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It may come as a surprise, but sometimes your credit score drops after you pay off a loan or credit card debt. This happens because paying off debt can impact several factors that make up your credit score. For example, it might change your credit mix, shorten your credit history, or impact your credit utilization ratio.

If you’re wondering why your credit score dropped 40 points after paying off debt, here are some potential reasons to consider. 

Why Would My Credit Score Drop 40 Points After Paying Off Debt?

Paying off your debt is a big win and usually boosts your credit score. But sometimes, you might see a dip. To understand why, it’s important to know how your score is calculated.

Information from the three major credit bureaus — Equifax, TransUnion, and Experian — comes together to create your credit score. The bureaus gather details about your loans, credit cards, and other debts. Your credit score is calculated using a formula that measures how reliable you are at making payments. Lenders use this score to decide if they should give you credit.

Recommended: How Long Does It Take to Build Credit?

Credit Score Factors

Although there are many ways to calculate your creditworthiness, here are some common factors that may affect your credit score after you pay off your debt. 

Payment History

Payment history makes up 35% of your FICO credit score and is the most important factor. So while late or missing credit card payments might not seem significant at the time, they could bring down your overall score. 

If you need help keeping track of bills, consider a tool like a money tracker app. It allows you to spot upcoming bills, create budgets, and monitor your credit score.

Credit Utilization

Your credit card utilization ratio — or the amount of available credit you’re using — makes up 30% of your credit score, so it’s worth monitoring. 

Here’s how it works: If you have $10,000 in available credit and a $5,000 credit card balance, your credit utilization ratio is 50%. Usually, credit bureaus and lenders want to see a utilization ratio under 30%.

When you pay off your debt and close the account, your total available credit decreases and your credit utilization ratio increases. This, in turn, can cause your credit score to dip. 

Length of Your Credit History

Your credit reports show how long your credit accounts have been open. Having a longer credit history can improve your credit score, albeit not to the extent other factors can. (It makes up 15% of your credit score.) On the flip side, if you close an old account, you shorten your credit history — which can potentially lower your score.

Credit Mix

The variety of your credit accounts — like personal loans, credit cards, and mortgages — is 10% of your credit score. And managing different kinds of credit can help improve it. Paying off a specific type of credit, such as a car loan or mortgage, can have the opposite effect, as it reduces the diversity of your credit mix. 

New Credit Applications

When you apply for a new line of credit, lenders check your credit report to determine the risk of lending you money. This check, known as a hard inquiry or “hard pull,” can drop your credit score by a few points for a short time, though it stays on your report for two years. 

But keep in mind, when calculating your score, FICO, the scoring model most lenders use, only looks at credit pulls from the past 12 months. And new credit only makes up 10% of your credit score.

Recommended: What Is a FICO Score?

How to Pay Off Debt and Help Your Credit Score

Paying off debt may lead to a temporary dip in your credit score, but its benefits far outweigh any drawbacks. In fact, there are steps you can take build your credit as you whittle down your debt load:

•   Make on-time payments: Always make payments on time, whether it’s your credit card balance or mortgage. Punctual payments positively impact your score the most.

•   Prioritize high-interest debt: Pay off credit cards with the highest interest rates first to reduce debt risk.

•   Pay off cards with a low credit limit: This can help keep your debt-to-credit ratio in check.

•   Keep credit utilization low: Aim to use less than 10% — and no more than 30% — of your available credit.

•   Clear small balances on multiple cards: Having zero balances on more cards is better for your score.

•   Pay off past-due bills: Prioritize the most recent ones. This shows new lenders that you’ve settled your debts.

How Long Does It Take for Your Credit Score to Improve After Paying Off Debt?

Luckily, a drop in your credit score is generally brief. After you pay off your debt, your score should bounce back within a month or two because credit bureaus typically update your credit information every 30 to 45 days.

You can check your credit score without paying. If it doesn’t improve right away, don’t worry. The paid-off debt will stay on your credit report for up to 10 years. If you made payments on time, this positive history can help boost your credit score in the long run. 

Ways to Increase Your Credit Score After Paying Off a Loan

Once your debt is settled, you may want to turn your focus to boosting your credit score. Some steps you may have taken as you paid down the debt will serve you well at this point, such as making on-time payments and keeping credit utilization low. But there are other strategies that can help:

•   Build a long credit history: Keep older accounts open so you can build a long history of responsible credit use. The longer your history of on-time payments, the better your score may be. 

