SoFi

College is expensive and costs continue to rise. In 1989, the average cost of a 4-year degree school term was $1,730. As of 2023, the average annual cost increased to an average of $9,377 for in-state students at a public four-year college.

With college costs continuing to skyrocket, many parents apply for federal Parent PLUS loans. Since these loans are issued in the parent’s name, it is important that parents understand the details of what these loans entail and how often you have to apply to ensure students receive proper funding.

So, to avoid missing an application deadline, here’s some helpful information about Parent PLUS loans and their application process.

Parent PLUS Loan Recap

A Parent PLUS loan is a type of Direct PLUS loan, which is offered to parents who have a student enrolled at least part-time in an eligible education program.

Borrowers may be able to borrow an amount that equals but does not exceed the full cost of attendance, minus any other financial aid such as scholarships and grants that your child has received.

These loans are federally-funded and not subsidized. This means that the loan will accrue interest while the student is in school. Parent PLUS loans offer fixed interest rates and won’t change throughout the life of the loan.

The interest rate for Parent PLUS loans disbursed for the 2023-24 academic year is 8.05%. It’s also important to note that as of October 1, 2019, Direct PLUS Loans have a fee of about 4.228% of the loan amount (which is deducted from each loan disbursement proportionately).

Qualifying For a Parent Plus Loan

To qualify for a Parent PLUS loan, borrowers must:

•   Be the biological or adoptive parent, or in some cases, the stepparent, of an undergraduate student enrolled part-time at an eligible school
•   Have poor credit history (unless the parent meets additional criteria). More information on what is considered an adverse credit history can be found on the Student Aid website .
•   Meet general eligibility requirements for federally-funded student aid

Keep in mind that even if a grandparent is primarily responsible for a student they are not eligible for a Parent PLUS loan, unless, grandparents have legally adopted their grandchildren and are legal guardians.

Applying for a Parent PLUS Loan

The first step to apply for a Parent PLUS Loan is to complete the FAFSA® form with the student. Then, parents can log in at StudentLoans.gov , choose the Parent Borrowers tab, and the “Apply for a PLUS Loan” link.

Most schools require you to apply for Direct PLUS Loans online, however, some may have different application processes that you must follow. Studentaid.gov provides a list of schools that allow you to apply online. If your school is not on this list, check with the school’s financial aid office to verify the application process you must follow.

Those who qualify for a Parent PLUS loan, will have to sign a Direct PLUS Loan Master Promissory Note (MPN) . This document verifies that the borrower agrees to the terms of the loan. Each school may have a different process, double check with the financial aid office to ensure you understand the specific process for your student’s school of choice.

Keep in mind, those borrowing more than one parent PLUS loan for separate children, will need to sign multiple MPNs.

Apply for A Parent Plus Loan Every Year

When you complete the FAFSA form , you are applying for financial aid for one school year. Therefore, to receive financial aid for the next year, you will have to submit a new FAFSA form to get new aid.

However, the website allows you to select a Renewal FAFSA form that remembers your information from the previous years, making it earlier to submit a new financial aid application.

Additionally, it’s important to pay attention to the FAFSA deadlines to avoid missing out on any financial aid opportunities. General recommendations suggest submitting the FAFSA form by the earliest financial aid deadline of the schools to which you are applying, usually by early February.

Each state may have their own deadlines, so it can help to verify your state’s specific date.

Pros of Parent PLUS Loans

First, eligible borrowers can take out a generous Parent PLUS loan, as long as it doesn’t exceed the total cost of attendance at the student’s school of choosing (minus other financial aid they qualify for).

Another advantage of the Parent PLUS loan is that the interest rates are fixed. This means that even if rates increase nationally, the interest rate on the loan is locked in at the rate determined at the time the loan was disbursed.

Having a fixed interest rate can make it easier to budget for the monthly payments when they become due since borrowers know exactly what to expect.

Additionally, when it comes to loan repayment, there are several flexible repayment options . For example, you could select a standard repayment plan with fixed monthly payments for 10 years or an extended repayment plan with either a fixed or graduated payment schedule over a 25-year term.

Parent PLUS loans are not eligible for income-driven repayment plans, unless they have been consolidated with a Direct Consolidation Loan . This is when multiple federal loans are consolidated into one single Direct Consolidation Loans. These loans are still federal loans and the new interest rate is the weighted average of the existing loans.

