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A preferred provider organization (PPO) is a type of health care plan that offers lower out-of-pocket costs to members who use doctors and other providers who are part of the plan’s network.

These preferred providers have signed onto the network at a lower negotiated rate than they might charge outside of the network.

PPOs also offer members the flexibility to see providers outside of the plan’s network, although they will most likely pay more in out-of-pocket costs to do so.

To learn more about PPOs, and how this type of plan compares to other health insurance options, read on.

How Does PPO Insurance Work?

When you join a PPO health plan, you’re joining a managed care network that includes primary care doctors, specialists, hospitals, labs, and other healthcare professionals. PPO networks tend to be large and geographically diverse.

If you see a preferred provider, you will likely pay a copay, or you might be responsible for a coinsurance payment (after you meet the plan’s deductible).

While you are free to see any health care provider whether or not they are in the PPO network, if you see a provider outside of the network, you may pay significantly more in out-of-pocket costs. In return for flexibility, large networks, and low in-network cost sharing, PPO plans typically charge higher premiums than many other types of plans.

PPOs are a common, and often a popular, choice for employer-sponsored health insurance.

Recommended: Common Health Insurance Terms & Definitions

What Are the Costs of Going Out of the PPO’s Network?

If you see a provider who is not part of the plan’s network, you will likely be expected to bear more of the cost. PPOs typically use what’s called a “usual, customary and reasonable” (UCR) fee schedule for out-of-network services.

Insurers calculate UCR fees based on what doctors in the area are charging for the same service you were provided.

If your doctor charges more than what your insurance company determines to be usual, customary, and reasonable, you most likely will be charged for the difference between the amount charged for the service and the amount covered by your insurer.

Depending on where you live and the service you received, this difference could be significant. It may also come as a surprise to policyholders who assume their medical costs will be covered and don’t fully understand the distinction between in-network and out-of-network providers.

A good way to avoid surprise charges with a PPO (or any health plan) is to talk to your provider and your insurer before you receive treatment about the total cost and what will be covered.


💡 Quick Tip: When you have questions about what you can and can’t afford, a spending tracker app can show you the answer. With no guilt trip or hourly fee.

How PPOs Compare to Other Types of Health Care Plans

PPO plans are most often compared with health maintenance organizations (HMOs), another common type of managed care health plan.

HMOs typically offer lower premiums and out-of-pocket costs than PPOs in exchange for less flexibility.

Unlike a PPO, HMO members typically must choose a primary care physician from the plan’s network of providers. Care from providers out of the HMO network is generally not covered, except in the case of an emergency.

Also unlike a PPO, an HMO’s network of providers is usually confined to a specific local geographic area.

Another key difference between these two types of plans: HMO members typically must first see their primary care doctor to get a referral to a specialist. With PPOs, referrals are not usually required.

PPOs are also often compared to point of service (POS) plans.

POS plans are generally a cross between an HMO and a PPO. As with a PPO, POS members generally pay less for care from network providers, but may also go out of network if they desire (and potentially pay more).

Like an HMO, POS plans require a referral from your primary care doctor to see a specialist.

PPOs (as well as HMOs and POS plans) are very different from high deductible health plans, or HDHPs.

HDHPs charge a high deductible (what you would have to pay for health care costs before insurance coverage kicks in).

This means that you would need to pay for all of your doctor visits and other medical services out of pocket until you meet this high deductible. In return for higher deductibles, these plans usually charge lower premiums than other insurance plans.

You can combine a HDHP with a tax-advantaged health savings account (HSA). Money saved in an HSA can be used to pay for qualified medical expenses.

HDHPs are generally best for relatively healthy people who don’t see doctors frequently or anticipate high medical costs for the coming year.

Recommended: Beginner’s Guide to Health Insurance

What Are the Pros and Cons of PPO Insurance?

As with all health insurance options, PPOs have both advantages and disadvantages. Here are a few to consider.

Advantages of PPOs

•   Flexibility. PPO members typically do not have to see a primary care physician for referrals to other health care providers, and they may see any doctor they choose (though they may pay more for out-of-network providers).

•   Lower costs for in-network care. Out-of-pocket costs, such as copays and coinsurance, for care from in-network providers can be lower than some other types of plans.

•   Large provider networks. PPOs usually include a large number of doctors, specialists, hospitals, labs, and other providers in their networks, spanning across cities and states. As a result, network coverage while traveling or for college student dependents can be easier to access than with more restricted plans.

Disadvantages of PPOs

•   High premiums. In return for flexibility, PPO members can expect to pay higher monthly premiums than they may find with other types of plans.

