Hypothecation may not be a word you’ve heard before, but it describes a transaction you may have participated in. Hypothecation is what happens when a piece of collateral, like a house, is offered in order to secure a loan.
Auto loans and mortgages frequently involve hypothecation, since it allows the lender to repossess the car or house if the borrower is later unable to pay.
There are, though, some more subtle details to understand about hypothecation, particularly if you’re in the market for a home loan. Read on to learn about hypothecation loans.
What Is Hypothecation?
Hypothecation is essentially the fancy word for pledging collateral. If you’re taking out a secured loan — one in which a physical asset can be taken by the lender if you, as the borrower, default — you’re participating in hypothecation. (Hypothecation is also possible in certain investing scenarios. We’ll briefly talk about that later.)
As mentioned above, some of the most common hypothecation loans are auto loans and mortgages. If you’ve ever purchased a car, it’s likely you have (or had) a hypothecation loan, unless you paid the full purchase price in cash.
It’s important to understand that, just because the asset is offered as collateral, it doesn’t mean the owner loses legal possession or ownership rights of it. For instance, with an auto loan, the car is yours even though the lender might hold the title until the loan is paid off.
You also maintain your rights to the positive parts of ownership, such as income generation and appreciation. This is perhaps most obvious in the case of homeownership. Even if you’re paying a mortgage on your property, you still have the right to lease the place out and collect the rental income.
However, the lender has the right to seize the property if you fail to make your mortgage payments. (Which would be a bad day for both you and your renters.)
Why Is Hypothecation Important?
Hypothecation makes it easier to qualify for a loan — particularly a loan for a lot of money — because the collateral makes the transaction less risky for the lender.
For instance, hypothecation is the only way that most people are able to qualify for a mortgage. If those loans weren’t secured with collateral, lenders might have very steep eligibility requirements before they would pay out hundreds of thousands of dollars for a home on a piece of land!
Unsecured loans, however, are possible. A personal loan is a good example.
With an unsecured loan, you’re not at risk of having anything repossessed from you, and you can use the money for just about anything you want.
It’s a trade-off: Unsecured loans are riskier for the lender, so they tend to be harder to qualify for and to carry higher interest rates than secured loans.
On the other hand, if you compare a car loan and personal loan of equal length, you’ll likely be subject to a stricter eligibility screening to get the unsecured loan and pay more interest on it in the end.
Along with hypothecation in the context of a secured loan for a physical asset, like a house or a car, hypothecation also occurs in investing — though usually only if you take on advanced investment techniques.
Hypothecation occurs when investors participate in margin lending: borrowing money from a broker in order to purchase a stock market security (like a share of a company).
This technique can help active, short-term investors buy into securities they might not otherwise be able to afford, which can lead to gains if they hedge their bets right.
But here’s the catch: The other securities in the investor’s portfolio are used as collateral, and can be sold by the broker if the margin purchase ends up being a loss.
TL;DR: Unless you’re a well-studied day trader, buying on margin probably isn’t for you and you should not worry about hypothecation in your investment portfolio. But you’ll want to know it can happen in investing, too.
A mortgage is a classic example of a hypothecation loan: The lending institution foots the six-digit (or seven-digit) cost of the home upfront, but retains the right to seize the property if you’re unable to make your mortgage payments.
Hypothecation also occurs with investment property loans. A lender might require additional collateral to lessen the risk of providing a commercial property loan. A borrower might hypothecate their primary home, another piece of property, a boat, a car, or even stocks to secure the loan.
Given the size of most home loans and the risk of losing the home, you may wonder if taking out a mortgage is worth it at all.
Even though any kind of loan involves going into debt and taking on some level of risk, homeownership is still usually seen as a positive financial move. That’s because much of the money you pay into your mortgage each month ends up back in your own pocket in some capacity…as opposed to your landlord’s bank account.
As you pay off a mortgage, you’re slowly building equity in your home. Homes have historically tended to increase in value.
There is such a thing as rehypothecation, which is what happens when the collateral you offer is in turn offered by the lender in its own negotiations.
But this, as anyone who lived through the 2008 housing crisis knows, can have dire consequences. Remember The Big Short? Rehypothecation was part of the reason the housing market became so fragile and eventually fell apart. It is practiced much less frequently these days.
The Takeaway
Hypothecation simply means that collateral, like a house or a car, is pledged to secure a loan. Mortgages are a classic example of hypothecation, and hypothecation is the reason most of us are able to qualify for such a large loan.
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Cashing out stocks essentially means selling them, and most investors should be able to sell their stocks without too much trouble. Buying stocks can be fairly straightforward, whether online or through a financial advisor. But, when it’s time to sell shares, some beginning investors struggle with how to turn their stocks back into cash. After all, money invested in stocks is not immediately cash.
Investors may want to sell stocks for a wide variety of reasons. They might wish to reinvest the cash into another asset with an eye toward long-term gains. Or they could choose to withdraw funds from the stock market to cover short-term, daily expenses with cash earned from the sale. So, how might investors go about cashing out stocks? And, what factors might individuals curious about how to cash out stocks bear in mind? Here’s an overview of the how and when of selling stocks.
Key Points
• Stocks can be cashed out by selling them through a broker on a stock exchange.