•   Apply for credit sparingly: Only apply for new lines of credit when needed. Too many applications in a short period can negatively impact your score.

•   Review your credit reports: Regularly review your credit reports for any errors or inaccuracies. If you spot anything out of the normal, make sure to dispute any mistakes. This way, you can ensure your score reflects accurate information.

How to Get Credit Score Monitoring

Using a credit monitoring service can help you keep tabs on your credit score. These services notify you when there are changes to your credit reports, which can help you catch any suspicious activity. While comprehensive monitoring services are available, there are ways to monitor it yourself:

•   Ask for a free copy of your credit report: You’re entitled to a free credit report every year from each of the three credit bureaus. Visit AnnualCreditReport.com to get started. 

•   Check for complimentary credit monitoring: Some accounts offer free credit score monitoring. Call your bank or credit card company to see if you qualify.

•   Freeze your credit reports: If you suspect a data breach or theft of your Social Security number, consider freezing your credit report. This restricts access to your credit information, stopping thieves from opening new accounts in your name. Note that freezing or unfreezing your credit is free and doesn’t affect your credit score.

•   Set up fraud alerts: You can place a fraud alert on your credit report if you think you’re a fraud or identity theft victim. Creditors will verify your identity by calling you when a credit application is made. It’s free to request and lasts for one year without affecting your credit score.

The Takeaway

There are many reasons why your credit score dropped 40 points after paying off debt. You may see a temporary dip in your credit score due to changes in your credit mix, history length, and utilization ratio. 

To help boost your score, make on-time payments, use less credit, maintain old accounts, apply for new credit sparingly, and regularly check for errors in your credit reports. These habits can help you maintain a strong credit score. And if you need help managing your finances as you pay off debt, consider enlisting the help of a spending app.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

How long does it take for a credit score to update after paying off debt?

You can expect your credit score to update within a month or two as long as you continue practicing good credit habits like making on-time payments. Credit bureaus usually refresh your information every 30 to 45 days.

Why is my credit score going down even though I pay on time?

Paying on time is just one part of your credit score. Other factors, like how much credit you’re using or the length of your credit history, can also cause your score to drop, even if you don’t miss any payments.

How to increase credit score after paying off debt?

To keep your credit score strong after paying off debt, follow a few key tips. For example, always make your payments on time, avoid using too much of your available credit, and apply for new credit only when you really need it. Also, review your credit score regularly so you can spot discrepancies.

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About the author

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Photo credit: iStock/Erdark

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Despite the obvious appeal of side hustles — more money! — they’re not for everyone. If your side hustle makes you stress out, neglect relationships, or miss opportunities at your day job, then consider it a bad idea. Side hustles are only beneficial when they help you accomplish goals without sacrificing what matters most.

Side hustles are often promoted as a simple way to generate extra cash or fulfill your passions. However, the often-ignored price tag is physical and mental strain. Not to mention the time requirement and potential financial commitment necessary to get a gig going.

Read on to find out how to evaluate your options and goals before taking on a side hustle.

What Is a Side Hustle?

A side hustle refers to a second job or source of income that people pursue outside their primary employment. The purpose may be to earn extra money, pursue a pet project, or develop skills in a different area.

A side hustle can take various forms, from freelance work or consulting to selling handmade crafts or driving for a rideshare service. Renting out property and offering tutoring services also qualify. The point is leveraging your time and skills to pad your budget or explore a wider field than your day job allows.


💡 Quick Tip: We love a good spreadsheet, but not everyone feels the same. A free budget app can give you the same insight into your budgeting and spending at a glance, without the extra effort.

Pros and Cons of a Side Hustle

Browse the pros and cons below, and make a mental note of how many of each apply to your situation. If one side of the scales is considerably heavier, your decision may be obvious.

Pros of a Side Hustle

Here’s a breakdown of the benefits of a side hustle:

•   Develop Your Career: Side hustles can provide a valuable opportunity to develop skills, gain experience, and broaden your professional horizons. By taking on projects or roles outside your main job, you may acquire new competencies to help advance your career or get a promotion. Additionally, side hustles can demonstrate initiative, entrepreneurial spirit, and versatility to potential employers, enhancing your marketability and opening up new opportunities.

