Sep
12
2023
Money Market Account vs. Savings Account

Savings Account vs Money Market Comparison

By | Budgeting & Goals, Growing Wealth, money | Comments Off on Savings Account vs Money Market Comparison

There are plenty of ways to stow your money for future use, and two popular options are savings accounts and money market accounts. These financial products have similarities, such as both being interest-earning, insured ways to stash cash for future needs. However, one may better suit your particular situation better than another.

If you’re wondering how to pick between a money market or savings account, you’re in the right place. Here, you’ll get the intel you need, including:

•  What is a savings account?

•  What is a money market account?

•  What are the differences between a savings and a money market account?

•  When should you use a money market vs. a savings account?

•  What are the risks for savings and money market accounts?

What Is a Money Market Account?

A money market account is a type of deposit account offered by banks and credit unions. These accounts can also be referred to as money market deposit accounts, money market savings accounts, or by their acronym, MMAs.

So how does a money market account work?

•  Money market accounts allow you to deposit money and earn interest on those deposits.

•  The interest rate and annual percentage yield (APY) earned can depend on the bank and the terms of the account.

•  If you need to withdraw money from a money market account, you will probably find quite a lot of flexibility. You may be able to do it via ACH transfer, debit card, check, or ATM withdrawal.

While Federal Reserve rules limiting you to six withdrawals per month from a money market account have been suspended, banks can still impose withdrawal limits. If you exceed the allowed number of withdrawals, your bank can charge an excess withdrawal fee for each transaction over the limit. It can be wise to check with your bank about their policies.

Worth noting: If you are wondering about a money market account vs. a money market fund, know that the latter is a type of mutual fund. Since it’s an investment, it is neither insured by the FDIC nor is it backed by the U.S. government.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

What Is a Savings Account?

A savings account is also a deposit account that can be used to hold money you don’t plan to spend right away. Banks and credit unions can pay interest to savers, though there can be a significant difference in rates from one financial institution to the next. Online search tools will quickly and conveniently show you some options.

Can you spend money from a savings account? Technically, a savings account is meant for funds you’ll eventually spend. For example, you might open a savings account to hold money for an emergency fund or for a wedding you’re planning. But you typically can’t spend freely from a savings account the way you would a checking account.

Access may be somewhat limited. Savings accounts usually don’t come with a debit card, ATM card, or checks. If you need to take money from savings, you will probably either transfer funds using your financial institution’s website or an app, by phone, or by visiting a branch if your account is held at a traditional bank. And again, banks can limit the number of withdrawals you’re allowed to make per month.

3 Main Differences Between Money Market vs. Savings Account

Both money market and savings accounts are interest-bearing deposit account options. We’ve just noted another similarity: They can both be subject to monthly withdrawal limits. But now, let’s take a closer look at the differences between money market vs. savings accounts. This intel may help you decide which kind of account best suits your particular needs.

1. Access and Flexibility

A money market account can offer an advantage over a savings account when it comes to how you can access your money. Depending on the bank, your options for making deposits and withdrawals might include:

•  Debit card

•  ATM card

•  Paper checks

•  Electronic transfers

•  Remote deposit capture (for mobile check deposit)

•  Teller withdrawals/deposits

Access to a savings account, on the other hand, is usually limited to electronic, ATM, or teller transactions.

With online banks, ACH transfers to and from a linked account at an external bank, wire transfers, mobile check deposit, or mailed paper checks may be your only option for making deposits or withdrawals. Some online banks enable you to make withdrawals from certain ATM networks, however, which adds to their convenience.

2. Account Opening

A number of banks allow you to open both money market and savings accounts online — a nice convenience. However, there may be differences in the minimum deposit requirement. Generally, money market accounts tend to require a higher minimum deposit to open.

So instead of being able to open a new account with a minimal amount (even no money), which may be the case with a savings account, you might need $100, $1,000, or more instead. Again, how much cash you’ll need to open a money market account vs. savings acct can depend on the bank.