•   High out-of-pocket costs for out-of-network care. Depending on where you live, the treatment you receive, and how your insurer calculates “usual, customary, and reasonable” fees, you may find you are responsible for a large portion of the bill when you receive care outside of the PPOs network.

•   Might be more insurance than you need. If you rarely see doctors and wouldn’t mind potentially switching doctors, you may be able to save money by going with an HMO or a HDHP.

💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

The Takeaway

PPOs are a popular type of health plan because of the flexibility, ease of use, and wide range of provider choices they offer. PPO networks tend to be large and varied enough to include a patient’s existing doctors. If not, members still have the option of going out-of-network and receiving at least some coverage from a PPO. PPO members pay for this flexibility, however.

PPOs typically come with higher premiums, along with extra costs associated with out-of-network care. That can be prohibitive for many consumers.

Your employer’s benefits department or an experienced insurance agent or broker can help you compare PPOs to other types of health care plans and determine which choice is right for your health care needs and your budget.

Before choosing a plan, it can also be helpful to track your spending for a few months to see how much you are currently spending on medical care. This can help you ballpark costs for the coming year and make it easier to compare plans.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

SORL0923001

For some, tax day means a much-awaited refund. For others, it may mean another expense. There are a variety of factors that can affect your taxes, including your status as a student.

If you paid qualifying educational expenses or student loan interest during the tax year, you may qualify for a student loan interest deduction or an education tax credit — which could potentially mean a lower tax bill or a higher tax refund.

When you claim a deduction on your taxes, it is subtracted from your total income. Your income taxes are assessed after the deduction is taken. In contrast, a tax credit is subtracted from any taxes you may owe.

Taxes are complicated so It’s a good idea to consult with a tax professional about what deductions and tax credits you may be eligible for. What follows, however, are some general guidelines on how student loans might affect your tax returns.

Student Loan Interest Deduction Explained

The student loan interest deduction lets borrowers deduct all or part of the interest they pay on their federal student loans and/or private student loans when they file their federal income tax return.

Usually, you can expect to receive a 1098-E form from each of your student loan providers by the end of January each year. This form details the amount of interest you paid over the past calendar year.

Your loan servicer is only required to send you a 1098-E form if you paid more than $600 in interest on a qualified student loan. If you did not receive this by mail, your provider may have sent an email notification to let you know your 1098-E is ready to download.

To qualify for the maximum $2,500 student loan interest deduction, you must meet certain filing and income criteria. It may be possible to deduct student loan interest that has been paid on loans issued for yourself, your spouse (if you file jointly), and your dependents. However, parents can’t claim the student loan interest deduction if the student loan is in their dependent’s name only.

Since this is an adjustment to your gross income, you can take this deduction even if you don’t itemize. In order to claim this deduction, there are certain income requirements that must be met. The deduction is phased out when an individual’s modified adjusted gross income (MAGI) reaches certain thresholds.

The threshold amounts change every year but for the 2022 tax year, the benefit began to phase out at $70,000 for single filers and $145,000 for married taxpayers filing jointly.

The deduction was eliminated completely for single filers making $85,000 or more and for married taxpayers filing jointly who are making $175,000 or more.

Recommended: Are Student Loans Tax Deductible?

Am I Eligible for Education Tax Credits?

If you paid tuition, fees, or other education-related expenses during the tax year, you may be eligible for an education tax credit, either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC).

Note that you can’t claim both credits for the same individual within the same year. If you qualify for both, it might be worth calculating them both in order to determine the option that is best for you.

American Opportunity Credit

This credit applies towards 100% of the first $2,000 of eligible education expenses and 25% of the next $2,000.

What does this mean? Students who are enrolled at least half time in a degree or certificate program for one academic period during the tax year may be eligible to receive a credit of up to $2,500 for the cost of tuition, fees, and course materials.

The credit may be claimed for up to four years, but it can’t be claimed after the eligible student has completed the first four years of post-secondary education, which means those pursuing graduate degrees aren’t eligible for this tax credit.

The MAGI limit for eligibility is $90,000 for individual filers and $180,000 for joint filers. The credit is reduced if MAGI is between $80,000 and $90,000 for individual filers and between $160,000 and $180,000 for joint filers.

The AOTC is a refundable tax credit. This means that if the credit takes your tax bill to zero, you can get 40% of the unused credit, up to $1,000, as a tax refund. The IRS has even more information on the requirements and eligibility factors for the AOTC on its website .

Recommended: Are Forgiven Student Loans Taxed?

Lifetime Learning Credit

The lifetime learning credit (LLC) is worth 20% of the first $10,000 of eligible education expenses, for a maximum of $2,000.

