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Federal student loans could be either Direct Loans or “indirect loans” until 2010, when Congress voted to eliminate the latter. Yet many borrowers of indirect loans, also known as Federal Family Education Loans (FFELs), continue to struggle with repayment.

The big difference between the loan types — and point of contention — was the source of the funding.

Indirect vs Direct Student Loans

Indirect Student Loans

The Federal Family Education Loan Program was funded by private lenders (banks, credit unions, etc.), but guaranteed by the federal government. The program ended in 2010, and loans are now made through the Federal Direct Loan Program.

The government didn’t directly insure FFEL Program loans. Instead, it acted through a guarantor, which paid the lender if the borrower defaulted. Then, the government reimbursed the guarantor.

When it came to questions about payment, borrowers dealt with the lender, the guarantor, the servicer, or a collection agency — not the government.

Direct Student Loans

With a Direct Loan, made through the William D. Ford Federal Direct Loan Program, the funds come directly from the U.S. Department of Education, which gets the money from the U.S. Treasury. The loans are made by the Department of Education and backed by the federal government.

Direct Loans consist of Direct Subsidized and Direct Unsubsidized Loans (also called Stafford Loans), Direct PLUS Loans, and Direct Consolidation Loans.

Recommended: Types of Federal Student Loans

Before 2010, every school made its own decision about whether to participate in a direct or indirect loan program, or possibly both. But there were some differences in interest rates, fees, and repayment options.

What Kind of Loans Do You Have?

If you’re thinking about how to best address your student loan debt, it’s important to know what kind of loan or loans you have, including whether they are Direct Loans or FFELs. You want to see who your loan servicers are, your loan amounts, your interest rates, your terms, and your monthly payments. Getting a baseline is crucial for determining next steps.

Repaying FFEL Program Loans

Even though indirect student loans ended on June 30, 2010, there are still 3.55 million borrowers who hold $94.8 billion in FFEL loans as of 2023.

Borrowers must consolidate their FFEL loans before they can apply for one of the four common income-driven repayment plans, which forgive any loan balance after 20 or 25 years of payments.

They also must consolidate loans to apply for Public Service Loan Forgiveness (PSLF), which allows some members of the military, classroom teachers, social workers, and nonprofit and government employees to have certain loan balances eliminated after 120 on-time payments.

Here’s more on repayment options, including the only income-driven repayment plan tailored to FFEL borrowers.

Income-Sensitive Repayment Plan

Only borrowers with a high debt-to-income ratio will qualify for this FFEL repayment plan. The lender determines the monthly payment based on your total gross income, not adjusted gross.

Consolidating Your Loans

Consolidating loans with a federal Direct Consolidation Loan can increase the amount of interest that is paid over the life of the loan. If you decide to lengthen your payment period (for example, from 10 to 20 or even 30 years), your monthly payment may be lower, but the total interest you’ll pay over the life of the loan will most likely be higher.

Consolidation isn’t necessarily a money-saving option over an extended time period. And the interest rate on a Direct Consolidation Loan is the weighted average of the borrower’s current federal loans, rounded up to the nearest one-eighth of a percentage point. So, the rate actually might rise slightly.

If you don’t have any indirect loans, you still can consider consolidating your Direct Student Loans. (Note that only federal student loans, not private student loans, are eligible for consolidation into a Direct Consolidation Loan.)

Refinancing Your Loans

Another option is to apply to refinance your student loans — federal, private, or both — into one new loan through a private lender.

Before deciding to refinance, it’s important to note that you lose access to federal benefits. This includes the ability to delay payments if you run into certain hardships and apply for federal loan forgiveness programs. But, if you don’t plan on using those, you could gain a chance at a lower interest rate with a refinance.

If you have a solid debt-to-income ratio after graduation and have built your credit profile since you first took out your student loans — and you don’t foresee a need for PSLF or an income-based repayment program — refinancing might help lower your payment without extending the length of your loan via a lower interest rate.

You can see exactly if and how much you could save with SoFi’s student loan refinancing calculator.