Borrowers can select the best repayment option based on the plans they qualify for and their goals for repayment. Whether the goal is to keep payments low or pay off the loan balance as soon as possible, borrowers can select a plan that best fits their needs. Generally, selecting a repayment plan that helps pay off the loan quickly will result in paying less interest over the term of the loan.

Cons of Parent PLUS Loans

Not everyone qualifies for a Parent PLUS loan. Although this isn’t necessarily a disadvantage to a Parent PLUS loan, it’s important to understand that you will have to meet all eligibility requirements to qualify. This includes passing a credit check.

Adverse credit indicators include defaults of debt, foreclosures, repossessions, debts discharged through bankruptcy, tax liens, wage garnishments, or previous write-offs of federal student debt.

However, you might be able to qualify if you apply with an endorser or a cosigner. Keep in mind, you also need to be a United States citizen or national.

Alternative Financing Options

If your application is denied due to poor or “adverse credit history,” there are still other financing options. Here are a few to consider:

Enlisting an Endorser

If a parent doesn’t qualify based on their own credit history, they can try to enlist a co-signer , called an endorser, on the Parent PLUS loan. The endorser agrees to take responsibility for the loan if the borrower fails to repay, and the loan will show up on the endorser’s credit report as his or her own debt. If you apply with an endorser, you will be required to complete PLUS credit counseling .

Looking for Free Money

It can be wise to continue to apply and look for scholarships, work-study, or grant rewards. There’s a myriad of ways to find reward opportunities such as contacting the school’s federal aid office, federal agencies , state grant agencies , or other organizations a student or parent is involved with.

New opportunities may become available every year, so it can be wise to continue to stay out on the look for funding opportunities.

Applying for Unsubsidized Federal Loans

If a parent is ineligible for a Parent PLUS loan, the student may be eligible to receive additional Direct Unsubsidized Loan funds up to the loan limits for independent students.

Federal student loans can be reliable borrowing options because they often have lower interest rates and could have better repayment terms than other loans available to students. However, it’s worth making sure that a student isn’t taking out more debt than they can handle after graduation.

Considering Private Loans

Lastly, if all other options fail, some families may want to consider private loans. These loans are offered through financial institutions such as banks, credit unions, and online lenders.

Keep in mind, private student loans tend to have less flexible repayment terms and higher interest rates than federal student loans.

For example, private lenders may require you to begin making payments before your child graduates. Conversely, with a Parent PLUS loan, parents can wait to make repayments until after their child has graduated.

Additionally, when applying for a private loan, the interest rate is generally based on factors like the borrower’s income and credit score.

If you think you may need to use private loans, don’t be discouraged, and instead, be informed about your options. First, it’s worth shopping around and comparing lenders for private loans.

Lenders’ terms will vary, so it can be helpful to get several quotes and ask about the interest rate (and whether it’s fixed or variable), the loan’s repayment terms, and what happens in the event there are financial difficulties that make it difficult to stick to the repayment plan.

If you do determine a private student loan is right for you, check out SoFi, where parent student loans are built to help you pay for your child’s education. SoFi loans have no fees, and qualifying borrowers can secure a competitive interest rate.

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.


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.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

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).

SOPS20028

More and more people are considering degrees from accredited schools with “distance learning” options. These prospective students might be wondering how much these colleges cost compared to in-person options, how credible these online degrees are, what steps should be taken to apply to them, and whether there are options for student loans or financial aid.

The short answer: online degrees are increasingly credible, competitively priced, have a similar application process as in-person colleges, and can be paid for with a wide range of financial aid, federal student loans, and even private student loan options. In fact, some might even pay you to attend.

A Little Bit About Distance Learning

Online college falls under the umbrella of “distance learning”—a form of education conducted outside the traditional in-person classroom and facilitated with the use of several different tools and technologies. Many distance learning programs allow students to complete courses in an “asynchronous” format, aka at their own pace and on their own schedule.

Some online colleges also incorporate “synchronous” learning methods like virtual classrooms and video conferencing for meeting during a designated class time. Depending on which format a student chooses, they can create their own online learning experience as part of their college education.

How Credible Are Online Degrees?

In previous decades, the jury may have been mixed on whether online degrees were considered as credible as their in-person counterparts. But with the advancement of global technology and the onset of digital transformation, online colleges have become more widely recognized as institutions of high-quality education.

According to Northeastern University’s Online Education survey, 61% of HR leaders believe online college credentials are equally credible as those completed in-person. This included both degrees and certificates.

How Much Does The Average Online College Cost?