The LLC is similar to the AOTC, but with a few important differences. This credit has a lower income limit than the AOTC. For the 2022 tax year, the amount of your LLC is gradually phased out if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

You can’t claim the credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).

There is no limit to how many years you can claim the credit. And the credit can be used to help pay for a variety of education expenses, including undergraduate, graduate, and professional degrees. You could even qualify for the credit if you’re taking classes to “acquire or improve job skills.”

Unlike the AOTC, the LLC is not refundable. This means that the credit can be used to pay for the taxes you owe, but if it surpasses that, you won’t receive any money back as a refund. The IRS has even more information on the LLC available on its website.

Finding Tax Help

If you want to learn more about these education tax credits and additional education tax deductions, the IRS has further information .

If the process of filing your taxes seems overwhelming or you’re still confused by the ins and outs of these tax advantages, you could consider finding help this tax season. A qualified tax professional could assist you in navigating your taxes and help you maximize your refund with less hassle — and they will know more about any credits or deductions you may be eligible for. After all, it’s their job to know!

Recommended: Is an Employee’s Student Loan Repayment Benefit Taxed As Income?

Figuring Out How to Pay for School

Even with tax credits and deductions, paying for school might still be an overwhelming prospect.

If scholarships, federal student loans, grants, and savings just aren’t enough to pay for school, you may want to consider applying for a private student loan. These are available through private lenders, including banks, credit unions, and online lenders. Loan limits vary by lender, but you can often get up to the total cost of attendance (which is more than you can borrow from the federal government). Interest rates may be fixed or variable and are set by the lender. Generally, borrowers (or cosigners) who have strong credit qualify for the lowest rates.

Keep in mind, though, that private loans may not offer the borrower protections — like income-based repayment plans and deferment or forbearance — that automatically come with 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.

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.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


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.

SOIS0923010

Student loans can help you finance your college education without paying much interest. However, you don’t want to take on more debt than you can comfortably pay back after you graduate. As of June, 2023, student borrowers owe 1.76 trillion in student loan debt, including federal and private student loans, according to the Federal Reserve.

High school can be a great time to start learning about the types of student loans available to you, how interest accrues, and what you can expect when it comes time to repay any student loans you take out. Read on to learn some of the ABCs of student loans, and how to not let them weigh down your financial future.

Student Loan Types

There are two main categories for student loans: federal and private student loans.

Federal Student Loans

Federal student loans are funded by the federal government. Interest rates are fixed (and comparatively fair) and are set annually by Congress every July. Federal student loans also come with protections like income-driven repayment plans and deferment or forbearance options in the case of life changes, such as sudden loss of a job or other roadblocks to repayment.

The following are the federal student loan options offered:

•   Direct Subsidized Loans These are available to eligible undergraduates with a proven financial need. The government subsidizes (meaning it pays for) the interest that accrues on these loans while the student borrower is enrolled in school at least half-time and during the loan’s grace period (more on that below), and other qualifying periods of deferment.

•   Direct Unsubsidized Loans These are available to eligible undergraduates and graduate students regardless of financial need. Student borrowers are responsible for paying all of the accrued interest on unsubsidized student loans.

•   Direct PLUS Loans These are available to eligible parents of undergraduate students and to graduate or professional students. They are not subsidized by the government.

Private Student Loans

Private student loans are issued by non-government institutions, such as banks, credit unions, and online lenders. The requirements for applying for these types of loans may be more stringent.

Lenders will typically look at the student’s or their cosigner’s credit history, income, and other financial information. Some lenders require you to begin making payments while you are in school, while others allow you to wait until six months after you graduate. Either way, interest typically begins to accrue as soon as the funds are disbursed.

How to Apply for a Student Loan

The process for applying for student loans varies based on whether the loan is private or federal.

Applying for a Federal Student Loan

To apply for a federal student loan, you need to fill out and submit the Free Application for Federal Student Aid (FAFSA®) . Even if you don’t think you’ll be approved for financial aid, it can be worth submitting the FAFSA. The application is free and you may qualify despite your circumstances. The FAFSA also gives you access to federal student loans.

Every year, the FAFSA form usually becomes available online as of October 1 for the next school year. (Note that the FAFSA for 2024-25 academic year won’t be available until December 2023 due to the roll out of a new, more simplified form.)

You can easily apply online (see the link above). Completing the FAFSA determines the combination of federal loans, grants, and work-study you’re eligible for. Some colleges and universities also use information from the FAFSA to determine if you qualify for school-specific financial aid.