•   Switch Up the Norm: A side hustle allows you to break away from the routine of your primary job. This variety can be refreshing and stimulating, helping to prevent boredom and burnout. Whether you’re pursuing a different passion, exploring a new industry, or experimenting with creative projects, having a side hustle can inject excitement and fulfillment into your life outside work.

•   Build Your Network: Side hustles often involve interacting with different people and communities, which can expand your professional network. Whether you’re collaborating with clients, partners, or fellow freelancers, each connection presents an opportunity to exchange ideas, learn from others, and potentially uncover new career prospects. Building a diverse network through your side hustle can provide valuable support, mentorship, and referrals in your professional journey.

•   Channel Creativity: Side hustles offer a platform for expressing your creativity, passions, and interests outside your primary job. Whether it’s writing, photography, crafting, or any other form of expression, a side hustle can bring more meaning and fulfillment than your 9-to-5. This outlet can serve as a source of inspiration, relaxation, and personal growth, enriching your life beyond the confines of your main occupation.

•   Increase Income: One of the most practical benefits of a side hustle is the extra money. Whether saving for a major purchase, paying off debt, or simply seeking financial security, the income from your side hustle can provide greater financial flexibility and stability. Likewise, having multiple streams of income can be a buffer against economic uncertainty and provide a safety net in case of job loss or another hardship.

Cons of a Side Hustle

On the other hand, these are the potential drawbacks of a side hustle:

•   Less Time to Relax: Side hustles require time and effort, eroding your leisure time. Working 60+ hour weeks can lead to fatigue and even burnout. When juggling your day job, side hustle, and personal commitments causes you to lose sleep, your quality of life can become unsustainably low.

•   Distraction from Work: A side hustle can encroach on your attention and focus during work hours. Constantly thinking about your other gig, responding to email, or taking calls while at your main job can detract from your performance. If colleagues or supervisors perceive your divided attention, this can also strain your professional relationships and undermine your credibility.

•   Managing the Stress of Two Jobs: Managing the demands of a side hustle on top of your primary job and personal responsibilities can significantly increase stress. Deadlines, client expectations, financial pressures, and the need to constantly switch between different roles and tasks can elevate anxiety. Chronic stress associated with balancing multiple commitments can affect your mental and physical health over time.

•   Sustainable Prices Can Be Elusive: Setting prices or negotiating rates for your side hustle services can be challenging, especially if you’re just getting started or dealing with imposter syndrome. Striking the right balance between competitiveness and fair compensation can be tricky, and you may encounter situations where clients or customers undervalue your work. Plus, breaking into a competitive market may require setting prices so low that you work at a loss for the first few months or even years. As a result, your side hustle may ding your budget instead of adding to it.

💡 Quick Tip: An online money tracker makes monitoring your spending a breeze: You can easily set up budgets, then get instant updates on your progress, spot upcoming bills, analyze your spending habits, and more.

When Does a Side Hustle Make Sense?

Several ingredients are key for a side hustle to make sense for your situation. First, it’s essential to have a clearly defined reason for pursuing a side hustle. For example, you may want to generate income, follow a creative impulse, or pave a path to a new career. This clarity of purpose will guide your efforts and motivate you throughout your side hustle journey.

Second thorough research is crucial to understanding the market, demand, competition, and potential challenges associated with your chosen side hustle. This is significant even if you don’t have financial aspirations for your other gig.

For example, if you’re interested in fitness, is your specific angle better suited for a blog or a YouTube channel? Will you create a social media presence to drive more traffic? What kind of value are you delivering to your audience?

In a different vein, if you want to become a rideshare driver, which company offers the best pay? Do you have a presentable vehicle that you’re willing to put miles on? Answering these kinds of questions will help you make informed decisions and set realistic expectations. Not doing your homework will likely bring a lack of results, monetary loss, and frustration.

Next, understand the time commitment your side hustle will require. For instance, a few hours of woodworking on the weekend is less demanding than taking a constant flow of orders on Etsy. If your schedule is already full to the brim from your primary job, family responsibilities, and personal pursuits, incorporating a side hustle can do more harm than good. Even if you work a side gig with your significant other, it’s not the same as spending quality time together.

Finally, your side hustle should fit into the larger picture of your goals and values. For instance, you might start a side hustle in order to build a $5,000 emergency fund. Or you could take a software engineering course in the evenings that will help you eventually switch careers. In any case, your side hustle should have specific benefits and point toward a defined objective. Otherwise, you’ll burn time without accomplishing much.