The Takeaway

More than 3.5 million borrowers are repaying FFEL Program loans as of 2023. The last of these “indirect loans” were issued in 2010, when federal Direct Loans largely took over. Whether you’re repaying an FFEL loan, Direct Loan, or private loan, it’s a good idea to learn your options and figure out which makes the most sense for your situation.

If you decide to refinance your student loans, SoFi offers an easy online application, no origination fees, and competitive fixed or variable rates.

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

Student loans are a significant issue in the United States, where consumers have more than $1.7 trillion in total student loan debt. In 2021, the average federal student loan debt per borrower was just over $37,000. And 20 years after students enter college, half of borrowers still owe $20,000 in student loans.

Broken down by degree levels, the debt increases. Graduate students who receive a degree leave school with an average of nearly $70,000 in debt. Law students are saddled with an average of $180,000; and medical students owe $250,000 on average for total student loan debt.

With so many borrowers and so much debt, it begs the question, “Should all student loan debt be forgiven?”

Who’s in Favor?

By a 2-to-1 margin, voters do support at least some student loans being forgiven, according to a poll from Politico and Morning Consult. And 53% of voters from the same poll support Biden’s extension of student loan payments through August.

Proponents of canceling student loan debt point out that the government is partially responsible for this debt crisis. Because many states slashed higher education funding after the 2008 recession, tuition at both public and private colleges has gone up steeply, and many students have been forced to take out even more in loans.

Unfortunately, the increase in student loan balances hasn’t gone hand in hand with a bump in post-college salary. The result is a national situation where borrowers owe increasingly more in student loans but don’t have the paycheck to aggressively tackle their balances.

Although the government has created income-driven repayment options that seek to keep monthly student loan payments affordable, signing up isn’t without its downsides.

Since these income-driven plans often lengthen loan terms, borrowers may pay significantly more interest on their loans over time. Also, any forgiven balance at the end of their loan term is typically treated as taxable income.

Why Forgiving Student Loan Debt a Isn’t a Slam-Dunk

There are several reasons why forgiving student loan debt may not be a straightforward positive. The first is that, according to U.S. tax laws, debt that’s forgiven is a taxable event. Under income-driven student loan repayment plans, for instance, if you make consistent, on-time payments for the life of the loan (20 or 25 years, depending on when you borrowed), any balance remaining at the end of your loan term is forgiven — but whatever’s forgiven is considered taxable income.

The second issue pundits raise with this plan is that it’s being sold as a stimulus: If the government forgives people’s student loan debt, they’ll put money back into the economy, the thinking goes. But forgiving debt isn’t the same as handing people a check.

And finally, the federal government so far isn’t planning to forgive student loans that borrowers hold with private lenders, which average over $54,000 per borrower.

Alternative Options to Canceling Student Loan Debt

Instead of targeting only student loan borrowers who qualify for relief, the government could provide a stimulus check to all Americans, and Americans could decide for themselves how to use it.

If someone has $10,000 in outstanding student loans, for example, they might prefer to use a check to put a down payment on a house or pay off high-interest credit card debt.

Then there’s the higher education system itself. Canceling or forgiving student loan debt may provide only temporary relief as long as tuition levels continue to rise. As it stands, future generations will be saddled with just as much, if not more, student debt than Americans currently have today.

Tackling Your Student Loan Debt

There’s no telling when or if some form of more long-term relief might appear for student loan borrowers. If you’re struggling under the weight of your student debt, there are strategies that might help:

•   Alternative payment plans: Federal student loans come with a variety of repayment options, one of which might suit your situation.

•   Direction of overpayments: If you make extra payments on your student loans, you may instruct your servicer to apply them to your principal, rather than the next month’s payment plus interest. This will help pay off your loans faster.

•   “Found” money: If you receive a work bonus or tax refund, applying it to your student loans can help reduce your balance faster.

•   Refinancing: Refinancing student loans (private and/or federal) into one new loan with a private lender could lower your monthly payment and interest rate, and make it easier to manage payments. Just know that refinancing federal student loans with a private lender means losing access to federal repayment and forgiveness programs.

Recommended: Can Refinanced Student Loans Still Be Forgiven?

The Takeaway

There is no quick fix for student loan debt, which will take further discussion from stakeholders on all sides.