Applying for a Private Student Loan

It’s important to take the time to do some research and find a lender with a good reputation that offers competitive rates and terms. Ideally, you want a lender that offers flexible repayment options, reasonable (or no) fees, and will provide helpful customer support if you find yourself having any issues with your student loan payments.

If you decide to apply for a private student loan, you will more than likely have to reveal personal financial details, like your credit history. Since students typically don’t have much, or any, credit history, they often need to apply with a cosigner. That’s someone who will share the responsibility with you of paying back the loan.

In many cases, that cosigner would be a parent or an adult with whom you have a close relationship. Getting a cosigner may increase your chances of getting a better interest rate, which could help you spend less in interest over the life of the loan.

Types of Student Loan Interest Rates

The interest rate on your student loans could have a lasting impact on your future finances. The interest charged is a percentage of your unpaid loan principal — that is, the amount you borrowed. Interest is paid to the lender in exchange for the opportunity to borrow money from them.

You can typically choose from between two types of interest rates: fixed-rate and variable rates.

Fixed-rate student loans: These types of loans offer an interest rate that remains the same throughout the life of the loan. This could give you peace of mind, knowing that the rate won’t change, even if the state of the economy does. Interest rates could fluctuate wildly during the course of your loan, but a fixed-rate won’t be affected. As previously mentioned, federal student loans have a fixed interest rate. Some private lenders also offer student loans with a fixed interest rate.

Variable-rate loans: These types of loans come with an interest rate that can increase or decrease based on market fluctuations. Some private lenders offer student loans with variable interest rates. These are also sometimes called floating-rate loans, because the interest rate can change during the life of the loan.

A variable-rate school loan might start with a lower rate than a fixed-rate loan but keep in mind that your interest rate — and monthly payment — could rise later on. A variable- rate loan can make sense if you plan to pay off your student loan early before rates have a chance to rise too much, expect rates to fall in the future, or you have some wiggle room in your budget in case of rising interest rates.

Student Loan Mistakes to Avoid.

1. Failing to Research Your Loans

With any type of student loan, it’s key to understand what you are agreeing to. You’ll want to make sure you understand what the interest rate will be, what your monthly payment will be, when you’ll need to start repayment, and how you plan to cover that obligation.

2. Borrowing Too Many Loans

It’s nice to be approved and accepted, but too many loans (borrowing more money than you actually need) can lead to a heavy financial burden after graduation. Generally, you’ll want to use any college savings, financial aid, and federal student loans before looking to private student loans (which tend to come with higher interest rates than federal student loans). If you’ll need to take on significant debt to attend a certain school, you might consider choosing a less expensive institution.

3. Not Having a Plan

Life can be unpredictable. The one thing you could have power over is your school loan repayment plan. It’s important that you know exactly when your student loan repayment plan starts (in some cases, that could be before you graduate), and exactly what your monthly payment will be.

It can also be helpful to set up a budget that accounts for all of your college costs, including tuition, books, room and board, food expenses, and anything else related directly to your education. If you budget for it ahead of time, you can help make it easier to use your student loan money wisely.

4. Not Realizing That Interest Continues Accruing

Understanding how and when interest accrues on your student loans is critical. For many student loans, interest will accrue while you are in school and during your grace periods. (A grace period is the period of time after you graduate or drop down below half-time attendance, during which you are not required to make payments.)

With the exception of subsidized federal student loans, interest will continue to accrue even if you are not making payments on your student loan. It will then typically be capitalized. Capitalization occurs when the accrued interest is added to the principal balance of the loan (the original amount borrowed). This new value becomes the balance on which interest is calculated moving forward.

Recommended: Understanding Capitalized Interest on Student Loans

Repaying Your Student Loan

Another important factor is understanding what repayment plans are available to you based on the type of loan you borrowed.

Repaying Federal Loans

For Direct Subsidized and Unsubsidized Federal Loans, students who are enrolled in school at least half-time aren’t required to make payments on their student loans. On these loans, repayments officially begin after the loan’s grace period.

Federal loans typically have a six-month grace period after graduation, which allows you time before you have to start repaying your loans. It’s important to note that even though you may be granted a grace period, depending on the loan you have, you may still be responsible for paying the interest on the loan during the time you are not making payments.

Note that PLUS Loans, which are available to parents of students and graduate or professional students, require repayments as soon as the loan is disbursed (or paid out).

Borrowers with federal loans are able to choose one of the federal repayment plans . These include:

•   Standard Repayment Plan On this plan, monthly payments are a fixed amount and repayment is set over a 10-year period.

•   Graduated Repayment Plan On this plan, payments start out on the lower end and then gradually increase as repayment continues. Loans are generally paid off over a 10-year period.