According to the U.S. News & World Report, the average cost of tuition for an online bachelor’s degree program is $40,491. For in-state students attending public online colleges, the average cost for a bachelor’s degree is $38,496. For out-of-state students, the cost is $54,183. And online bachelor’s degrees from private colleges cost an average of $60,593.

This, of course, is simply the average. In some cases, online college can cost even more than in-person programs. And, in other cases, online colleges can actually pay students to attend (more on that below).

How Do I Apply For Online College?

The process of applying to an online college is similar to that of a traditional in-person college or university. Depending on which school the prospective student chooses, there should be detailed application and enrollment instructions on the website.

Each college will have its own unique admissions policies and application instructions, with some adhering to set application deadlines and others offering “rolling admissions” where students can apply at any time.

Researching deadlines and requirements in advance can be a prudent way to approach the online college application process and provide exactly what the admissions team wants.

Are There No-Cost Online Colleges?

Yes. There are a few colleges and universities that offer tuition-free online classes with a variety of work study programs, scholarships, and other forms of financial aid. A few of those institutions include:

•   Alice Lloyd College
•   Arizona State University
•   Barclay College
•   Brown University
•   City College of San Francisco
•   College of the Ozarks
•   Community College of Rhode Island
•   Curtis Institute of Music
•   Deep Springs College
•   Louisiana Free Tuition

How Do I Pay For College If I Have No Money?

There are several ways to pay for college, even if the applicant has little-to-no means of funding:

•   Applying for scholarships is one way to pay for online college without having any money. There are several resources available for prospective college students seeking scholarships and, unlike student loans, repayment is not required.
•   Financial aid helps prospective students secure funds for online college in the form of grants, scholarships, work-study programs, and federal student loans.
•   Getting an extra gig could be a great way to accumulate some extra cash to subsidize online college costs.
•   Prospective students can see if they qualify for a private student loan online. Once they’ve applied for a student loan for online college, there are many different student loan repayment options to help them tackle the tuition debt on their own terms.

Are There Student Loans For Online Schools?

When online education first began, student loans weren’t offered by the government to cover their costs. But today, federal student loans are offered for online colleges that are accredited by the US Department of Education. Contacting the university’s financial aid office prior to enrollment is the best way to check on eligibility.

Outside of federal student loans, private student loans are another way to potentially pay for online college. With private student loans, each lender will have their own eligibility requirements, terms and conditions, and borrowers must agree to these parameters and complete on-time payments to avoid any fees or penalties associated with account delinquency. Still, there are several smart ways to pay off student loans as well as student loan refinancing options if the loan’s interest rates are unreasonably high.

What About Online Colleges That Accept FAFSA?

If you’re wondering, does FAFSA® cover online classes?, the answer is yes. The Free Application for Federal Student Aid (FAFSA) allows prospective students to apply for financial aid for online classes much like they would an in-person university. All they have to do is fill out the form online, print and mail a paper copy, or request a paper copy be sent by mail and returned.

What Types of Federal Student Loans are Available For Online College?

Prospective students might consider consulting with their online college’s financial aid office before deciding which type of federal student loan to apply for, but many students opt for one of the following types of Federal Direct student loans:

•  Federal Direct Subsidized loans help students who qualify for financial need and are attending traditional four year colleges or universities, community colleges, or technical schools. The federal government will pay the loan’s interest while the borrower is in school, during the six-month grace period after graduation, and in the event of student loan deferment.
•  Federal Direct Unsubsidized loans help undergraduate, graduate, and professional school students cover college costs without requiring a demonstration of financial need. However, borrowers are responsible for paying back all the interest accrued on the loan from the time they start attending college onward (although they aren’t required to start making payments until after they graduate).
•  Direct PLUS loans are unsubsidized loans issued for graduate or professional students as well as parents of undergraduate students who are helping them pay for college.
•  Direct Consolidation loans are a way to combine different federal student loans into one single loan so the borrower can commit to one monthly payment under one loan servicer.

How Can I Get Private Student Loans?

For prospective students seeking an alternative to federally-backed student loans, a private student loan is another way to pay for online college. Depending on the lender, there are several options for interest rates, terms, conditions. And in certain circumstances where borrowers have difficulty paying back the private student loan, negotiations might be made with the lender for deferment, forbearance and even refinancing.

With SoFi Private Student Loans, paying for online college just got a whole lot more convenient. Qualifying borrowers can get competitive rates, apply easily online, find flexible repayment options, avoid pesky fees, and get exclusive members-only rate discounts.