The Opportunity Cost of a Side Hustle

The “opportunity cost” of a side hustle depends upon the resources you invest. When you dedicate yourself to anything, you lose opportunities to engage in leisure activities, spend time with family and friends, and take vacations. In essence, the opportunity cost of a side hustle equals the value you place on other aspects of life that matter most.

Also ask yourself what is the financial cost of your side hustle? You might have to invest money to purchase materials or pay for marketing. You might also give up overtime at your primary job. That’s cash that could go into savings, investments, or paying off debt.

Likewise, your time could be going into skill development for your day job, leading to promotions or raises. Plus, your employer might sponsor specific types of professional development, resulting in free training that moves your career forward and increases your salary.

Ultimately, the opportunity cost of a side hustle varies depending on individual circumstances, goals, and priorities. It’s essential to carefully consider these factors and assess how the benefits of the side hustle compare to the time and money.

Examples of Side Hustles

While there are unusual ways to make money, side hustles are typically more accessible. Here are some side hustles that match with a range of backgrounds and skill sets:

•   Freelancing: Offer services such as writing, graphic design, programming, bookkeeping, and more. You’ll take projects on a contract basis with multiple clients.

•   Dog Walking: Providing exercise and companionship for dogs by taking them on walks on a regular or as-needed basis.

•   Blogging: Creating and maintaining a consistent feed of valuable written content on a topic you love or have expertise in. Find out how much it costs to start and run a blog.

•   Non-Medical Senior Care: Assisting elderly individuals with daily tasks (shopping, bathing, housework, etc.) and providing companionship to support their wellbeing.

•   Babysitting: The tried-and-true income-generator for teenagers and adults alike. You’ll care for children in the evenings and on weekends when parents are busy or need a break.

•   Personal Assistant: Providing administrative support and assistance to individuals or businesses. You’ll manage schedules, run errands, and handle correspondence. You can also be a virtual assistant and provide numerous essential services (bookkeeping, arranging travel, etc.), therefore creating a side hustle from home.

•   Handyman: Offering services to repair, maintain, and improve residences. You can specialize in one or more areas: plumbing, electrical work, carpentry, or general home tasks.

•   Crafting: Creating handmade goods and artwork, such as jewelry, clothing, and home décor, to sell online or at craft fairs.

•   Cooking/Baking: Crafting you can eat! Get to work in the kitchen to make treats, desserts, or meal kits for sale.

•   Private Tutor: Providing personalized academic instruction to students in a particular subject or skill, often on a one-on-one basis.

•   Self-Publishing: Writing and publishing books or other written works independently, without the involvement of traditional publishing companies. Self-publishing is inexpensive because your work will be accessible as an ebook.

•   Teaching Online Courses: Creating and delivering educational courses or tutorials on a specific topic via online platforms is another side hustle from home.

•   Product Tester: Testing and reviewing products or services for companies or brands, often providing feedback and insights based on personal experience.

•   E-Commerce: Selling products or services online through a website or online marketplace, which may involve sourcing or creating products, managing inventory, and handling customer inquiries and orders.

When Is a Side Hustle Not Worth It?

A side hustle may not be worthwhile because of the toll on your physical, mental, and financial wellbeing. Here are more specific ways that a side hustle can negatively impact your life:

•   Burnout: Working an 8-hour job and dedicating 2 to 4 additional hours per day to your side hustle leaves little room for anything else. The demands of a side hustle can result in excessive stress, fatigue, and burnout.

•   Missed Career Advancements: Devoting significant time and energy to a side hustle may detract from opportunities for advancement in your primary job. They can also keep you from visualizing a sustaining career. So if you’re in a job you don’t like, a side hustle can act as a bandage instead of a cure. It’s advisable to focus on switching vocations instead of supplementing your income through another unsatisfying side job.

•   Unhealthy Lifestyle Habits: A demanding side hustle may lead to poor eating choices due to lack of time for meal prep, insufficient exercise, and disrupted sleep. Over time, these habits damage physical health and overall quality of life.

•   Strained Relationships: Spending excessive time on a side hustle can strain relationships with family, friends, and romantic partners. Missing significant events or quality time with loved ones due to work commitments can lead to feelings of resentment and isolation.

•   Financial Costs: Some side hustles require upfront investments of time and money, for purchasing inventory or equipment, marketing expenses, or training courses. If the return on investment does not justify these costs, the side hustle may not be financially sustainable in the long run.