•   Extended Repayment Plan Payments may be either fixed or may gradually increase over the loan term. Loans are paid off within 25 years.

•   Income-Driven Repayment Plans There are four income-driven repayment plans. These tie payments to the borrower’s discretionary income. The percentage and repayment term may vary depending on the type of income-driven repayment plan the borrower is enrolled in.

With private student loans, the repayment terms are determined by the lender. That schedule will tell you exactly when your first payment is due and how much you will owe.

Unlike federal loans, many private loans have to be paid back before you graduate, so be sure to review your agreement closely and know exactly what you are going to need to do. Contact the lender directly if you have any questions.

Recommended: How to Pay Off College Loans

If Repaying Loans Becomes a Problem

Nobody plans on not paying back their student loans, but sometimes life can throw a few financial punches that you weren’t expecting. A smart strategy if this were to happen to you: face the problem head-on.

Options for Federal Student Loans

If a borrower is struggling to make payments on their federal student loans, they may consider changing their repayment plan. Federal loans, as mentioned, offer income-driven repayment options which tie the monthly payments to the borrower’s income. This can help make monthly payments more manageable for borrowers.

In cases when even income-driven repayments are too much, borrowers may be able to apply for deferment or forbearance. These allow borrowers to pause their loan payments. Depending on the loan type, you may or may not accrue interest during periods of deferment or forbearance.

Options for Private Student Loans

Private lenders are not required to offer the same repayment plans or borrower protections (like deferment and forbearance, mentioned above) as federal student loans. Some private lenders may be willing to work with you during times of financial difficulty so that you can continue making payments. Check in directly with your lender to see what payment plans or options they may have available to you.

A Note on Student Loan Default

After a certain number of missed payments (which can vary depending on whether you have borrowed a federal or private student loan), your loan may enter default. That can have serious financial consequences, such as impacting your credit score.

Declaring bankruptcy generally won’t rid you of your federal student loan obligations. It is extremely challenging to get student loans (federal or private) discharged in bankruptcy.

What to Do if You Don’t Get Enough Federal Loans

It’s never too early (or too late) to begin researching methods of additional funding if your federal loans aren’t going to cover your tuition costs. Here are just a few to consider.

Scholarships

Scholarships do not typically have to be paid back. If you’re not sure where to begin your scholarship search, you might ask your high school guidance counselor for recommendations. An online scholarship search tool can also be helpful.

In addition, you may want to try local community and civic organizations, as well as businesses and religious groups. You can also ask about scholarships in your college’s financial aid office.

You can also try scouting scholarships based on a certain skill or talent: music, writing, sports, and even academics. Qualifying for multiple small scholarships could add up and go a long way toward helping ease your financial burden.

Grants

Grants work like scholarships in that you typically don’t have to pay them back. They are often offered by the federal government (and would be part of your federal aid package); in some cases, in exchange for a grant, you agree to work in a certain field for a set period of time after graduation.

Work-Study

Through the federal work-study program, you can earn money to put toward school expenses by working jobs around your college’s campus. If you are approved for the work-study program, it will be included as a part of your financial aid award. Then, you may need to apply for jobs that are part of the program. These jobs may be on- or off-campus.

If you can’t find a work-study job to fit your schedule, there may be other part-time job opportunities available off-campus. You could inquire about part-time work at your on-campus career services office.

Private Student Loans

As mentioned, a private student loan may cover the remaining tuition costs not covered by your federal financial aid package. Qualifying for these loans might require a credit check and your credit history can potentially affect your private loan interest rate. For undergraduates with little-to-no credit applying for private student loans, they may benefit from applying with a cosigner in order to qualify for a more competitive rate.

As another reminder, private loans are not required to offer the same benefits or borrower protections afforded to federal student loans. As a result, most students only consider private student loan options after all other sources of aid and funding have been carefully evaluated.

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.

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.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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.


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.

SOIS0923009

Satisfactory Academic Progress (SAP) is the minimum amount of academic progress you need to make in college to keep receiving financial aid, including grants, work-study funds, and federal student loans.

Each school sets its own Satisfactory Academic Progress policy, but typically students need to maintain at least a C average and be on target to complete their program within 150% of the program’s length.

According to federal regulations, students who fail to make satisfactory academic progress towards their degree or certificate may lose their eligibility for federal student aid. However, students can file a SAP appeal if they believe that extenuating circumstances prevented the successful completion of SAP requirements.

Here’s more information on Satisfactory Academic Progress and what steps to take for a SAP appeal.

What Does SAP Stand For in College?

SAP stands for Satisfactory Academic Progress. Each college and university has its own SAP policy for financial aid purposes.