The Takeaway

Online college is a form of distance education that allows students to engage in self-regulated learning and acquire a degree outside the traditional in-person university setting. Degrees from online college degrees are considered increasingly credible by employers and HR leaders.

There are several student loan and financial aid options for online college attendees, including federally-backed student loans, financial aid, scholarships, work-study programs, grants and private student loans.

SoFi Private Student Loans help people pay for school with a simple online application process, no hidden fees, exclusive rate discounts and flexible repayment options that fit their 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.

SOPS21004

For many students, financial aid is the only reason they can afford to go to college. Unfortunately, getting approved for aid (which may include scholarships and federal loans), isn’t a guarantee that you will have it throughout all your years in college. Schools can suspend — or even cut-off — financial aid for a number of different reasons, including poor academic performance.

Fortunately, a financial aid suspension typically doesn’t disqualify you from getting aid in the future. You will, however, need to take some steps to appeal the suspension and get your aid reinstated.

Read on to learn why federal financial aid can get suspended and what you can do to get it back.

What Is Financial Aid Suspension?

Financial aid suspension occurs when the federal financial assistance you qualified for stops coming in.

Financial aid can come in the form of scholarships, loans, grants, and work-study programs. When you fill out the Free Application for Federal Student Aid (FAFSA), you are applying for federal student aid.

After your application is reviewed, you will generally receive information on what aid you are eligible for, if any. When financial aid is being suspended, you will be notified as well, generally by the financial aid office at the school where you are enrolled.


💡 Quick Tip: When shopping for a private student loan lender, look for benefits that help lower your monthly payment

Common Reasons for Financial Aid Suspension

Financial aid suspensions can occur for a variety of reasons. Here’s a closer look at why a student may find there are issues with their aid.

Not Making Satisfactory Academic Progress

In order to be eligible for certain financial aid, you need to be making Satisfactory Academic Progress (SAP).

This means you must be enrolled in a certain number of credit hours and be earning grades that are considered good enough to be working towards completing a degree or certificate in a certain time period.

SAP policies will often vary by school. Typically, SAP rules require students to maintain at least a 2.0 GPA on a 4.0 scale, which is a “C” average in classes.

If students receive scholarships, they may have to maintain a higher GPA than 2.0. To find out the SAP policy at a specific school, take a look at their website or contact the financial aid office.

Taking Too Long to Complete Degree

A student may experience financial aid suspension if they’ve been in school for too long. Federal financial aid is generally restricted to a time limit that is based on the length of the program the student is enrolled in.

This information is generally listed in a school’s catalog. For example, federal aid is generally limited to six years for a bachelor’s degree and three years for an associate degree.

Not Applying for Aid Each Year

You must apply for federal student aid by submitting a FAFSA each year that you are enrolled in school. Failing to submit the FAFSA means you may not receive federal aid for that year.

Also keep in mind that when you fill out the FAFSA annually, you might not receive the same amount or type of aid you received previously if your family’s financial situation has changed.

Making a Change to Your Course of Study

You could also lose federal aid if you switched majors and the aid was tied to your original major. Other changes that can lead to loss of financial aid include switching schools, not taking enough credits to qualify for the aid, and defaulting on other student loans.

Not Meeting General Eligibility Requirements

In order to continue receiving federal aid, you need to continue meeting the general eligibility requirements set by the Department of Education.

For example, if a student is not a U.S. citizen and their eligible noncitizen status expired or was revoked, then they would need to reinstate their status to keep receiving aid.

A student could also potentially lose federal financial aid if they were convicted for a drug offense or became incarcerated.

If it comes to light that a student’s high school diploma is not valid, or they have property subject to a judgment lien, that could also cause financial aid suspension.

Even though it can be frustrating and worrisome to lose financial aid, there are steps that students can take to hopefully get it back.


💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.

Appealing a Financial Aid Decision

One of the first things you can do after being notified that your financial aid is being suspended is to call or visit your school’s financial aid office. The office can likely tell you more about why you are losing financial aid and if there is anything you can do about it, like file an appeal.

The appeals process can vary based on the school. In general, you can fill out a form and write an appeal letter to your college. In the appeals letter, you may consider sharing details about the circumstances surrounding your financial aid suspension.

For example, if you lost a loved one that semester, you might have become upset and unable to concentrate on your grades. Sometimes, students experience tough circumstances that have nothing to do with school, but their grades suffer. Schools understand that this happens and they may be willing to work with students who show they are still dedicated to their studies.