• Selling stocks can provide cash for major expenses or to reinvest in other assets.
• Steps to cash out stocks include determining investment goals, accessing a brokerage account, placing a sell order, waiting for the sale to be completed, and receiving the proceeds.
• Motivations for selling stocks include accessing cash for expenses, cashing out profits, preventing significant losses, day trading, and offloading low-performing stocks.
• Types of sell orders include market orders, limit orders, stop orders, and trailing sell stop orders.
Can You Cash Out Stocks?
Investors can cash out stocks by selling them on a stock exchange through a broker. Stocks are relatively liquid assets, meaning they can be converted into cash quickly, especially compared to investments like real estate or jewelry. However, until an investor sells a stock, their money stays tied up in the market.
What Happens When You Sell a Stock?
When you sell a stock for a higher price than you paid, the proceeds from the sale will include your original investment plus your gains and minus any fees. If you sold your stock at a lower price than you paid, your total return will be less than your original investment (depending on how much of an overall loss you’re taking), minus any fees. So, you can have either a positive or negative return.
How to Cash Out Your Stocks: 5 Steps
There are several steps involved in selling stocks, including the following:
1. Determine your investment goals: Consider why you want to sell your stocks and whether it aligns with your overall investment goals.
2. Access your brokerage account: You need to access or log in to your brokerage account to sell your stocks.
3. Place an order to sell your stocks: Once you’re logged into your brokerage account, you can place a sell order (like the orders outlined below) to sell your stocks. You can choose to sell at a specific price or through a market order, which will sell the stocks at the current market price.
4. Wait for the sale to be completed: After placing an order to sell your stocks, you will need to wait for the sale to be completed. This can take anywhere from a few seconds to several days, depending on market conditions and the type of order you have placed.
5. Receive the proceeds from the sale: After the sale is completed, the proceeds from the sale will be deposited into your brokerage account or sent to you in the form of a check.
Motivations for Selling Stocks
Some investors watch their portfolios closely, selling stocks regularly to cash out profits or avoid significant losses.
However, one common reason investors decide to sell stocks is that they need the cash from the investments to pay for living expenses. While different investors might sell for various reasons, it can be helpful to understand the motivation that drives the desire to sell.
So, why might investors want to cash out stocks? Some common reasons could include the following:
Accessing Cash for Life Expenses
If investors know they’ll need cash for a major life expense, such as buying a car or home, they may choose to cash out some stocks. Selling shares might ensure there’s enough cash around to cover big expenses.
One benefit to having cash on hand instead of having money invested in stocks is that cash is not subject to the ups and downs of the stock market. However, the value of cash is impacted over time by inflation.
Some investors might also opt to move money out of stocks into potentially more secure investments, such as bonds or a money market account, until they’re ready to pay for that large expense.
Cashing Out Profits
If it appears as though a recession is coming or investors have seen significant gains in their portfolio, they might choose to cash out to lock in the profits. It’s important to understand, however, that attempting to time the stock market to avoid losses during unstable economic conditions is risky. What seems to be a trend in the market one day may or may not indicate how the markets may perform in the future.
Investors may want to ask themselves whether they’re interested in cashing out based on an emotional reaction (fear of recent market ups and downs, for instance) or a need for profits.
Preventing Significant Losses
The goal of investing in stocks is to earn profits or generate a positive return – online investing, or otherwise – is to not take losses. Still, there are some instances in which it could make sense to sell at a loss.
For example, an investor may sell specific stock holdings to prevent the likelihood of deeper losses in the future. Another scenario that might drive an investor to want to sell stocks is an industry-wide hardship, where numerous companies in one sector of the economy experience financial calamity at the same time. Industry-wide hardships may negatively impact the value of specific stock holdings.
In other instances, a company might reduce or eliminate shareholder dividends. Earning dividends may be a prime reason an investor bought the stock in the first place, so they decide to sell the stock because it’s no longer part of their investment strategy.
Day Trading
Day trading is one way of selling stocks, but it can involve significant risks. Day trades are the purchasing and selling (or vice versa) of the same stock on the same day. Here, traders are attempting to gain profit through short-term trades — typically through the use of technical or market analyses, which can require an in-depth knowledge of the intricacies of trading.
If it were possible to clearly predict future stock movements, everyone might want in on the stock market. But, stocks are volatile. Rather than guessing based on company news and technical indicators, traders who wish to make shorter term trades might choose to set a price goal. For instance, if they buy shares at $10 each, they could set a goal to sell them when they reach $18 per share.
Offloading Low Performing Stocks
Even if investors conduct thorough research on a company before buying a stock, they may later realize it wasn’t a boon for their portfolio. If a purchased stock continues to decline in value over time, investors may opt to offload the low-performing stock.
Also, some investors sell low-performing stocks at the end of the year for tax-loss harvesting, where investors sell investments at a loss to reduce their overall tax burden.
Understanding Types of Sell Orders
Once an investor has decided to cash out a stock, there are several options for how to sell. Each comes with different amounts of control over the sale. Here’s an overview of the most common types of sell orders:
Market Orders
When placing a market order, an investor agrees to sell their shares at the current market price per share. The sell order will be placed immediately or when the market reopens if the order is placed after hours.