Your school’s SAP policy will likely outline:

•   The grade point average (GPA) you need to maintain

•   How many credits or hours you must complete by the end of each academic year

•   How an incomplete class, withdrawal, repeated class, change of major or transfer of credits from another school affects your Satisfactory Academic Progress

•   How often your progress is evaluated

•   What will happen if you fail to meet SAP requirements

•   Whether you are able to appeal your school’s decision on your SAP status and approved reasons for an appeal

•   How you can get back eligibility for federal student aid

💡 Quick Tip: Make no payments on SoFi private student loans for six months after graduation.

What Is Satisfactory Academic Progress?

The U.S. Department of Education requires that any student receiving federal financial aid meet and maintain academic progress standards as they continue through their educational program. This is known as Satisfactory Academic Progress, and a college’s student loan requirements must be at least as strict as the requirements stated by the Higher Education Act of 1965.

Colleges typically use an academic performance metric as well as a time-based metric to determine a student’s SAP status. To see your school’s standards for Satisfactory Academic Progress, check your school’s website or ask someone in the financial aid office.

Satisfactory Academic Progress GPA Requirement

Academic performance is based on a student’s GPA. Typically, if the academic program is two or more years, then the student must have a minimum 2.0 cumulative GPA, or a grade of “C”, on a 4.0 scale by the end of the second academic year.

If the student’s degree or certificate program is a year or less in length, the school may evaluate academic performance after each academic term. If the program is longer than a year, the school must review academic performance at least once per year.

Satisfactory Academic Progress Credit Hour Requirement

You may need to enroll in and complete a minimum number of credit hours to receive financial aid for the year. Students must typically complete at least 67% of cumulative credits attempted in order to meet SAP requirements.

Dropping a class could potentially hurt your satisfactory academic progress if you are taking the minimum number of credit hours each year.

Satisfactory Academic Progress Completion Rate Requirement

Students must progress through their undergraduate program no longer than 150% of the published length of the educational program. For a four-year Bachelor’s degree program, 150% of the normal length is six years. For a two-year Associate’s degree program, 150% of the normal length is three years.

Recommended: The Ultimate Guide to Studying in College

What Is SAP Used For?

SAP is used to make sure that students are at least meeting Satisfactory Academic Progress standards in order to continue receiving federal, state, or institutional aid. Part of the reason for SAP requirements is to prevent students from using financial aid as a form of welfare and indefinitely delay responsibilities to repay student loan debt.

What Is an SAP Violation?

An SAP violation means your GPA doesn’t meet satisfactory academic performance standards or you are in danger of not completing your degree or certificate within a certain timeframe. Federal regulations state that any student receiving federal financial aid who fails to meet SAP standards may lose their eligibility to receive federal assistance.

Some colleges may give out a financial aid warning if you don’t make Satisfactory Academic Progress. Financial aid will still be given after a warning, but academic performance must be improved after one academic term. If progress isn’t made by the end of the term, federal financial aid may be suspended.

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SAP Appeal

If your financial aid has been revoked because you didn’t meet your school’s standards, you may be able to file a SAP appeal if your school allows it. Your SAP appeal may be accepted based on extenuating circumstances and whether it can be linked to poor academic performance. Some examples include:

•   Death of a relative

•   Severe personal injury or illness

•   Other extenuating circumstances determined by the school

SAP appeals generally include the following:

•   An explanation of what happened Why weren’t you able to maintain Satisfactory Academic Progress? Explain what the problem was, when the problem occurred, how long the problem lasted and how this affected your ability to satisfy SAP criteria.

•   An explanation of what has changed Explain the corrective measures you have taken or will take to reach and maintain Satisfactory Academic Performance.

In addition to any forms required by your school, it may also be helpful to attach any relevant supporting documentation with your SAP appeal, such as a doctor’s note, hospital bill, or an obituary.

For information on how to file a SAP appeal, check your college’s website for directions.

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SAP & Student Loans

If you’re successful in your request for a SAP appeal, your school may place you on financial aid probation. Although this allows you to continue receiving financial aid, probation that lasts longer than one academic term will require you to have an academic plan that addresses the faults that caused the financial aid suspension and to get you back on track. Academic progress is reviewed after each term while on probation.

On the other hand, if the SAP appeal was unsuccessful or if the school does not allow appeals, then financial aid is withdrawn until SAP requirements are met. Without financial aid, students are responsible for all costs associated with enrollment until they can raise their cumulative GPA to at least 2.0 and prove that they are on track to graduate within 150% of the normal timeframe.