•   Not-So-Passive Income: Many side hustles require active participation and ongoing effort to generate income, which can limit scalability and long-term earning potential. Without the ability to create passive income streams, you’ll constantly trade time for money without achieving financial freedom.

•   Neglecting Personal Growth: A side hustle that consumes all available time and energy may leave little room for hobbies or other interests. Over time, this can lead to stagnation and dissatisfaction with your lifestyle.

Side Hustle Tips

A side hustle can quickly get out of hand or detract from your life if you’re not careful. Here’s how to create a practical side hustle that serves your needs:

•   Start Small: When beginning a side hustle, starting with manageable tasks or projects that don’t require a significant investment of time or resources is wise. Starting small allows you to test the waters, gain experience, and assess the viability of your chosen side hustle without taking on too much risk. As you gain confidence and experience, you can gradually expand and scale your side hustle over time.

•   Play to Your Strengths: Identify your special skills, interests, and areas of expertise, and leverage them in your side hustle. By focusing on activities that align with your strengths, you’re more likely to enjoy the work, excel at it, and differentiate yourself from competitors. This approach also allows you to maximize your earning potential by offering high-value services or products that cater to a specific niche or market. Remember, this doesn’t mean you must stick to your current skill set. Your interests and abilities can also lead you to pick up new skills.

•   Maintain Your Performance at Work: Balancing a side hustle with a full-time job means prioritizing high performance and professionalism in your primary job while pursuing your side hustle. To that end, it’s recommended to set boundaries for the time you dedicate to your side hustle and to manage your schedule efficiently. By maintaining your performance at work, you can preserve your job security and opportunities for advancement.

•   Aim at a Goal Instead of a Job: Instead of treating your side hustle as just another job, set out to achieve specific goals or milestones that align with your long-term aspirations. Whether your goal is to generate additional income, pursue a passion project, or transition to full-time entrepreneurship, having a clear vision and purpose for your side hustle will keep you motivated and focused on what truly matters to you. By focusing on goals rather than simply exchanging time for money, you can create a more fulfilling and meaningful side hustle.

The Takeaway

Side hustles can be a bad idea when they damage your quality of life. While picking up a side gig can create more income, this result must be weighed against other priorities, including advancement in your day job, time dedicated to relationships, and alternatives that slowly but surely create passive income.

Asking yourself whether a side hustle is a good move might not be the most relevant question. Instead, you can ask yourself if a second job makes sense after developing a clear vision of the future.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Are side hustles risky?

Side hustles can be risky because of the opportunity cost of picking up extra work. Specifically, a side hustle can drain time and financial resources, add unmanageable stress to your life, and lead to worse quality of life because of the sacrifices required to work a second job. As a result, it’s essential to evaluate your circumstances and identify your goals before starting a side hustle.

Are side hustles a waste of time?

Side hustles can be an excellent way to generate more income, develop yourself professionally, or transition to a different career. However, they can also be a waste of time if you don’t set goals and create a realistic plan when starting. So a carefully planned side hustle that fits into the larger picture of your life can provide massive benefits, while picking up more work to simply stay busy can lead to missed opportunities in your professional and personal life.

Is starting a side hustle really worth it?

Starting a side hustle can be worth it for additional income, pursuing passions, or expanding your skill set. However, it requires careful consideration of the potential drawbacks, such as time constraints, increased stress, and the risk of hindering career advancement. Ultimately, the value of a side hustle depends on your aligning it with personal goals, managing resources effectively, and maintaining a healthy work-life balance.

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About the author

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Photo credit: iStock/JLco – Julia Amaral

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Disappointed by your financial aid package? Sometimes students don’t get as much aid as they hoped for. Occasionally, they’re denied any aid at all. Before you give up on going to your dream school, know that the decision isn’t necessarily final.

A financial aid appeal letter allows you to plead your case and share any new information. However, it’s essential to know how to write a letter compelling enough to change minds.

Here we’ll offer proven tips for building a persuasive argument, and a sample financial aid appeal letter template to get you started.

When To Write a Financial Aid Appeal Letter

At what point in time after you receive your financial aid offer should you send an appeal letter? As soon as possible. That’s because some financial aid is handed out on a first come, first served basis. The sooner you appeal the decision, generally the more funds there will be to draw on.