After writing the appeal letter, you can mail it or hand it into your financial aid office, depending on preferences and the process determined by the school. It can help to confirm that the office received it. In addition to writing an appeal letter, there are other ways you may be able to qualify for aid again, depending on the issue that caused the suspension of aid.

You may be able to study harder and bring your grades up, for instance. Or, you might enroll in more classes and get back on track to graduate in a certain amount of time. If you are an eligible noncitizen, you could figure out how to reinstate your status.

If you switched majors, you could look into other forms of financial aid for your new course of study. There are many ways to go about it — asking your financial office for guidance can provide insight to help you get back on track.

In some scenarios, you might lose financial aid for the year and then be able to reapply through FAFSA the next year. If you still don’t receive aid, you may need to look into alternative options to pay for your education.

Recommended: I Didn’t Get Enough Financial Aid: Now What?

Avoiding Financial Mistakes in College

If you went through financial aid suspension and couldn’t appeal the decision, you’ll need to figure out ways in which you can pay for school without hurting your financial future.

For instance, you may want to reconsider staying in the dorms and on an expensive college meal plan if you can’t afford it. If you do continue to live and eat on campus, you could run up a huge bill that in and of itself could take years to pay off.

While it may be tempting to put extra expenses on a credit card, debt can add up quickly. If you use a credit card but are unable to pay off your balance every month, you could end up graduating with student loan debt and credit card debt. Credit card debt can have relatively high interest rates which can make it difficult to pay off.

Also keep in mind that, while going to an expensive private school may seem more prestigious, state schools can also be solid options, offering rigorous programs as well.

I Lost My Financial Aid — How Do I Pay For School?

There are many students wondering how to pay for school if they no longer have financial aid — and thankfully, there are a number of ways to cover the cost of college.

One option is to consider transferring to a school that offers a lower tuition or where you can qualify for a more competitive aid package or scholarship.

If you aren’t able to transfer, or already go to a less expensive school, you might try to find a job on or off campus and start earning money to pay for your education.

You might also consider budgeting and cutting costs as needed. A few options to cut expenses might include opting to use public transportation instead of driving, moving to cheaper housing off-campus, cooking meals at home instead of eating out, or limiting how much you spend on entertainment.

You might also consider turning to family members for help. If your parents are able to help pay for your tuition or take out loans to pay for it, this could be a solution.

Another option you might consider is taking out a private student loan. Before applying for a private student loan, however, it’s important to compare different lenders and loan rates and terms. Each lender will also have their own eligibility requirements, so it’s worth looking around at different options.

Unlike federal student loans, private student loans generally require a credit check. If you don’t have much (or any) credit history, you will typically need a cosigner, such as a parent or other adult who has strong credit. With some lenders, you can quickly find out if you qualify, and at what rate, online. Just keep in mind that private student loans don’t offer the same protections, like forbearance and income-driven repayment plans, that 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.

SOIS0623002

Special Purpose Acquisition Companies (SPACs) were all the rage on Wall Street, particularly during 2020 and 2021. Nearly 250 SPACs went public in 2020 — four times as many as 2019. That momentum carried over into 2021 as well, but in 2022 and 2023, interest has dropped.

In 2022, the Securities and Exchange Commission (SEC) proposed new rules for SPACs that would require more transparency, and protections for investors.

As for what drove the SPAC boom in 2020 and 2021? It was a combination of factors, and SPACs are still very much a part of the financial ecosystem. That’s why it’s important for investors to understand what they are, and what drove their popularity.

SPACs 101

SPACs are shell companies that list on the stock market with the intention of finding an existing private business to buy. Also known as blank-check companies because they have no operating business of their own, SPACs typically have two years to purchase a target.

The current SPAC boom is unsurprising given the long-time dissatisfaction with the traditional IPO model. Private companies, especially tech startups in Silicon Valley, have grumbled for years that the IPO process is expensive, onerous, and time-consuming. Many have been staying private for longer, taking advantage of other avenues for raising capital such as venture capital firms.

Here’s how SPACs work:

1.    The first step tends to involve sponsors, generally former industry specialists or executives. They typically pay $25,000 in what’s known as the “promote” or “founder’s shares,” obtaining a 20% stake in the company in return.

2.    The SPAC goes public on a stock exchange, listing shares at $10 each and promising to use the proceeds to find a private company to merge with.

3.    Once an acquisition is found, shareholders of the SPAC vote on the company merger.

4.    SPACs can buy firms valued at five times the money raised in their IPO. Therefore, additional funding is often raised through institutional investors in something known as a “private investment in public equity” or PIPE.