One upside of market orders is that the trade can usually be executed quickly. A downside is that the investor has no control over the selling price.
Limit Orders
With a limit order, however, an investor can set the minimum price they are willing to sell their shares for. The sell order only gets executed if and when the stock reaches that price or higher.
For example, if you want to sell a stock currently trading at $50 per share and place a sell limit order at $55, the order will only be filled if the stock price rises to $55 or above.
The upside of limit orders is that investors can control the selling price (and potentially get a higher price than the current market rate). But, one possible downside is that their order won’t go through instantly and, potentially, might never go through (if the stock doesn’t reach the selected price).
Stop Orders or Stop-Loss Orders
A stop-loss order is placed with a brokerage to automatically sell a security when it reaches a specific price, known as the stop price. The reason investors set stop orders is to prevent incurring significant losses if a stock plummets in value.
For example, if you own a stock currently trading at $50 per share and place a stop-loss order at $40, the order will be triggered, and the stock will be sold if the price falls to $40 or below.
The upside of stop orders is that they can help protect against significant losses if the stock price drops unexpectedly (but not guarantee that you’ll avoid them). However, stop-loss orders do not guarantee a specific price, and the actual sale price may differ from the stop price due to market fluctuations.
Trailing Sell Stop Orders
Investors may also choose to place a trailing sell stop order, which allows you to set a stop price for a security that adjusts automatically as the price of the security moves in your favor.
With a trailing sell stop order, you can set the initial stop price at a certain percentage or dollar amount below the market price. The stop price will then adjust automatically as the market price of the security increases so that the stop price remains a fixed percentage or dollar amount below the market price. If the market price of the security then falls and reaches the stop price, the order will be triggered, and the security will be sold.
Trailing sell stop orders may allow traders to benefit from gains when a stock’s price rises while still protecting themselves from potential losses.
Factors to Assess When Cashing Out Stocks
There are several factors that you should consider when cashing out stocks:
• Capital gains taxes: Cashing out stocks may result in capital gains, which are subject to taxes. It is important to consider the tax implications of cashing out stocks. Not all stock holdings are taxed similarly, which could impact an investor’s decision to sell or not to sell.
• Investment goals: Consider why you are cashing out stocks and whether it aligns with your overall investment goals. If you are cashing out stocks to meet a short-term financial need, selling may be necessary even if the stock price is not optimal. However, if you are cashing out stocks as part of a long-term investment strategy, it may be worth holding onto the stocks, even if they’ve declined in price, because they may still appreciate over time.
• Fees and commissions: Brokerage firms generally charge investment fees and commissions for executing trades, which can impact the overall profit or loss on the sale of your stocks. Considering these fees and commissions is important when deciding whether to cash out stocks.
Pros and Cons of Reinvesting Profits
Investors may choose to sell stocks to gain or spend cash. But, individuals may want to reinvest earnings from the stocks sold into other assets. If investors decide to reinvest their profits, they need to consider the advantages and disadvantages of doing so.
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Pros:
• Benefit from potential compound growth
• Diversify your portfolio
• Hedge against inflation
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Cons:
• Lose out on opportunity to use profits for other financial needs
• Capital gains taxes
• Exposure to market risk
Pros
• Compound growth: Reinvesting stock profits allows you to compound your returns on your investments, which may significantly increase your overall returns over time.
• Diversification: Reinvesting stock profits can help you diversify your portfolio and reduce risk by investing in various stocks rather than holding a lot of cash.
• Hedge against inflation: Cash is subject to inflation, which makes cash savings lose value over time. Over a long-term period, cash tends to lose value, whereas the stock market tends to grow. By reinvesting rather than holding on to cash, investors may be less likely to lose money due to inflation.
• Opportunity cost: Reinvesting stock profits means that you are not using the proceeds from the sale of your stocks to meet other financial goals or needs, such as paying off debt or saving for a down payment on a house.
• Taxes: Reinvesting stock profits may result in capital gains tax, which can reduce the overall returns on your investments.
• Market risk: The value of your investments can fluctuate due to market conditions, and reinvesting stock profits means you are exposed to the risks of the stock market.
Platforms for Buying and Selling Stocks
People just getting started with building a portfolio of stocks have several options. Options might include online platforms or traditional phone-in and in-person traders, including:
Online Brokerage Accounts
There are numerous online brokerage accounts and digital apps where investors can buy and sell stocks to build a portfolio. Online brokerage accounts and apps can be a convenient investment method, allowing users to sell from anywhere. Unlike many traditional brokerage firms, many trading apps don’t charge a commission on trades.
Opening a brokerage account will require identity verification and connection with a bank account for deposits and withdrawals.
Financial Advisors
Investors can also make stock trades over the phone or in person by working with a financial advisor. Sell orders placed through these individuals generally get executed within 24 hours, so it can be a slower method to cash out stocks. Before the arrival of web-driven trading, most stocks were bought and sold through traditional investment brokers or financial advisors.
The Takeaway
Before selling any stocks, investors might opt to evaluate their short- and long-term financial goals. Then, they could devise a plan to pursue those objectives, which may lead to cashing out stock holdings. However, knowing when to sell a stock can take time and effort. Rather than trying to time the market and sell stocks to lock in immediate profits and avoid future losses, individuals may want to invest for the long term.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
How long does it take to cash out stocks?