If you are struggling with your own student loan debt, there are options to consider. You can apply for an income-driven repayment plan, apply for student loan deferment or forbearance on your federal student loans, or refinance your loans with a private lender. Keep in mind, though, that refinancing disqualifies you from federal benefits you may otherwise be eligible for.

If you do decide to refinance, consider SoFi. SoFi has a quick online application process, competitive rates, and no origination fees or prepayment penalties.

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.

The dividend payout ratio is the ratio of total dividends paid to shareholders relative to the net income of the company. Investors can use the dividend payout formula to gauge what fraction of a company’s net income they could receive in the form of dividends.

While a company will want to retain some earnings to reinvest or pay down debt, the extra profit may be paid out to investors as dividends. As such, investors will want a way to calculate what they can expect if they’re a shareholder.

Understanding Dividends and How They Work

Before calculating potential dividends, investors will want to familiarize themselves with what dividends are, exactly.

A dividend is when a company periodically gives its shareholders a payment in cash, or additional shares of stock, or property. The size of that dividend payment depends on the company’s dividend yield and how many shares you own.

Many investors look to buy stock in companies that pay them as a way to generate regular income in addition to stock price appreciation. A dividend investing strategy is one way many investors look to make money from stocks and build wealth.

Investors can take their dividend payments in cash or reinvest them into their stock holdings. Not all companies pay dividends, and those that do tend to be large, established companies with predictable profits — blue chip stocks, for example. If an investor owns a stock or fund that pays dividends, they can expect a regular payment from that company — typically, each quarter. Some companies may pay dividends more frequently.


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Pros and Cons of Investing in Dividend Stocks

Since dividend income can help augment investing returns, investing in dividend stocks — or, stocks that tend to pay higher than average dividends — is popular among some investors. But engaging in a strategy of purchasing dividend stocks has its pros and cons.

As for the advantages, the most obvious is that investors will receive dividend payments and see bigger potential returns from their holdings. Those dividends, in addition to stock appreciation, allow for two potential ways to generate returns. Another benefit is that investors can set up their dividends to automatically reinvest, meaning that they’re holdings grow with no extra effort.

Potential drawbacks, however, are that dividend stocks may generate a higher tax burden, depending on the specific stocks. You’ll need to look more closely at whether your dividends are “ordinary” or “qualified,” and dig a little deeper into qualified dividend tax rates to get a better idea of what you might end up owing.

Also, stocks that pay higher dividends often don’t see as much appreciation as some other growth stocks — but investors do reap the benefit of a steady, if small, payout.

What Is the Dividend Payout Ratio?

The dividend payout ratio expresses the percentage of income that a company pays to shareholders. Ratios vary widely by company. Some may pay out all of their net income, while others may hang on to a portion to reinvest in the company or pay off debt.

Generally speaking, a healthy range for payout ratios is from 35% to 55%. There are certain circumstances in which a lower ratio might make sense for a company. For example, a relatively young company that plans to expand might reinvest a larger portion of its profits into growth.

How to Calculate a Dividend Payout

Calculating your potential dividend payout is fairly simple: It requires that you know the dividend payout ratio formula, and simply plug in some numbers.

Dividend Payout Ratio Formula

The simplest dividend payout ratio formula divides the total annual dividends by net income, or earnings, from the same period. The equation looks like this:

Dividend payout ratio = Dividends paid / Net income

Again, figuring out the payout ratio is only a matter of doing some plug-and-play with the appropriate figures.

Dividend Payout Ratio Calculation Example

Here’s an example of how to calculate dividend payout using the dividend payout ratio.

If a company reported net income of $120 million and paid out a total of $50 million in dividends, the dividend payout ratio would be $50 million/$120 million, or about 42%. That means that the company retained about 58% of its profits.

Or, to plug those numbers into the formula, it would look like this:

~42% = 50,000,000 / 120,000,000

An alternative dividend payout ratio calculation uses dividends per share and earnings per share as variables:

Dividend payout ratio = Dividends per share / Earnings per share

A third formula uses retention ratio, which tells us how much of a company’s profits are being retained for reinvestment, rather than paid out in dividends.