For the private company getting bought, SPACs offer a cheaper, faster route to listing. Below are some potential benefits of SPACs:

•   In a regular IPO, investment bankers, who advise companies in going public, alone can eat up 4% to 7% of an IPO’s proceeds in fees.

•   The IPO process typically takes 12 to 18 months. In contrast, a SPAC merger generally takes between four to six months.

•   Regulators review SPAC mergers, but more forward-looking projections can be used to market the deal as opposed to IPO prospectuses, which require that only historical figures be shared. This can be particularly appealing to more futuristic ventures like those in electric vehicles or space travel.

•   The valuation of a SPAC target is typically determined by private negotiations behind closed doors, similar to how a deal in a merger would be struck. This can make SPAC IPO valuations less tied to the whims of public markets.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

SPAC Performance

Critics of SPACs argue that they are much too lucrative for the sponsors, and bypass measures in the traditional IPO process that are designed to protect investors. The flurry of SPAC activity in recent years also had many worried that a bubble was forming.

However, defenders of the structure argue that this most recent wave of SPACs is different. They say that more recent SPACs have had more credible sponsors, who then in turn target higher-quality companies.

An academic paper by professors at Stanford and New York University law schools looked at SPAC acquisitions between January 2019 and June 2020. The study found that companies that went public by SPAC fell by an average of 3% three months after debuting, 12% after six months, and 35% after a year.

Meanwhile, those with higher-quality sponsors returned 32% after three months and 16% after six months.
When it came to companies with higher-quality sponsors that had been public for at least a year, there were only seven and they fell on average by 6%. The professors concluded that, “It is true that a few SPACs sponsored by high-profile funds or individuals have performed well. But these are the exceptions, not the rule.”

How the SPAC Boom Came About

Here’s a table with the number of SPAC IPOs by year and the capital raised. It shows that the number of SPACs that have listed on the stock market have steadily increased in recent years.

Only 13 debuted in 2016, but the number of SPACs in the stock market spiked in 2020, quadrupling from 59 to 248, and more than 600 launched during 2021. The table also shows the money raised through these IPOs also climbed dramatically, but has since fallen again after a blowout year in 2021.

Source: SPACInsider

Recommended: How Many Companies IPO Per Year?

What Drove the SPAC Boom?

There were several factors that drove the SPAC boom in 2020 and 2021.

1. IPO Dissatisfaction

IPOs have historically been an important step for maturing companies, signaling that a business is ready for public scrutiny, greater regulation, and increased liquidity of its equity.

However, in the past decade, tech IPOs haven’t always kept pace with the number of unicorn companies that have cropped up. Private companies have shunned the traditional listing process by either staying private for longer or seeking alternative routes such as direct listings or SPACs.

2. Booming Markets

Context is important, too: After the volatility in early 2020 caused by the COVID-19 pandemic, financial markets soared. The Federal Reserve’s stimulus measures played a role in keeping the markets buoyant.

In addition, there was an increase in investing during this time for several reasons. All told, it created an optimal window for private companies to enter public markets, giving them better odds of pricing SPAC deals at higher valuations.

3. Rule Changes

Both the New York Stock Exchange and the Nasdaq have tried to loosen their rules on SPACs in recent years in order to attract more such listings. Nasdaq had dominated the SPAC market until 2017, when NYSE had the first blank-check listing on its main market, after getting approved by regulators to ease some requirements. Separately, Nasdaq tried in 2017 to gain permission to lower a number for required shareholders.

4. Famous Sponsors

Well-known sponsors were also a defining feature during the SPAC frenzy. Well-known investors, former politicians, and former athletes have all jumped on the SPAC bandwagon, setting off a flurry of launches.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

SPAC Risks

Despite the combination of factors that helped spark the SPAC trend, the fact remains that most SPACS — like most IPOs — are highly risky endeavors.

In addition, despite the hype around both these paths for going public, the main beneficiaries of SPACs have been those closest to the company itself. Retail investors typically don’t have access to SPAC shares until they’re in the secondary market.

The Takeaway

SPAC activity reached a peak in 2020 and 2021, but some of the conditions that have turned SPACs into a popular IPO alternative had been in place for a while. For example, many private companies had been long unhappy with the traditional IPO model. Additionally, the mood in the stock market at the time had become increasingly ebullient, luring private companies into public listings.

SPACs have a checkered history when it comes to actual performance in the stock market. But some market observers have claimed that having more credible sponsors will lead to better mergers and consequently, better share prices.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

SoFi Invest®