3. Interest and Fees

Money market accounts and savings accounts can also differ when it comes to the interest you can earn and the fees you might pay. If you put a regular savings account vs. money market account from an online bank side by side, for example, the regular savings account is more likely to offer a lower rate and APY, or annual percentage yield. In addition, it’s more likely to charge a monthly maintenance fee.

An online money market account, on the other hand, may have no monthly maintenance fee at all and may offer considerably higher interest rates vs. traditional banks.

Additionally, money market accounts often offer tiered rates, meaning the more you have on deposit, the higher the rate you may qualify for.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

Similarities Between Money Market and Savings Accounts

Here’s a closer look at ways in which savings and money market accounts are similar.

Earning Interest

Both money market accounts and savings accounts pay you interest. When you keep money at a financial institution, they use some of it for other aspects of their business, such as loans to other customers. For the privilege of using some of your funds this way, they pay you interest. Usually, this interest rate will vary with economic factors.

Being Insured

Money market and savings accounts are both likely to be insured by the Federal Deposit Insurance Corporation (FDIC) or NCUA, the National Credit Union Administration. Typically, accounts are insured for $250,000 per depositor, per financial institution, per ownership category.

Offering Accessibility and Liquidity

Unlike time deposits (such as certificates of deposit, or CDs), savings and money market accounts allow you to withdraw funds at will vs. waiting for the maturation date. However, there may be limits on how many outbound transactions you can make per month, depending upon the institution.

When You Should Use a Savings Account

A savings account could be a good fit in several scenarios:

•  One good reason to use a savings account is if you want a safe place to set aside money for future expenses. Maybe you are gathering funds to landscape your yard next spring. Or perhaps you just want to be prepared and several months’ worth of living expenses stashed away in case of emergency (which is a very good idea).

•  You might opt for a savings account vs. money market account if you don’t necessarily need a debit card, ATM card, or checks to access funds.

•  Where you decide to open a savings account can depend on your needs and personal banking preferences. Online banks may appeal to you if you’re looking for long-term savings account options that pay the best interest rates and charge the fewest fees.

On the other hand, you might choose a regular savings account at a brick-and-mortar bank instead if you want to be able to get cash at a teller or drive-thru in a pinch. It’s your call.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 3.80% APY on savings balances.

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When You Should Use a Money Market Account

Money market accounts definitely have their appeal, too. They are attractive if you need a low-risk option to put cash away for a rainy day or until you’re ready to spend it on a planned expense. For example, you might consider opening a money market account if you’re saving toward any of these goals:

•  Down payment on a home

•  New (or used) car

•  Vacation

•  Wedding

•  Education expenses

•  Home renovations or repairs

In any of those scenarios, a money market account could offer convenience if you need to write a check or use your debit card to pay for something. If you’re upgrading your kitchen, for example, you could write a check to your contractor from your money market account.

Here’s an overview of the pros and cons of savings vs. money market accounts:

Pros of Savings Accounts

Pros of Money Market Accounts

Cons of Savings Accounts

Cons of Money Market Accounts

InsuredInsuredMay be charged for excess withdrawalsMay be charged for excess withdrawals
Earns interestEarns interestLess accessMay have higher balance requirements
Secure way to saveSecure way to saveNo tax benefitsNo tax benefits
Easy access/withdrawalsMay have more fees

Potential Risks of Using a Money Market or Savings Account

Ready to take a look at the potential downsides of having a money market or savings account? In general, you don’t have too much to worry about. Money market accounts and savings accounts are both quite low-risk since these products can be FDIC-insured.

FDIC insurance applies in the rare event that a bank fails. In that case, as noted above, protection extends up to $250,000 per depositor, per account ownership category, per insured financial institution.

That said, there are some potential drawbacks to these accounts. Being aware of the risks is of course a good idea as you choose the best type of savings account.