While waiting for federal financial aid to be reinstated, students must pay costs out-of-pocket or rely on private student loans to help fund each academic term.


💡 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.

The Takeaway

You must meet your college’s Satisfactory Academic Progress standards or risk losing federal financial aid in grants, student loans, or work-study funds. Contact your school’s financial aid office if you’re worried about your SAP standing, wish to complete an SAP appeal, or have any questions about your school’s SAP policy.

If you’re not eligible for federal student aid, there are other financing options out there to help pay for your education. Private student loans can cover up to 100% of the school-certified cost of attendance, which typically includes expenses like tuition, food, books and supplies, room and board, transportation and personal expenses.

While private loans can be useful in helping students fill any gaps in funding when paying for college, they aren’t required to offer the same benefits or borrower protections as federal student loans — things like deferment options or income-based repayment plans.

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.

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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.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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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If you’ve ever heard the expression, “A dollar today is worth more than a dollar tomorrow,” then you know the basic definition of the time value of money. Essentially, having $1,000 today is more valuable than having $1,000 a year from now because of the potential for growth over that time period.

Other factors can also influence the time value of money, or TVM. For example, inflation naturally increases over time, and that can lower the purchasing power of future dollars. In short: Money you can put to work now is usually worth more than the same amount down the line.

Investors and business owners use TVM as a way to compare values of certain sums of money over different time periods.

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What Is the Time Value of Money?

The time value of money is the relationship between a dollar at one point in time and the value of that same dollar at another point in time. For example, $50 today likely won’t have the same value as $50 a year from now, just as $1 million now is not the same as $1 million 20 years ago (when a million dollars bought more than it does now).

You don’t need to know the formula for time value of money to understand the basic forces at play here. First, there is the potential for a present sum of money to earn a profit (if you invest it) or to gain interest (if you save it or buy debt instruments like bonds) over time.

Inflation is also an important consideration when calculating the time value of money. As goods get more expensive, each dollar will purchase less than it did the year before. For example, the historic rate of inflation is about 2% per year. If you consider how much $10,000 can buy today, it would buy roughly 2% less in a year — about $9,800 worth of goods.

So the time value of money is a framework for comparing lump sums of money and/or payments across different time periods. Dollars can be future, present, or past — almost like different currencies.

The definition of the time value of money may seem like a purely academic concept, but has many real-world applications. Time value of money is used in personal finance, real estate, and investing decisions.


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How Does Time Value Work?

The time value of money can look at both the present and future value of money and the value of cash flows. It allows both institutional and retail investors to compare payments or sums of money over different time frames.

Within a business context, calculating the time value of money using a TVM formula is important because it can help with decision making, e.g. about acquiring a new business or developing a new product. If you put $X amount of cash into a new line of business, what is the future value of that amount? And would the new investment equal or exceed it — or not (in which case it might not be a good use of your capital)?

To determine the value of money over periods of time, investors can use a formula that takes into account the present value and future value of a specific amount, and how it will change over time.

How to Calculate TVM for a Future Value

Quite often, investors are called upon to evaluate the future value (FV) of a present dollar amount. That formula is:

Where:

•   PV – Present value of money

•   FV – Future value of money

•   i – interest rate or other amount that can be earned on the money

•   t – number of years being considered

•   n – number of compounding periods of interest per year

Let’s say you have $2,000 that’s earning 5% per year in interest payments. You could keep your money where it is, or you could consider another investment opportunity. In order to decide, it helps to know what the future value of your cash will be, given current parameters.

In this case, the calculation would look like this, employing the FV formula above:

This calculation tells you that your money is likely to be worth $2,205 in two years, assuming nothing changes. This could help you gauge whether the new opportunity would be likely to deliver a higher or a lower return.

How to Calculate TVM for a Present Value

It’s also possible to consider a future sum that’s being offered, and what that translates to in present dollars. Let’s say you could earn $2,000 now or be given $2,200 in a year. You’d need to calculate what the present value of $2,200 is.

To determine whether it makes sense to wait one year for an extra $200, here’s how to calculate the present value of that future amount, assuming you could earn 5% in the coming year.

In this case, the present value of the $2,200 being offered in one year is higher than taking just $2,000 now ($2,095). Which suggests that waiting to take the $2,200 payment might be a better move.

If there are multiple times per year when interest compounds, the result can be quite different. If interest compounds daily, monthly, quarterly or yearly can have a big effect on the TMV calculation (see below for more on compounding).

Why Is the Time Value of Money Important?

Time changes the value of money. Being able to calculate the present vs. the future value of money enables you to make better choices about how to invest and spend your money.