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

Why Write a Financial Aid Appeal Letter

There are two main reasons why students appeal their financial aid offer: not getting the amount of aid they need and getting denied outright.

The Financial Aid Offer Fell Short

A student’s financial aid offer is based on the school’s certified cost of attendance (COA) and the student’s Student Aid Index, or SAI (formerly called Expected Family Contribution, or EFC). The latter is calculated based on information provided in the Free Application for Federal Student Aid (FAFSA®) form.

But a lot can happen between when you file your FAFSA and when you receive your student aid offer letter. Your circumstances may have changed. Some common life changes that can affect your financial aid calculation include:

•   Parent’s job loss or switch to a lower-paying position

•   Medical emergency or other financial commitment that ate up the cash your family had set aside to help you

•   Parents’ divorce

•   New member joined the family, through birth, adoption, or guardianship

•   Death of a parent

Recommended: Independent vs Dependent Student: Which One Are You?

Not Meeting Eligibility Requirements

In order to qualify for federal financial aid, students need to meet a handful of eligibility requirements. The criteria include being enrolled or accepted for enrollment in an eligible degree program, and maintaining “satisfactory academic progress,” including a 2.0 GPA. The full list of eligibility requirements is available on the Federal Student Aid website at StudentAid.gov.

If you don’t meet one of the requirements before the financial aid office makes its decision or you lose eligibility after receiving an offer, you may not get the help you need.

Recommended: What Are the FAFSA Income Limits for Eligibility?

What To Say in a Financial Aid Appeal Letter

Before you begin writing your letter, you’ll want to verify if your school has an official appeals application or form. In addition, you can check your school’s financial aid office for details on the financial aid appeal process. Some schools offer appeal forms online or have walk-in hours to address appeal questions.

If your school doesn’t offer a form, here’s a look at some specific things you may want to include in your appeals letter.

Address a Specific Person

It’s a good idea to avoid generic greetings like “To Whom It May Concern.” Instead, you’ll want to identify a specific individual at the financial aid office. If you are unsure whom to address, reach out to the financial aid office to ask.

Highlight Examples

Your case will likely be more compelling if you can provide details about your situation and why you are unable to pay for college. Consider writing a bulleted list so you can provide straightforward facts about your family’s financial situation. A bulleted list will also make it easier to connect details with support documentation.

Provide Documentation

If you have any relevant documents that can help support your case, you will want to include them with the letter. For example, a death certificate, doctor’s note, or unemployment benefits letter can give the financial aid office the evidence that it needs.

State a Dollar Amount

If you’re asking for a specific amount, consider including a budget breakdown of how you’d spend that money, including tuition, room and board, supplies, books, and transportation costs. (SoFi’s Ca$h Course: A Student’s Guide to Money may help with this.)

Recommended: Ca$h Course: A Student’s Guide to Money

Add a “Thank You”

You may want to end your letter by thanking the person you’re sending it to. You may also want to express your excitement about attending this school.

Sample Financial Aid Appeal Letter

Date
Person’s name (if available)
OR
Financial Aid Appeal Committee
Name of School
Office of Financial Aid

Dear Name Here,

I am writing to appeal the financial aid offer I received. My proposed package included $00,000 in scholarships and grants, and $00,000 in federal student loans, for a total award of $00,000. However, the amount I will need to cover my cost of attendance this year and living expenses this year is $00,000. I am requesting an increase in student loans or gift aid to cover the remaining $00,000.

Since completing and submitting the FAFSA, my family has experienced a change in circumstances. My father was laid off from his job in February and is still looking for work. He provided the primary income for our household, so our family’s total income has dropped from $00,000 to $00,000 per year.

My family and I would be grateful if you would approve an increased aid amount of $00,000 to help me afford the cost of school this year. I’m thrilled to have been accepted at my school of choice and am eagerly looking forward to starting in the fall.

I appreciate your taking the time to consider my appeal. Thank you very much.

Sincerely,
Your name

3 Tips for Writing a Financial Aid Appeal Letter

A good financial aid appeal letter can potentially shift your financial aid office’s decision in your favor. Here are some things to keep in mind while you’re writing it.

1. Be Polite

Not getting the financial aid you feel you need can be a frustrating experience. When it comes time to direct your request to someone specific, look for a contact in your school’s financial aid office and address the letter to them directly. If you’ve received some aid, you could thank them for the amount and perhaps explain how much you appreciate them considering your appeal.