Money Market Account

Here are some of the main risks associated with money market accounts:

•  Monthly maintenance fees may apply if your balance falls below the required minimum.

•  Interest rates are not fixed, so you’re not guaranteed to earn a higher APY.

•  Additional withdrawals from a money market account may trigger fees.

•  There aren’t tax benefits for saving this way.

Savings Account

Consider these risks before opening a savings account:

•  Interest rates may be well below what you could get with a money market account (though typically online banks offer a higher APY than traditional ones).

•  Accessing cash in an emergency may be difficult if you don’t have an ATM card and/or your money is at an online bank without an extensive ATM network.

•  You may be penalized for withdrawals over and above your limit.

•  You won’t enjoy tax benefits for saving with this kind of account.

Recommended: Ways to Earn Interest on Your Money

Opening a SoFi Savings Account

Money market accounts and savings accounts can both offer ways to earn interest on your money while safely stowing it away. Whether you’ll benefit more from a money market account vs. savings account can depend on how much you plan to keep in the account, the interest rate and APY you’re hoping to earn, and how you’d like to be able to access your money. Those fine points can make the difference between growing your money in a way that’s frustrating or fabulous.

On the topic of fabulous: Finding the right banking partner for your funds can enhance your money management.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

Is a money market better than a savings account?

A money market account might be better than a savings account for people who want to be able to make purchases from the account using a debit card, write checks against their balances, or withdraw cash at an ATM. When comparing money market vs. savings accounts, it’s important to compare the accessibility, fees, interest rates, and other features.

Can you lose your money in a money market account?

Money market accounts are some of the safest places to keep your money. Even if your bank fails, which happens rarely, you’d still be protected by FDIC coverage up to the applicable limit.

Do you get taxed on money market accounts?

Interest earned in a money market account is considered to be taxable by the IRS. If your money market account earns interest for the year, your bank will send you a Form 1099-INT to report interest income. The bank will also send a copy of this form to the IRS on your behalf.

What is the downside of a money market account?

A money market account may have a higher opening deposit and ongoing minimum balance requirement vs. a savings account. Also, it may have limits on the number of withdrawals you can make.

Is a money market account safer than a savings account?

Both money market accounts and savings accounts are typically insured by either the FDIC or NCUA, depending on your financial institution, for $250,000 per depositor, per account ownership category, per insured institution.

Photo credit: iStock/akinbostanci

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

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

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

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Sep
12
2023
What Credit Score Do You Need to Lease a Car?

What Credit Score Is Needed to Lease a Car?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Credit Score Is Needed to Lease a Car?

If you are thinking about getting a car, you likely are deciding between buying or leasing. And if leasing seems like the right option for your finances and lifestyle, then you probably want to know what is needed to seal that deal.

Leasing a car typically requires both some cash and a solid credit score. If you have a high credit score, you may snag the best possible (meaning lowest) interest rate. If your credit history is not solid, then you may face higher rates or have difficulty getting approved.

Here, you can learn about:

•  What are car lease requirements?

•  Can you lease a car with a credit score under 680?

•  Can you build your credit?

•  Can leasing help or hurt your credit score?

What Are Car Lease Requirements?

It’s a good idea to know your credit score before you start shopping around; your credit score is an important factor influencing the final lease amount. If you have poor credit and only have $300 a month to spend on the lease and insurance, a lot of that amount might be going to the higher interest rate a lender could potentially offer you.

If, on the other hand, you have good credit and $300 a month to spend on the lease and insurance, you may be able to lease a better quality car. Here’s why: Not as much money will be going to interest payments. (It’s always a good idea to weigh the pros and cons of leasing vs. buying a car before pulling the trigger on either financial decision.)

A couple of points to consider:

•  When you’re wondering, “Do you need good credit to lease a car,” the answer is typically yes. Having good credit may make it easier to lease a car because a leasing company may not see you as financially risky as someone who has poor credit. Not all leasing companies will necessarily approve a car lease for someone who has a low credit score.