Dividend payout ratio = 1 – Retention ratio

You can determine the retention ratio with the following formula:

Retention ratio = (Net income – Dividends paid) / Net income

You can find figures including total dividends paid and a company’s net income in a company’s financial statements, such as its earnings report or annual report.

Why Does the Dividend Payout Ratio Matter?

Dividend stocks often play an important part in individuals’ investment strategies. As noted, dividends are one of the primary ways stock holdings earn money — investors also earn money on stocks by selling holdings that have appreciated in value.

Investors may choose to automatically reinvest the dividends they do earn, increasing the size of their holdings, and therefore, potentially earning even more dividends over time. This can often be done through a dividend reinvestment plan.

But it’s important to be able to know what the ratio results are telling you so that you can make wise decisions related to your investments.

Interpreting Dividend Payout Ratio Results

Learning how to calculate dividend payout and use the payout ratio is one thing. But what does it all mean? What is it telling you?

On a basic level, the dividend payout ratio can help investors gain insight into the health of dividend stocks. For instance, a higher ratio indicates that a company is paying out more of its profits in dividends, and this may be a sign that it is established, or not necessarily looking to expand in the near future. It may also indicate that a company isn’t investing enough in its own growth.

Lower ratios may mean a company is retaining a higher percentage of its earnings to expand its operations or fund research and development, for example. These stocks may still be a good bet, since these activities may help drive up share price or lead to large dividends in the future.


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Dividend Sustainability

Paying attention to trends in dividend payout ratios can help you determine a dividend’s sustainability — or, the likelihood a company will continue to pay dividends of a certain size in the future. For example, a steadily rising dividend payout ratio could indicate that a company is on a stable path, while a sudden jump to a higher payout ratio might be harder for a company to sustain.

That’s knowledge that may be put to use when trying to manage your portfolio.

It’s also worth noting that there can be dividend payout ratios that are more than 100%. That means the company is paying out more money in dividends than it is earning — something no company can do for very long. While they may ride out a bad year, they may also have to lower their dividends, or suspend them entirely, if this trend continues.

Dividend Payout Ratio vs Dividend Yield

The dividend yield is the ratio of a stock’s dividend per share to the stock’s current price:

Dividend yield = Annual dividend per share/Current stock price

As an example, if a stock costs $100 and pays an annual dividend of $7 the dividend yield will be $7/$100, or 7%.

Like the dividend payout ratio, dividend yield is a metric investors can use when comparing stocks to understand the health of a company. For example, high dividend yields might be a result of a quickly dropping share price, which may indicate that a stock is in trouble. Dividend yield can also help investors understand whether a stock is valued well and whether it will meet the investor’s income needs or fit with their overall investing strategy.

Dividend Payout Ratio vs Retention Ratio

As discussed, the retention ratio tells investors how much of a company’s profits are being retained to be reinvested, rather than used to pay investors dividends. The formula looks like this:

Retention ratio = (Net income – Dividends paid) / Net income

If we use the same numbers from our initial example, the formula would look like this:

~58% = (120,000,000 – 50,000,000) / 120,000,000

This can be used much in the same way that the dividend payout ratio can, as it calculates the other side of the equation — how much a company is retaining, rather than paying out. In other words, if you can find one, you can easily find the other.

The Takeaway

The dividend payout ratio is a calculation that tells investors how much a company pays out in dividends to investors. Since dividend stocks can be an important component of an investment strategy, this can be useful information to investors who are trying to fine-tune their strategies, especially since different types of dividends have different tax implications.

In addition, the dividend payout ratio can help investors evaluate stocks that pay dividends, often providing clues about company health and long-term sustainability. It’s different from other ratios, like the retention ratio or the dividend yield.

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).

FAQ

How do you calculate your dividend payment?

To calculate your exact dividend payment, you’d need to know how many shares you own, a company’s net income, and the number of total outstanding shares. From there, you can calculate dividend per share, and multiply it by the number of shares you own.

Are dividends taxed?

Yes, dividends are taxed, as the IRS considers them a form of income. There may be some slight differences in how they’re taxed, but even if you reinvest your dividend income back into a company, you’ll still generate a tax liability by receiving dividend income.

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