It can be difficult to leave emotion out of the equation, but a respectful tone can have a positive influence.

2. Keep It Concise

Be clear with your request and how much aid you need. Then give a straightforward explanation of why it’s needed. If you were denied aid for an issue with eligibility, you might want to explain the reason why it happened. For example, maybe your grades dipped because you were diagnosed with a severe illness, lost an immediate family member, or became homeless.

Try to keep your letter to one page. This is not the time for a manifesto. The financial aid office will likely be reviewing multiple letters, and brief messages can be surprisingly powerful.

3. Proofread the Letter

After writing and thoroughly proofreading the letter yourself, consider having a trusted friend or family member give the letter another read. It’s not always easy to catch errors on your own, and the easier your letter is to read, the better the impression you’ll make.

What To Do If Your Appeal Is Unsuccessful

If your appeal is denied, you may still have other options for covering college costs.

For example, you may be able to qualify for scholarships through your school or a private organization. Check your school’s website for opportunities, as well as websites like Scholarships.com, Fastweb, and the College Board. SoFi also offers a helpful Scholarship Search Tool.

Even if you were denied a federal Direct Subsidized Student Loan, you may have the option of taking out a Direct Unsubsidized Student Loan, which is not need-based. Or, if your parents are willing to help, they can apply for a Parent PLUS Loan through the Department of Education. These loans are also not need-based, and the maximum amount they can borrow is your school’s cost of attendance minus any financial aid you’ve already received.

Finally, you may also be able to apply for a private student loan. These loans are available through banks, credit unions, and online lenders. Loan amounts vary by lender but you can often borrow up to the full cost of attendance. These loans require a credit check, so if you’re still relatively new to credit, you may need a parent to cosign the loan. As you consider these options, take the time to research their costs and terms to make sure you get the best deal for you. You‘ll want to exhaust all federal aid options first before applying for a private student loan.


💡 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.

The Takeaway

Writing a financial aid appeal letter can help students qualify for additional financial aid. Appealing an aid offer won’t always result in an increased award, but writing an effective letter can potentially improve a student’s chances of getting more aid. A few suggestions to strengthen your letter include being concise, providing supporting documentation, being specific in how you’ll use the funds, and keeping the letter polite in tone.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

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

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

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.

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Federal student loans come from the government and offer perks like fixed interest rates and income-driven repayment plans, all set by law. Personal loans are issued by banks and other financial institutions with terms set by the lender, typically making them more expensive.

When it comes to paying for college, starting with federal loans is usually the most cost-effective option. However, if your federal loans aren’t enough, you still have options, from private student loans to scholarships and grants. While personal loans are a great resource for many large purchases, college tuition is not one of them.

Read on to understand the key differences between federal student loans and personal loans, including how they work and the purposes they’re best suited for.

What Are Student Loans?

A federal student loan is government-provided financial aid that covers educational expenses and requires repayment with interest. To apply, you must complete the FAFSA annually to assess your financial need. There is no credit check required for federal student loans.

Some federal student loans provide flexible repayment options, such as income-driven repayment plans that adjust payments according to post-college earnings, and forgiveness programs tied to specific occupations. Borrowers are free to modify their repayment plan after obtaining the loan.

There are several different federal student loan options, including:

•   Federal Direct Subsidized Loans: These loans are for undergraduates in need of financial assistance. The amount depends on college costs and family income, as determined by the FAFSA. The government usually covers interest while you’re in school.

•   Federal Direct Unsubsidized Loans: These are for undergraduates and graduate students. The amount you receive is determined by the cost of attending your school and not your financial need. Interest starts accruing immediately, and you can choose to pay it while in school or add it to your total repayment.

•   Parent PLUS Loans (Direct Parent Loans for Undergraduate Students): Allow parents to borrow on behalf of their undergraduate children. You must complete a separate application from other federal loans to qualify for these.

•   Grad PLUS Loans: Allow graduate and professional students to borrow money for education expenses.

What Are Personal Loans?

Personal loans are offered by banks and other individual lenders and can be used for just about anything. Common purposes include consolidating high-interest debt, home improvement, moving, family planning (think IVF or adoption costs), and major car repairs. Generally, a personal loan cannot be used for a down payment on a home, business expenses, investing, or college expenses. That’s right: Most lenders don’t allow borrowers to use personal loans to pay tuition and fees, or to pay down student loans. If you need funding for college outside of federal loans, it’s best to look into private student loans.