•  You might also need to prove that you have a job with a certain income when you’re leasing a car, show recent bank statements, or that you have a cosigner with a good credit history.

What Credit Score Do You Need to Lease a Car?

As you may know, credit scores typically go from 300 to 850, with five credit score ranges:

•  Poor credit score, 300-579

•  Fair credit score, 580-669

•  Good credit score, 670-739

•  Very good credit score, 740-799

•  Exceptional credit score, 800-850.

That said, what credit score do you need to lease a car? The average credit score of people who leased cars in late 2022 was 736 — generally at the high end of the good credit score range. If you have excellent credit, the upfront costs of leasing a car might be lower than if your credit isn’t so great.

Typically, leasing a car might require the first month’s payment, a security deposit, taxes, registration, and an acquisition fee. Someone whose credit score is in the low 600s might need to put money down on the lease in addition. Keep reading to find out more about how different credit scores affect leasing a car.

💡 Quick Tip: Make money easy. Enjoy the convenience of managing bills, deposits, and transfers from one online bank account with SoFi.

Leasing With a Credit Score Above 680

The credit score to lease a car and get favorable rates is one that’s considered a “prime” or “good” credit score, meaning between 670 and 739, or higher. Having good credit typically makes it more justifiable for lenders to approve you for the lease because it’s less of a risk to them.

Just as with any type of financing, applicants who have good credit may be offered lower interest rates on auto leases. Having an above-average credit score could give you more negotiating power over the rates and terms of the car lease.

Leasing With a Credit Score Lower Than 680

Having a lower credit score means you’ll likely have difficulty finding a company willing to lease to you or you’ll pay more to lease a car. Leasing companies may see you as a risk-based on your credit history. You might find that having a trustworthy cosigner on the lease could help you get a lower interest rate or better terms than if you’re applying on your own.

If your credit score is lower than 680, you might want to work on building it before leasing a car so you get a better deal. A good place to start is by checking your credit report which you can do for free once a year at Annual Credit Report.

It’s important to check your report for accuracy — if there are any errors, contact the credit bureau that issued the report. Factors that affect your credit score are your payment history, length of your credit history, how much you owe compared to how much available credit you have, types of credit you have, and any new applications for credit that show up on your credit report. (You’ll learn more about these below.)

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

Building Your Credit Before Leasing

There are several ways to build your credit before leasing a car. Two of the most important to consider:

•  Pay down debt. This will lower your credit utilization ratio or rate, meaning the percentage of your credit limit you are using. The lower that ratio (preferably no more than 10%), the better your credit can look.

•  Pay on time. Be meticulous about paying your bills on time or even early. Just one or two late payments can cause your credit score to dip.

Can Leasing a Car Build Credit?

Any time you apply for credit, you have the opportunity to build your credit. A car lease is credit, just as a car loan would be credit.

How you manage your lease payments affects your credit report just as a loan would. Making regular, on-time monthly payments will affect your credit in a positive way. In other words, yes, leasing a car can help build your credit.

Can Leasing a Car Affect Your Credit Score?

As just mentioned, paying a car lease on time can be a positive thing. However, missing payments or being late with payments will hurt your credit and may negatively affect your credit score.

You may also see a small drop in your credit score when the lease begins because your credit report will show a new account is open. You may see a similar small drop when the lease is terminated because the account is closed. Both of these credit events — opening and closing a credit account — can affect your credit score.

If you’re shopping around at different leasing companies over the course of a few weeks and apply for leases at those places, there will be inquiries into your credit history by the leasing companies. However, those multiple inquiries may show up as just one query on your credit report and minimally affect your credit score.

Recommended: Should You Buy a New or Used Car?