The time it takes to cash out stocks can vary depending on the type of order you place and market conditions. Generally, it can take anywhere from a few seconds to several days for a sale of stocks to be completed.
Do you get money when you sell stock?
Yes, you will receive money when you sell stock, as long as its value is more than $0. The proceeds from the stock sale will be deposited into your brokerage account or sent to you in the form of a check. The amount of money you receive will depend on the price you sell the stock and any fees or commissions charged by the brokerage firm.
Can I withdraw money from stocks?
To access cash from stocks, you need to sell your holdings and use the proceeds from the sale to withdraw cash from your brokerage account.
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You may be able to finance student loans without a cosigner as long as you meet specific lender requirements. Refinancing is when a private lender like a bank, credit union, or online lender pays off some or all of your existing student loans and replaces them with a new loan.
A cosigner is an individual with good credit who agrees to repay the loan if you, the primary borrower, cannot. A cosigner may give a student without a strong credit history a better chance of being approved for refinancing and also help them secure a better interest rate on the loan. However, it is possible to refinance loans with no cosigner if you meet certain conditions.
Read on for more information about student loan refinancing without a cosigner and what it involves.
Key Points
• Refinancing student loans without a cosigner requires a good credit score, a solid credit history, and a stable income.
• A lower debt-to-income ratio increases the chances of qualifying for student loan refinancing.
• Refinancing student loans can potentially result in a lower interest rate. It also streamlines student loan payments by consolidating multiple loans into one.
• Refinancing federal student loans turns them into private loans and results in the loss of federal benefits like federal loan forgiveness programs.
• Alternatives to refinancing include income-driven repayment plans and loan forgiveness programs.
Understanding Student Loan Refinancing
With student loan refinancing, a private lender pays off your existing student loans, whether they are private student loans, federal student loans, or a mixture of both. The lender then issues you a new loan with a new interest rate and loan terms.
Ideally, refinancing student loans allows you to get a lower interest rate or more favorable loan terms. The loan interest rate, which is a percentage of your principal amount borrowed, is the amount you pay to your lender in exchange for borrowing money. A lower interest rate can help you save money on your monthly student loan payments.
When you refinance, you may be able to change the repayment terms of the loan. For instance, if you need more time to repay the loan and smaller monthly payments, you may be able to get a longer loan term. However, this means that you will likely pay more in interest overall since you are extending the life of the loan. Alternatively, if you are refinancing student loans to save money, you might be able to get a shorter loan term so that you can repay the loan faster, helping you save on interest payments.
Refinancing can also help you manage your student loan payments by streamlining the process. Instead of having to keep track of multiple loans with different due dates and balances, with refinancing you have just one loan to repay.
You can refinance both federal and private student loans, but be aware that refinancing federal student loans means that you’ll lose access to federal benefits such as federal loan forgiveness and income-driven repayment plans. Clearly, it’s important to consider when to refinance student loans for the best possible outcome.
Refinancing student loans without a cosigner means you’ll have full control over your loan and the responsibility of repaying it will be all yours. No one else will be financially liable for it.
However, to qualify for student loan refinancing on your own you will need to meet specific requirements. These eligibility requirements include:
Qualifying With Your Own Credit
To get approved for student loan refinancing, you typically need a good credit score and a solid credit history. FICO®, the credit scoring model, considers a good credit score to be between 670 to 739. Different lenders have different credit score requirements — some have a minimum credit score that’s slightly lower than 670 — but a higher score is usually better not only for approval but also to get the best rates and terms.
If your credit score needs some work, there are ways to build your credit over time. First, make all your payments in full and on time. Payments account for 35% of your FICO score, so this is critical. In addition, keep your credit utilization — the amount of debt you owe vs. the available credit you have — as low as you can. This can help show that you’re not overspending. And have a balanced mix of credit, such as credit cards and loans, to demonstrate that you can successfully deal with different types of debt.
In addition to your credit score, lenders will also check your credit history — meaning the age of your credit accounts. Having some older active credit accounts shows that you have a track record of borrowing money and repaying it.
Debt-to-Income Ratio
The lender will also look at your debt-to-income (DTI) ratio. This is a percentage that indicates how much of your money goes toward your monthly debts versus how much money you have coming into your household each month.
You can calculate your DTI by adding up your monthly debts and dividing that figure by your gross monthly income (your income before taxes). Multiply the resulting number by 100 to get a percentage, and that’s your DTI. The lower your DTI is, the less risk you are to lenders because it indicates that you have enough money to pay your debts, including the new loan.
If your DTI is high, above 50%, say, work on paying down the debt you owe before you apply for student loan refinancing. You can also work to boost your income by applying for a promotion or taking on a side hustle.
Employment Status
Generally, lenders look for borrowers who are currently employed and have a steady income, or, in some cases, those who have an offer of employment to start within the next 90 days, in order to approve them for student loan refinance. Check with your lender to learn their specific employment and income criteria.
If you can’t qualify for student loan refinancing without a cosigner, there are some other options to explore to help manage your student loan payments.
