan

By | Student Loans, student_loan | No Comments

Applying for a student loan generally works one of two ways. Students interested in borrowing a federal student loan can apply by filling out and submitting the Free Application for Federal Student Aid (FAFSA®) as early as the October before the school year. The federal deadline for filling out the FAFSA is typically June of the school year, though states and individual colleges may have their own deadlines.

Private student loans run independently of the federal loan program. Students are able to apply for a private student loan at any time during the school year.

Understanding The Difference Between Private and Federal Student Loans

There are a few important differences between federal and private student loans that it’s important to understand.

For federal student loans, The U.S. Department of Education runs the William D. Ford Federal Direct Loan Program. The program has four types of loans to consider:

•   Direct Subsidized Loans: for undergraduates who demonstrate financial need.

•   Direct Unsubsidized Loans: for undergraduate, graduate, and professional students. Eligibility is not based on financial need.

•   Direct PLUS Loans: made only to graduate or professional students, or to the parents of dependent undergraduate students. No financial need is required for Direct PLUS Loans, but a credit check is. If you’re applying yourself and your credit isn’t great, you may need to meet some additional requirements.

•   Direct Consolidation Loans: these allow you to consolidate all of your federal student loans into one single loan, which is managed by a single loan servicer.

Private student loans are offered through private lenders. As a part of the application process, lenders will generally evaluate a borrower’s personal financial information and history, including their credit score, among other factors. Private loans don’t have to follow the same government regulations as federal loans, and they don’t offer the same borrower benefits or protections — like income-driven repayment plans or Public Service Loan Forgiveness. For this reason, private loans are generally considered an option only after other sources of funding have been exhausted.

💡 Quick Tip: SoFi offers low fixed- or variable-interest rates. So you can get a private student loan that fits your budget.

How to Apply for a Federal Student Loan

The first step in applying for a federal student loan is to complete and submit a form called the Free Application for Federal Student Aid (FAFSA®). As mentioned, the FAFSA is typically available starting in October of the year before school starts. The FAFSA will remain open until June 30th of the academic year. So for example, for the 2023-2024 school year, the FAFSA application opened on October 1, 2022, and will close on June 30, 2024.

While there is a large window to fill out the FAFSA, there may be college or state deadlines that fall before the federal deadline. Additionally, some aid is awarded on a first-come first-served basis, so it can be beneficial to fill out the FAFSA as early as possible.

Once the FAFSA is submitted, your school will review and determine your financial aid offer, which may include federal student loans, scholarships, grants, and work-study.

Before you receive any federal student loan that you apply for, you’ll be required to complete entrance counseling , which is designed to help you understand your obligation to repay the loan. You’ll also be asked to sign a Master Promissory Note, which says you officially agree to the terms of the loan.

How To Apply For Private Student Loans

You may want to consider a private student loan after you’ve explored your options for financial aid, grants, scholarships, and federal student loans. Private lenders typically have their own qualification criteria, but you may be eligible to apply for a private student loan if you’re an undergraduate or graduate student, pursuing a certificate, a student of the dental, medical, or other health professions, studying to take the bar exam, or relocating for medical or dental residencies.

Parents may also be eligible to take out private loans to pay for their child’s education.

Private student loans can usually be used for any type of expenses related to your education, including tuition, room and board, fees, books, supplies, equipment, computers and electronics related to your schoolwork, transportation, and personal needs at school.

This list details some of the information you may need when applying for a private school loan. Note that applications will vary by lender so you may not need everything here:

•   The applicant’s name, address, phone number and email address

•   Date of birth

•   Social security number

•   Employer’s name

•   Proof of income (a recent pay stub)

•   Bank account balances

•   Monthly housing payment (rent/mortgage)

•   School name

•   Estimated cost of attendance

•   Your current student status (freshman, full time, for example)

•   Other financial aid you’ve received so far

•   Anticipated graduation date

•   References

•   Student loan cosigner and cosigner’s information, if applicable

Private student loan lenders may let you submit your loan application online, and some may even be able to give you an answer the same day. Of course, underwriting timeframes and documentation requirements can vary greatly by lender.

Private student loans are granted based on your income, credit history, and credit score, among other factors. That means the lender looks at your history of borrowing money and paying it back. This history also determines your loan’s interest rate.

If your credit history is unestablished or less than stellar, applicants may consider adding a cosigner to the loan: that person will be responsible for paying it if you are unable to do so.

Interest rates on private student loans can be fixed-rate or variable interest rate. Fixed rates do not change over the life of the loan. Variable interest rates could increase or decrease due to the financial index that determines the variable rate, or other factors as determined by your lender. Your total monthly payment could vary based on the loan’s current interest rate.

Know that not all private student loans are exactly alike. If you’re interested in borrowing a private student loan, consider shopping around and researching your options. The Consumer Financial Protection Bureau and the U.S. Department of Education are two student loan resources that may be useful.

💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate

Beyond Student Loans: Other Ways to Pay for College

Students can explore other options to pay for college, including scholarships, work-study, grants, and more.

Scholarships and Grants

Scholarships and grants are types of aid that don’t need to be repaid. Grants are generally awarded based on financial need and may be awarded by your school, the government, or another organization such as a nonprofit.

Scholarships may be awarded based on financial need or merit.

Work-Study

The federal work-study program offers part-time employment to undergraduate students who demonstrate financial need. Eligibility for work-study is determined by the FAFSA. Some schools may match students to a work-study job, while other schools may require that students apply for positions.

Part-Time Job

Working part-time can be another way to earn extra cash to pay for college expenses. Students could look into jobs such as tutoring, babysitting, or working at a local business in their college town.

The Takeaway

To get a federal student loan, students fill out the FAFSA in order to see which type and how much aid they may be eligible for. The application process for private student loans may vary by lender. Private student loans can help students pay for college if they don’t get enough federal aid.

Students can also explore other options to help pay for college, such as scholarships and grants and work-study or another part-time job.

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.

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.

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

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. 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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