5 Things That Impact Your Credit Score

Here are factors that can influence your score:

1. Your Payment History

The single biggest factor in your credit score is your payment history, which can boil down to making payments on time, month after month. That can help build your credit score. Paying late or not at all can trigger your score to drop.

2. The Amount Owed

It can reflect positively on your credit score if you have a low credit utilization rate or ratio. This means that you are using little of your credit limit. Using 10% or less of your credit limit can benefit your score; using 30% or more can have a negative impact.

3. The Length of Your Credit History

Having a longer credit history and having managed lines of credit well for years can benefit your credit score. It shows that you can successfully borrow and pay back money.

4. Your Credit Mix

Having more than one kind of credit account can show that you manage borrowed funds well. For instance, it could be helpful if you have handled both installment debt (student loans and car loans are examples of this) and revolving accounts (such as credit cards) well.

5. New Credit

If you apply for a number of new lines of credit and have what are known as hard credit pulls vs. soft pulls done as part of this, your credit score could suffer. It can look as if you are applying for new debt and could then wind up financially overextended.

The Takeaway

It’s important you know your credit score to lease a car before you go car shopping. Checking your credit reports in advance will uncover any surprises before you’re at the dealership. Knowing your credit score and working to build it as much as possible before applying for a car lease may help you save money on your car lease and give you more negotiating power.

The less you have to spend on interest and fees, the farther your money can go while leasing. Successfully managing leases, loans, and credit in general is part of good financial habits. Having the right banking partner can also enhance how well you handle your cash.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

Can you lease a car with a 600 credit score?

You may wonder what does your credit score have to be to lease a car. While it’s not impossible to lease a car with a 600 credit score, it will likely take more time and energy to find an offer. You will also probably pay a higher interest rate than those with a higher credit score (680+), meaning you will pay more over the long term.

Does leasing a car hurt your credit?

When you apply for a car lease and the leasing company pulls your credit file, you may see a dip in your credit score in the short term. After that, whether the lease hurts your credit depends on how well you manage the account. If you pay late or miss payments, your credit score could suffer.

Is it better to lease or finance a car?

Whether it’s better to lease or finance a car will depend on your particular financial situation and aspirations. When you finance a car, you can eventually own it outright. It’s similar to buying a home with a mortgage. Leasing, on the other hand, is similar to renting. You never own the car or have it as an asset, but then again, you might like “trading up” every few years.

Photo credit: iStock/dusanpetkovic

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

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.

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 .

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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12
2023
Complete Guide to the volume weighted average price indicator (VWAP)

Complete Guide to the Volume-Weighted Average Price Indicator (VWAP)

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on Complete Guide to the Volume-Weighted Average Price Indicator (VWAP)

The volume-weighted average price indicator (VWAP) is a short-term trend indicator used on intraday charts. It measures the average price of a stock weighted by trading volume and price, and shows up as a single line.

Professionals and retail traders alike can use the VWAP as a benchmark to aid their trading strategies by using this indicator to identify liquidity points, or as part of a broader trend confirmation strategy.

VWAP also helps determine the target price for a particular asset, helping traders determine when to enter or exit a position. VWAP restarts at the opening of each new trading session, and is thus considered a single-day indicator.

What Is Volume-Weighted Average Price (VWAP)?

The volume-weighted average price (VWAP) is a technical indicator that shows a security’s average price during a specific trading period, adjusted for trading volume. In effect, it’s a measure of demand for that security.

It’s similar to the moving average indicator (MA), but because VWAP factors in trading volume, it’s a clearer indicator of the security’s value.

VWAP is calculated as the total amount traded for every transaction (price x volume) and divided by the total number of shares traded.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Why Is VWAP Important?

VWAP is important to traders and financial institutions for a few reasons. They can use the VWAP in combination with different trading strategies because it helps determine whether an asset is over- or underpriced based on the current market.

VWAP also helps identify a target price for the security so traders can aim for the best exit or entry points, depending on the strategy they’re using.