Therefore, TVM is inherently important in both an investing and a business context because it can help you gauge the value of different opportunities, and assess which makes the most sense financially.

Time Value of Money and Compound Returns

For the individual investor, there is perhaps no way in which the time value of money is more important than with the potential for earning compound returns.

To earn compound returns is to earn a rate of return on both the initial principal invested and all subsequent profits. As profits grow, so does the potential to earn more — and all that this exponential growth requires is that you stay invested.

The key to harnessing the raw power of compound returns is to spend as much time invested as possible — another example of the time value of money. Each year of positive returns is fuel for greater future returns.

This can be hard for investors to wrap their heads around because the results can take decades to reveal themselves. To understand compound returns, and the phenomenon of compounding in general, it helps to start with a comparison of simple and compound interest.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Comparing Simple Interest to Compound Interest

With simple returns, a rate of return is produced on the principal investment in each period. An example is a basic Treasury note or bond that pays a 5% rate of return on $1,000 each year for five years. Each year the bondholder receives a $50 payment ($1,000 x 5%). The amount is not reinvested (i.e. there is no compounding), and at the end of five years the investor gets back the principal, and makes a profit of $250 (5 x $50) for a total of $1,250.

The time value of money has a bigger impact when you have a savings bond that pays 5% that compounds semi-annually. At the end of the five years, the investor’s initial $1,000 investment has grown to approximately $1,276. This is a total profit of $276, compared to simple interest’s $250. While this might not seem like much, this gap will continue to grow as compound return growth increases.

Likewise, the more frequent the compounding is, the greater the potential for growth would be. Thus compounding is an important factor in the time value of money as well.

Factors Affecting Compound Returns

There are four variables at play when calculating compound returns: the rate of return, the principal invested, the duration, and the frequency of compounding (e.g. monthly, quarterly, annually).

Check out a compound returns calculator for a better understanding of how these variables interplay. What you’ll find is that all factors can have a powerful impact on the time value of money.

Investors should also consider inflation. Inflation, or rising prices over time, also has a compounding effect. Investors can consider using a time value of money formula for inflation, and think about ways to hedge against inflation.

How Does Inflation Impact the Time Value of Money?

Inflation is another reason that money is typically worth more in the present than in the future. As time goes on, inflation erodes the purchasing power of money. So the same amount of money can’t buy as many goods in the future as it can today.

This is sometimes called inflation risk, and it refers to the need for investors to factor in the potential gains of an investment over time vs the impact of inflation, so they can protect their money. Invested money that gains more than the rate of inflation won’t lose value over time.

Recommended: Is Inflation a Good or Bad Thing for Consumers?

Working With the Time Value of Money

Investors use the time value of money to understand the worth of money in relation to time, which helps them understand the value of their funds in the present and the future and how to invest them.

As noted above, factors such as interest rates, inflation, and risk all affect investments over time, so having formulas to help make decisions is a useful tool. Here are some other factors to consider.

Discount Rate

To decide whether the future cash flows from an investment will be worth more than the money required to fund the project now, in the present, you can use something called the discount rate. The discount rate is the rate of interest used to assess the present value (PV) of those future dollars.

For example, if you put $1,000 into an account or investment with a guaranteed 5% annual return, the future value of that money will be $1,050 in a year. So the discount rate in this case is 5%; you would discount $1,050 by 5% to arrive at its PV.

Sinking Funds

There is also the option to use the TVM calculation for so-called sinking funds, which is actually a savings strategy.

If you’re saving up for something in the future and know how much you need to save, you can figure out how much you need to save each month or year to reach that goal if you are earning interest on those savings.

Real Estate Investments

An investor might look at a property in a high-growth neighborhood and predict that it will be worth a certain amount in five years, but they want to calculate whether it is actually a good investment. They can use the TVM calculation to discount that estimated future value to find out the current value and see how the two compare.

Investing With SoFi

The time value of money (TVM) is an important concept for investors. It underscores the notion that time affects the value of money, along with other factors, and being able to calculate TVM in different scenarios, from investing to business, can help you decide whether one choice is likely to be more profitable over time.

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

Why use the time value of money concept?

A dollar now is almost always worth more than that same dollar in the future, owing to that dollar’s potential for growth (and the diminishing effect of inflation) over time. Using TVM formulas, it’s possible to gauge the long-term impact of different choices so you can make the more profitable one.

Is the time value of money concept always true?

Yes, for the simple reason that it’s always possible to invest your money now and gain some interest over time, even a minor amount.

What are some factors that may affect the time value of money?

The main factors that can impact the time value of money are the rate of interest, the number of years the money will earn that rate, and how often interest compounds.

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