Personal loan lenders may offer variable or fixed interest rates, along with repayment periods typically ranging from one to seven years. To qualify for a personal loan, lenders review your financial history and credit score. It’s important to note that each lender has different terms and conditions, so it’s essential to understand the annual percentage rate (APR) and repayment terms before committing to a specific offer.

Student Loans vs Personal Loans: Key Differences

Purpose aside, here’s a breakdown of the key differences between student loans and personal loans.

Interest Rates

In general, federal student loans have fixed interest rates, meaning your rate remains the same throughout the entire loan term. For example, the average rate for Direct Subsidized and Unsubsidized Loans for undergraduates for the 2024-25 school year is 6.53%.

On the other hand, personal loans can have variable or fixed rates, and are often higher than federal student loan rates. Depending on the borrower’s creditworthiness, repayment term, principal amount, and the lender, personal loan rates vary widely, ranging from 7% to 36%.

Loan Forgiveness

With federal student loans, you may qualify for additional benefits, such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness (TLF). These programs can forgive your loan balance after a specific period or upon meeting certain criteria.

Personal loans, however, do not offer any loan forgiveness programs. Nonetheless, lenders may provide options to prevent default if you encounter difficulty making payments due to hardship.

Repayment Terms

Federal student loans provide several repayment plans ranging from 10 to 25 years, including options that allow you to lower your payments based on your income. Repayment can also be deferred while you’re enrolled at least half-time and immediately after graduation.

Personal loan lenders also offer different repayment terms, typically between five and 20 years, giving you the power to choose what works best for you.

Credit Requirements

Federal student loans are part of an overall financial aid package offered to students. To apply for these loans, you’ll need to fill out the FAFSA each year, typically between October and July. Federal loan approval is often based on financial need, and no credit check is required.

When applying for a personal loan, you’ll complete an application and undergo a credit check. Each lender sets its own criteria for approval, often requiring a credit score of at least 670. If you don’t meet the credit requirements independently, many private lenders allow you to apply with a cosigner. Having a cosigner with a strong credit history can improve your chances of approval.

Deferment and Forbearance Options

If you’re dealing with a short-term financial challenge, you might qualify for a deferment or forbearance on your federal student loans. During deferment, you can pause your payments temporarily. It’s important to note that subsidized loans won’t accrue interest, but unsubsidized loans will. This means any unpaid interest adds to your loan balance, increasing your debt. For forbearance, if you can’t make payments, interest continues to build on your loan balance.

Personal loans may also offer deferment and forbearance options, but each lender has different rules. Before taking out a personal loan, it’s important to understand these options in case you face financial difficulties.

When to Choose Student Loans

It’s a trick question to compare personal loans vs student loans for college expenses, since student loans are the only option. But even if personal loans were an alternative for college expenses, federal student loans make more sense due to their typically lower interest rate and additional borrower protections.

Those protections include income-driven repayment plans, loan forgiveness programs, and deferral and forbearance options, which can be really helpful if you hit a rough patch financially.

When to Choose Personal Loans

Personal loans are a good option if you have a major purchase coming up and want to avoid putting it on a high-interest credit card. Just be sure to compare personal loan options carefully to avoid piling up debt. To find the right loan and repayment choice, look for the one with the lowest overall cost by considering the loan amount, interest rate, term, and fees.

The Takeaway

When deciding between federal student loans vs. personal loans for funding college, personal loans are simply off the table due to lender restrictions. This shouldn’t pose a problem, though, because federal student loans offer a better deal for college students anyway, with fixed interest rates, income-based repayment plans, and forgiveness options. In the event that federal student loans don’t cover your total cost of attendance, consider a private student loan to bridge the gap.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

Can I use both student and personal loans?

Most lenders don’t allow personal loans to be used for college expenses. However, if federal student loans don’t cover your full cost of attendance, you can apply for a private student loan to bridge the gap.

Do personal loans have borrowing limits for college?

Trick question! Personal loans can be used for just about anything, from home improvement to moving costs. However, there are a few exclusions, and college costs are one of them. Fortunately, private student loans exist for just that purpose, with borrowing limits up to your cost of attendance.

Are personal loan interest rates higher than student loans?

Personal loan interest rates are usually higher than federal student loan rates and private student loan rates.

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Photo credit: iStock/Drazen Zigic

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).

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.

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.


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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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