This benefits day traders, but also comes into play during corporate acquisitions, or big institutional trades.

Accuracy

One reason traders use VWAP is because it removes some of the static around a security’s price movement, and thus this indicator can provide a more realistic view of a security’s price throughout the day.

Trend Confirmation

Traders can also use the volume-weighted average price to gauge the strength and momentum of a price trend or reversal. When a price is over the VWAP, it might be considered overvalued. When it’s below the VWAP it may be undervalued. Thus it’s possible to determine support and resistance levels using the VWAP.

Simplicity

In many ways VWAP is a quick and easy way to interpret a security’s price and trend, and decide whether to make a trade.

Recommended: Using Technical Analysis to Research Stocks

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How Is VWAP Used in Trading?

As a trend indicator, VWAP adds more context to a moving average (MA). Since a moving average does not take volume into account, it could potentially be misleading when relatively big price changes happen on low volume, or if relatively small price changes happen despite large volume.

In addition, moving averages aren’t always helpful for short-term traders, because MA’s require longer time frames to provide good information. The VWAP is made to be a short-term indicator, as it involves one data point for each “tick,” or time period of a selected chart (each minute on a 1-minute chart, for example).
There are several ways that investors use the VWAP when trading.

Institutional Investors

Large institutional investors and algorithm-based traders use the VWAP to make sure they don’t move the market too much when entering into large positions. Buying too many shares too quickly could create price jumps, making it more expensive to buy a security.

Instead, some institutions try to buy when prices fall below the VWAP, and either sell or pause purchases when prices rise above the VWAP, in an attempt to keep prices near their average.

Retail Traders

Retail investors use the VWAP as a tool to confirm trends. As noted above, the VWAP indicator is similar to a simple moving average with one key difference — VWAP includes trading volume, as the name implies. Why does this matter?

Moving averages (MA) simply calculate average closing prices for a given security over a particular period (e.g., 9-day MA, 50-day MA, 200-day MA, etc.). Adding volume to an indicator helps confirm the potential strength of a trend.

Recommended: Institutional vs Retail Investors: What’s the Difference?

How to Calculate VWAP

VWAP is a ratio that indicates the relationship between an asset’s price and its volume. When used as a technical indicator on a chart, the computer automatically calculates VWAP and displays it as a single line.
Investors can also calculate VWAP manually. The two main pieces of the equation include:

•   Typical price + volume

•   Cumulative volume

The formula for calculating VWAP equals the typical price (the average of the low price, the high price, and the closing price of the stock for a given day) multiplied by the number of shares traded in a given day, divided by the total number of shares traded (cumulative volume).

Calculated daily, VWAP begins when the markets open and ends each day when the markets close.

Calculating a 30-Day VWAP

The 30-day VWAP is equivalent to the average of the daily VWAP over a 30-day period. So, to calculate the 30-day VWAP, you would have to add up the daily closing VWAP for each day, then divide the total by 30.

How Do You Read a VWAP Chart?

As with most technical indicators, there are many different ways to interpret the VWAP. Some of the most common ways to use this indicator for price signals include establishing support and resistance, indicating a trend being overextended, or using VWAP in combination with a different indicator.

Support and Resistance

This might be one of the simplest and most objective ways to read a chart using VWAP. One method for reading a VWAP chart is to use the line as an indicator for short-term support and resistance levels. If prices break beneath support, this could indicate further weakness ahead. If prices break above resistance, this could indicate more bullish momentum is yet to come.

Support and resistance are commonly measured using historic points of price strength or weakness, but this becomes more difficult when time frames are very short. Traders may use a volume-weighted indicator like the VWAP to predict short-term moves.

Trend Overextended

When looking at the VWAP indicator on a short-term chart, there could be times when price action goes very far beyond the VWAP line.

If price quickly goes too far above the line on heavy volume, this could indicate that the security has become overbought, and traders might go short. If price quickly falls far below the line, this could indicate that the security has become oversold, and traders might go long.