Income-driven Repayment Plans
With an income-driven repayment (IDR) plan, your monthly student loan payments are based on your income and family size. Your monthly payments are typically a percentage of your discretionary income, which usually means you’ll have lower payments. At the end of the repayment period, which is 20 or 25 years, depending on the IDR plan, your remaining loan balance is forgiven.
Loan Forgiveness Programs
You might qualify for student loan forgiveness through a state-specific or federal program. For instance, borrowers with federal student loans who work in public service may be eligible for the Public Service Loan Forgiveness (PSLF) program. If you work for a qualifying employer such as a not-for-profit organization or the government, PSLF may forgive the remaining balance on your eligible Direct loans after 120 qualifying payments are made under an IDR plan or the standard 10 year repayment plan. There is also a federal Teacher Loan Forgiveness program for student loan borrowers who teach in low-income schools or educational service agencies.
Be sure to check with your state to find out what loan forgiveness programs may be available. Some state programs even offer forgiveness to private student loan holders.
Federal Student Loan Consolidation
A federal Direct Consolidation loan allows you to combine all your federal loans into one new loan, which can lower your monthly payments by lengthening your loan term. The interest rate on the loan will be a weighted average of the combined interest rates of all of your consolidated loans. Consolidation can simplify and streamline your loan payments, and your loans remain federal loans with access to federal benefits and protections. However, a longer loan term means you’ll pay more in interest over the life of the loan.
How SoFi Can Help You Refinance
If you opt to refinance your student loans, you may want to consider refinancing your loans with SoFi. You’ll get competitive fixed or variable interest rates on refinanced student loans, no fees, flexible repayment options, and member benefits such as financial advice.
You can refinance online with SoFi and the process is quick and easy. You can view your rate in just two minutes, and it won’t affect your credit score. Then, you can choose a term and payment that makes sense for you. Just remember that refinancing federal student loans makes them ineligible for federal benefits such as income-driven repayment plans.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQS
Can I refinance my student loan without my cosigner?
If you can qualify for refinancing on your own, you typically won’t need to include the cosigner on the new loan which will have new loan terms. By qualifying on your own, you are essentially demonstrating to the lender that you have what it takes to make your loan payments. To qualify for refinancing without a cosigner, you’ll generally need a strong credit score and solid credit history, a low debt-to-income ratio, and a stable income
Is there any way to get a student loan without a cosigner?
Your ability to get a student loan without a cosigner depends on the type of loan it is and your financial situation. Most federal student loans, including Direct Subsidized and Unsubsidized loans, don’t require you to have good credit or to prove you have income, so you won’t need a cosigner for those loans. However, if you’re taking out a Direct PLUS loan and you have adverse credit, such as a recent loan default, you will likely need a cosigner for the loan.
If you’re interested in private student loans, private lenders generally have strict qualification requirements regarding your credit score and income. As a student without much of a credit history or a steady income, you may need a cosigner to qualify for a private student loan.
How easy is it to refinance student loans?
Refinancing student loans is quite easy today because in most cases you can do virtually all of it online. Here’s how: Research different lenders that offer refinancing and compare their loan terms and interest rates. Get a rate estimate from a few lenders to see what rate you may be eligible for (this process involves a soft credit check that does not affect your credit score), and then choose the lender that makes the most sense for you. You can typically complete the entire loan application online (just be aware that you will need to supply documentation to prove your financial situation).
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Student loan interest rates are rising. In July 2024, interest rates rose to their highest level in 16 years. Rates for undergraduate loans have increased almost 19% over last year and 44% over the past five years. Some loan rates for graduate students have never been as high as they are now.
Why are student loan interest rates so high? Some of it comes down to perception: Interest rates are up after a decade of historical lows. But other factors also come into play.
Read on to learn how student loan interest rates are set, why interest rates are going up, and the different options available for managing high-interest student loans.
Key Points
• Federal student loan interest rates have risen to their highest levels in years, and rates for some loans for graduate students are at record highs.
• Interest rates on federal student loans are set annually by Congress, influenced by the 10-year Treasury note rate plus a fixed increase. Rates are capped at specific limits.
• Private lenders determine interest rates on private student loans, using benchmarks such as the prime rate. Borrowers’ credit scores and credit history also impact private loan rates.
• Students who don’t have a strong credit history may need a cosigner on a private student loan to qualify for more favorable rates.
• Methods to help pay off student loans include paying any accruing interest while in school, using an income-driven repayment plan after graduation, and refinancing student loans.
Understanding Student Loans
There are two main types of student loans — federal and private student loans. Federal loans are offered by the Department of Education (DOE) and they include Direct Subsized and Unsubsidized student loans for undergraduate students, and Direct Unsubsidized loans and Direct PLUS loans for graduate or professional students.
• Direct Subsidized loans are for undergraduates who have financial need. You fill out the Free Application for Student Aid (FAFSA), and your school determines how much you can borrow. The interest on the loan is paid by the DOE while you’re in school and for a six-month grace period after graduation.
• Direct Unsubsidized loans are available for undergrads and graduate students. A borrower does not have to prove financial need for these loans. Again, your school determines the amount you can borrow. However, unlike Direct Subsidized loans, the interest on Direct Unsubsidized loans begins to accrue as soon as the loan is disbursed.
• Direct PLUS loans are for eligible parents (typically called a parent PLUS loan) and grad students. To be approved for one of these loans, a borrower must undergo a credit check and cannot have an adverse credit history. Interest accrues on Direct PLUS loans while the student is in school.
Here’s a look at how the interest rates on these federal loans have increased over the last four years:
School Year 2021 – 2022
School Year 2022 – 2023
School Year 2023 – 2024
School Year 2024 – 2025
Direct Subsidized and Unsubsidized Loans for Undergrads
3.73%
4.99%
5.50%
6.53%
Direct Unsubsidized Loans for Graduate or Professional Students
5.28%
6.54%
7.05%
8.08%
Direct PLUS Loans for Graduate or Professional Students or Parents of Undergrads
6.28%
7.54%
8.05%
9.08%
There are several different repayment plans for federal student loans, including the standard 10-year plan; graduated repayment in which your monthly payments gradually increase over 10 years; extended payment, which gives you up to 25 years to repay your loans; and income-driven repayment plans that base your monthly payments on your income and family size. Federal loans come with benefits such as federal loan forgiveness.
Private student loans are issued by private lenders, such as banks, credit unions, and online lenders. Their interest rates and loan terms differ from lender to lender. The interest rates on private student loans may be fixed or variable, and the rate you get depends on your credit history. You can use student loan refinancing later on for potentially better interest rates and terms on your private loans, if you’re eligible. (Federal loans can be refinanced as well, but they then become private loans and lose the federal benefits mentioned above.)
By using our student loan refinance calculator, you can check the interest rate and repayment terms you could qualify for — and find out if refinancing makes sense for your situation.
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Factors Contributing to High Interest Rates
Congress sets federal student loan interest rates, while private loan rates depend on the credit rating of the borrower (or their student loan cosigner, if they have one). But that’s not the whole story.
The federal government adjusts federal student loan rates every year based on 10-year Treasury notes, plus a fixed increase. Rates are also capped, so they can’t rise above a certain limit. Here are the formulas:
• Direct Unsubsidized Loans for Undergraduates: 10-year Treasury + 2.05%, capped at 8.25%
• Direct Unsubsidized Loans for Graduates: 10-year Treasury + 3.60%, capped at 9.50%
• PLUS Loans to Graduate Students and Parents: 10-year Treasury + 4.60% Capped 10.50%
The rates for Treasury notes are set based partly on global market conditions and the state of the economy. When market conditions are in flux, the rates for Treasury notes tend to rise.
Federal student loan interest rates are fixed over the life of the loan. That means, if you get a federal student loan for your freshman year, the rate it was issued with won’t change despite Congress setting a new rate every year. If you need to take out another federal student loan for your sophomore year, however, you’ll then get the new rate, not the previous one.
Private student loan rates vary by lender and fluctuate with market trends. A borrower’s credit history also determines the rate they get for a private student loan.
Another factor is that student loans are unsecured. Unsecured loans are not tied to an asset that can serve as collateral. Secured loans, by comparison, are backed by something of value, such as a car or house, which can be seized if you default. But lenders can’t seize a degree. So student loan interest rates may be higher than secured loan rates because the lender’s risk is higher.
Comparison of Federal and Private Student Loan Interest Rates
Why are student loan interest rates so high? As noted above, private student loan rates will fluctuate with market trends and from lender to lender. They also depend on a borrower’s credit score. As of November 2024, some private student loan rates start at about 4% and go up to around 17%.
Private student loan rates for 10-year loans may be higher than the federal interest rate when you are comparing rates concurrently on offer. The rates may be lower for a loan that has a shorter term length than the standard 10 years of federal loans.
What’s more, private student loan rates and student loan refinance rates that are currently on offer can very well be lower than the federal interest rate you received at the time of getting your loan. And you can shop around with private lenders for the best interest rates.
Pros and Cons of Federal and Private Student Loans
Both federal and private student loans have advantages and drawbacks.
Pros of federal student loans include:
• Interest rates for federal loans are fixed over the life of the loan
• The rates for federal loans may be lower than the rates you might get for private student loans
• Depending on the type of federal loan you have, the government may pay your interest while you are in school and during the six-month grace period after graduation
• Federal loans have federal programs and protections such as income-driven repayment plans and federal deferment options
Cons of federal student loans include:
• You can’t shop around for interest rates
• If you take out a new loan in subsequent years, you may get a higher rate than you got with your initial loans
• Borrowing limits may be lower compared to private student loans
Pros of private student loans include:
• You can shop around with different private lenders for lower rates
• Borrowers (or cosigners) with very good or excellent credit can get lower interest rates
• May offer higher borrowing limits than federal loans, spending on what a borrower is eligible for
Cons of private student loans include:
• Borrowers with poor credit will get higher interest rates or may not be able to qualify for a loan
• If the loan has a variable interest rate, it may rise over time
• Private loan student holders don’t have access to the same programs and protections that federal student loan borrowers do
• Deferment and forbearance options (if any) depend on the lender
Interest Rates for Graduate and Professional Degrees
For graduate students and those pursuing advanced professional degrees, interest rates on federal Direct PLUS loans and Direct Unsubsidized Loans for graduate and professional students are substantially higher than the interest rate for Direct Subsidized and Unsubsidized loans for undergrads.