Of course, there is a subjective component involved in determining the exact definition of “overextended.” Typically, however, investors assume that price tends to return to the VWAP line or close to it, so when prices go too far beyond this line one way or the other, they could eventually snap back.

Recommended: Understanding Stock Volatility

VWAP Plus MACD

As they do with many technical indicators, investors often use the VWAP indicator in conjunction with other data points.

Technical analysis can become more effective when using multiple indicators together. By confirming a trend in multiple ways, investors can feel more confident in their projections.

As an example, some traders like to look at the VWAP while also looking at the Moving Average Convergence Divergence (MACD).

If the MACD lines see a bullish crossover around the same time that prices become overextended to the downside beneath the VWAP line, this could indicate a buying opportunity. If the MACD shows a bearish crossover as prices stretch far above the VWAP line, this could indicate a good time to close out a trade or establish a short position.

Limitations of VWAP

The VWAP is useful for day traders because it’s based on that day’s trading data; it’s more difficult to use the VWAP over the course of many days, as that can distort the data.

VWAP is also a lagging indicator, so while it captures recent price changes, it’s less useful as a predictive measure.

Is VWAP Good for Swing Trading?

It’s impossible to explore the role of VWAP in trading without addressing swing trading with this indicator.

The VWAP tends to work well for short-term trading like day trading and short- to medium-term trading like swing trading, in which investors hold a position for anywhere from a few days to a few weeks.

Using the VWAP on a daily basis could potentially help swing traders determine whether to continue to hold their position. If a short-term chart consistently shows prices beneath the VWAP, this fact could combine with other information to help the trader decide when to sell.

A Cumulative Indicator

It’s important to note that VWAP is what’s known as a cumulative indicator, meaning the number of data points grows higher as the day goes on. There will be one data point for each measurement of time on a given chart, and as the day passes, these points accumulate.

A 5-minute chart would have 12 data points one hour after the market opens, 36 after 3 hours, and 84 by the time the market closes. For this reason, VWAP lags the price and the lag increases as time goes on.

The Takeaway

The volume-weighted average price (VWAP) is essentially a trading benchmark that captures the average intraday price of a given security, factoring in volume. It’s considered a technical indicator, and it’s important because it gives traders pricing insight into a security’s trend and value, making it most helpful for intraday analysis. It’s one data point among many that traders might use when devising their investment strategy.

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FAQ

What is the difference between the volume-weighted average price and a simple moving average (SMA)?

The simple moving average or SMA just shows the average price of a security over a period of time. The volume-weighted average price, or VWAP, factors in the asset’s trading volume over the course of the day as well, thus giving investors more information about demand and price trends.

How do you use VWAP in day trading?

Day traders often use VWAP to determine the target price of an asset, the better to determine the entry and exit points for trades, based on their current strategy, whether long or short.

What is the difference between Anchored VWAP vs VWAP?

Traditional VWAP always starts with the opening price of the day (VWAP is primarily used as an intraday metric), whereas anchored VWAP allows the trader to specify a certain price bar where they want their calculation to start.

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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.

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2023
Why Making Minimum Student Loan Payments Isn't Enough

Minimum Student Loan Payments (And Why You Should Try to Pay More)

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

The Debt Ceiling Bill signed into law in June 2023 finally brought an end to the federal student loan payment pause, with payments resuming on October 1, 2023 (and interest accrual resuming a month earlier). The result is that millions of federal student loan borrowers — at least, those not taking advantage of the student loan “on-ramp” — will need to begin making minimum payments again as of October 1. However, some borrowers may opt to make more than the student loan minimum payment so that they can expedite the repayment process on their loan.

Key Points

•   The minimum student loan payment depends on the repayment plan and loan type, with federal plans ranging from fixed payments to income-driven repayment options.

•   Borrowers can make extra payments without penalty to reduce interest costs and pay off loans faster by applying additional payments to the loan principal.