For the 2024-2025 school year, the interest rates are:
Direct PLUS loan: 9.08% Direct Unsubsidized loans for graduate and professional students: 8.08% Direct Subsidized and Unsubsidized loans for undergraduate students: 6.53%
The higher rates on loans for graduate and professional students add significantly to the cost of borrowing. Not only that, the interest on these loans begins accruing immediately and while the borrower is in school, which also adds to the overall amount they’ll need to repay.
It’s worth noting that loans for graduate students have much higher borrowing limits than federal loans for undergrads. Graduate students can usually borrow up to $20,500 each year, with a lifetime cap of $138,500. Undergrad borrowers can typically borrow $5,500 for the first year, $6,500 for the second year, and $7,500 for the next two years, up to a total of $31,000.
Credit Score Impact on Private Student Loan Interest Rates
Private lenders will look at your creditworthiness when determining your interest rate. This involves considering such factors as:
• Credit score: Lenders have different requirements when it comes to credit scores for private student loans, but many look for a score of at least 650. As a student, you may not have that high a score, and in that case, you may need a cosigner on the loan in order to be approved.
• Credit history: When entering college, most students have little to no credit history. That means the lender could be unsure of their ability to repay the loan since students don’t typically have a history of paying any loans. This can lead to a higher interest rate.
• Your cosigner’s finances: Since many private student loan applicants are relatively new to debt and have no credit history, they might be required to provide a cosigner, as previously mentioned. A cosigner shares the burden of debt with you, meaning they’re also on the hook to pay it back if you can’t. A cosigner with a strong credit history can potentially help secure a lower interest rate on private student loans.
To help build your credit as a student, having student loans can help. Managing your student loans responsibly is a good way to help establish credit.
In addition, you might consider getting a credit card with a lower line of credit and use it to cover a few small expenses such as groceries and transportation. Be sure to pay your bill on time each month and in full if you can. Strategies like these can help you build credit over time.
Strategies to Pay Off Student Loans Faster
Whether you’re still in school or you’ve just graduated, you have options that may save you money. But it’s important to be proactive. Here are some potential actions you could take:
If You’re Still in College or Grad School
Borrowers with Direct Unsubsidized loans are responsible for the interest that accrues while they’re in school and immediately after. They don’t have to make payments while enrolled, but not making payments means that, in certain situations, interest may “capitalize” — that is, it will be added to the principal. In other words, a borrower would be paying interest on the interest.
To save yourself money on interest, consider making interest-only payments during school until your full repayment period begins after graduation. It will take a small bite out of your budget now, but it can save you money in the long run.
If you have Direct Subsidized loans, no interest will accrue until your grace period ends.
If You Graduated
Borrowers are automatically placed on the standard repayment plan, unless they select another option. The standard repayment plan spreads repayment over 10 years. Other options, such as the extended plan, extend the repayment term, which can make payments more manageable in the present, but that means you may pay more in interest over the life of the loan.
With an income-driven repayment (IDR) plan, your monthly student loan payments are based on your income and family size. Your monthly payments are typically a percentage of your discretionary income, which usually means you’ll have lower payments. At the end of the repayment period, which is 20 or 25 years, depending on the IDR plan, your remaining loan balance is forgiven.
Federal Student Loan Forgiveness
You could also explore student loan forgiveness through a state or federal program. Borrowers with federal student loans who work in public service may be eligible for the Public Service Loan Forgiveness (PSLF) program. If you work for a qualifying employer such as a not-for-profit organization or the government, PSLF may forgive the remaining balance on your eligible Direct loans after 120 qualifying payments are made under an IDR plan or the standard 10 year repayment plan.
In addition, check with your state to find out what loan forgiveness programs they may offer.
Refinancing Student Loans
Refinancing is one way to deal with high-interest student loan debt if you don’t qualify for federal protections. You can potentially lower your interest rate or your monthly payments.
If you’re considering refinancing to save money, you could be a strong candidate if you’ve strengthened your credit since you first took out your loans. Unlike when you were first headed to college, you may now have a credit history for lenders to take into account. If you’ve never missed a payment and have continually built your credit, you might qualify for a lower interest rate.
Having a stable income can also help. Being able to show a consistent salary to a private lender may help make you a less risky investment, which in turn could also help you secure a more competitive interest rate.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
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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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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.
A shareholder activist may be a hedge fund, institutional investor, or wealthy individual who uses an ownership stake in a company to influence corporate decision-making. Shareholder activists, sometimes called activist investors, typically seek to change how a company is run to improve its financial performance. However, they may also have other objectives, such as increasing transparency or promoting social responsibility.
Activist shareholders can impact the way a company is managed, thus affecting its stock price. As such, you may benefit from understanding shareholder activism and how these investors may impact the stocks in your portfolio.
Key Points
• Shareholder activists use ownership stakes to influence corporate decisions, aiming to improve financial performance or promote transparency and social responsibility.
• Activists can be hedge funds, institutional investors, or wealthy individuals seeking changes in company management.
• Activist investors may use media and shareholder voting to gain support for their proposals and influence company strategies.
• Goals of activism vary, from improving environmental impact to unlocking shareholder value through strategic changes.
• Activism can lead to stock volatility, but targeted stocks may still be valuable for diversified portfolios if proposed changes are supported.
How Shareholder Activism Works
Shareholder activism is a process in which investors purchase a significant stake in a company to influence the management of the company. When an investor builds up a large enough stake in a company, this usually opens up channels where they may discuss business proposals directly with management.
Activist investors may also use the shareholder voting process to wield influence over a company if they believe it is mismanaged. This more aggressive tactic may allow activist shareholders to nominate their preferred candidates for the board of directors or have a say on a company’s management decisions.
Activist investors typically own a relatively small percentage of shares in a company, perhaps less than 10% of a firm’s outstanding stock, so they may need to convince other shareholders to support their proposals. They often use the media to generate support for their campaigns.
Shareholder activists may also threaten lawsuits if they do not get their way, claiming that the company and its board of directors are not fulfilling their fiduciary duties to shareholders.
Activist investors’ goals can vary. Some investors may want to see companies improve their environmental and social impact, so they will suggest that the company adopt a Corporate Social Responsibility framework. Other investors try to get the company to adopt changes to unlock shareholder value, like selling a part of the company or increasing dividend payouts.
However, shareholder activism can also be a source of conflict between shareholders and management. Some activist investors may prefer the company unlock short-term gains that benefit shareholders, perhaps at the expense of long-term business operations. These investors may exit a position in a company once they unlock the short-term gains with little concern for the company’s future prospects.
There are three primary types of shareholder activists: hedge funds, institutional investors, and individual investors. So, your average investor who may be doing a bit of online investing or building a retirement portfolio likely wouldn’t qualify as a shareholder activist. Each type of shareholder activist has its distinct objectives and strategies.
Hedge Funds
Hedge funds are private investment vehicles usually only available to wealthy individuals who make more than $200,000 annually or have a net worth over $1 million. These funds often take a more aggressive approach to shareholder activism, like public campaigns and proxy battles, to force a company to take specific actions to generate a short-term return on its investment.
Institutional Investors
Institutional investors are typically large pension funds, endowments, and mutual funds that invest in publicly-traded companies for the long term. These investors often use their voting power to influence a company’s strategy or management to improve their investment’s financial performance.
Individual Investors
Though less common than hedge funds and institutional investors, very wealthy individual investors sometimes use their own money to buy shares in a company and then push for change.
Examples of Shareholder Activists
Shareholder activism became a popular strategy in the 1970s and 1980s, when many investors – called “corporate raiders” – used their power to push for changes in a company’s management. Shareholder activism has evolved since this period, but there are still several examples of activist investors
For example, Carl Icahn is one of the most well-known shareholder activists who made a name for himself as a corporate raider in the 1980s. He was involved in hostile takeover bids for companies such as TWA and Texaco during the decade.
Since then, Icahn has been known for taking large stakes in companies and pushing for changes, such as spin-offs, stock buybacks, and management changes. More recently, Icahn spearheaded a push in early 2022 to nominate two new directors to the board of McDonald’s. His goal was to get McDonald’s to change its treatment of pigs. However, his preferred nominees failed to get elected to the board.
Another well known activist investor is Bill Ackman, the founder and CEO of Pershing Square Capital Management, a hedge fund specializing in activist investing. Ackman is known for his high-profile campaigns, including his battle with Herbalife.
In 2012, Ackman shorted the stock of Herbalife, betting the company would collapse. He accused Herbalife of being a pyramid scheme and called for a government investigation. Herbalife denied the allegations, and the stock continued to rise. Ackman eventually closed out his position at a loss.
Other examples of shareholder activists include Greenlight Capital, led by David Einhorn, and Third Point, a hedge fund founded by Dan Loeb.
In 2013, Einhorn took a stake in Apple and pushed for the company to return more cash to shareholders through share repurchases and dividends. Apple eventually heeded his advice and initiated a plan to return $100 billion to shareholders through dividends and buybacks.
In 2011, Loeb’s hedge fund took a stake in Yahoo and pushed for the company to fire its CEO, Scott Thompson. Thompson eventually resigned, and Yahoo appointed Loeb to its board of directors. More recently, in 2022, Loeb took a significant stake in Disney and started a pressure campaign calling on the company to spin-off or sell ESPN. However, he eventually backed off that suggestion.
Is Shareholder Activism Good for Individual Investors?
Depending on the circumstances, a shareholder activist campaign may be good for investors. Some proponents argue that shareholder activism can improve corporate governance, promote ESG investing, and lead to better long-term returns for investors.
Others contend that activist investors are primarily interested in short-term gains and may not always have the best interests of all shareholders in mind. While individual investors may benefit from a stock’s short-term spike after an activist shareholder’s campaign, this rally may not last for investors interested in long-term gains.
The Takeaway
Shareholder activists use their financial power to try to influence the management of publicly traded companies. Because activist investors often leverage the media to promote their goals, individual investors may read about these campaigns and worry about how they could affect their holdings.
Generally, the impact of shareholder activism on investors depends on the specific goals of the activist and the response of the company’s management. If an activist successfully pressures management to make changes that improve the company’s performance, this can increase shareholder value. However, if an activist’s campaign is unsuccessful or the company’s management resists the activist’s demands, this can lead to a decline in the stock price.
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