•   Paying off student loans early lowers the debt-to-income ratio, strengthens credit, and frees up funds for savings or future financial goals.

•   Strategies to accelerate loan repayment include budgeting, making consistent extra payments, using windfalls like bonuses, and seeking additional income sources.

•   Refinancing student loans can lower interest rates or simplify payments, but borrowers should consider losing access to federal benefits before refinancing federal loans.

What Is the Minimum Payment on Student Loans?

The minimum payment on student loans is the lowest amount of money a borrower can pay each month. The actual student loan minimum payment amount owed each month might be determined by factors including the loan type, interest rate, and the repayment plan. Generally, the minimum monthly payment includes the principal (the original amount borrowed), interest, and fees.

For federal student loans, the minimum monthly payment depends on the repayment plan a borrower is on, as follows:

Standard Repayment Plan: On this plan, your payments are a fixed minimum amount of at least $50 a month, and your loans are paid off within 10 years.

Saving on a Valuable Education (SAVE) Plan: With SAVE, a new income-driven repayment (IDR) plan introduced by President Biden in late June 2023, borrowers with undergraduate federal student loans will get the lowest monthly payments of any IDR plan. For those who are single and make $32,800 a year or less and for families of four who make $67,000 or less annually, the minimum monthly payment is $0 (meaning they owe no loan payment). Those who earn more than those amounts will save at least $1,000 a year on the SAVE plan compared to current IDR plans.

Pay As You Earn (PAYE) Plan: Under the PAYE plan, borrowers’ payments are 10% of their discretionary income and are also based on their family size. With PAYE, their payment could be as low as $0 per month, and they won’t owe more monthly than they would have on the Standard Repayment Plan.

Income-Based Repayment Plan: Borrowers on this plan need to have a high debt-to-income ratio in order to be eligible. Their monthly payments will be 10% to 15% of their discretionary income, and could be as low as $0. Borrowers won’t owe more monthly than they would have paid on the Standard Plan.

Income-Contingent Repayment Plan: Borrowers with Direct loans who are eligible for this plan will have monthly payments that are the lesser of 20 percent of their discretionary income or the amount they would pay on a fixed repayment plan over 12 years, adjusted for their income. Their payments may be as low as $0 a month.

Graduated Repayment Plan: With this plan, a borrower’s monthly payments are lower at first and then increase, usually every two years. The monthly amounts they will pay will be enough to repay their loans within 10 years.

Extended Repayment Plan: For those on the Extended plan, their payments may be fixed or graduated, and the amount they pay each month will be enough to ensure their loans are paid off in 25 years. Their payments will be lower on this plan than they would be on the Standard or Graduated plans.

You can use the Federal Student Aid’s Loan Simulator to help calculate how much you’ll owe and find the best repayment plan option for your situation.

Can I Pay More Than The Minimum on Student Loans?

It’s possible to make more than the minimum payment on student loans without being charged for any prepayment penalty fees. Both federal student loans and private student loans are required to allow borrowers to make extra payments and pay off their loan early without charging any additional fees.

Making extra payments can help decrease the interest paid and help reduce the overall cost of the loan. Typically, you can contact your lender to specify that the extra payment be applied to your highest interest loan and be applied to the principal value of the loan.

Making payments directly to the principal value of the loan can help speed up repayment. And, because most student loan interest is charged per day, making additional payments on the principal value of the loan can help reduce the amount you pay in interest over the life of the loan.


💡 Quick Tip: Often, the main goal of refinancing is to lower the interest rate on your student loans — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.

Why Would You Pay off Your Student Debt Sooner?

As with any debt, a primary motive for paying off student debt early is to more quickly remove debt that’s racking up interest. Prioritizing debt repayment could help lower your debt to income ratio and could help you reduce the amount of money you owe in interest over the life of the loan. Here are a few reasons you may want to pay off your student loans sooner rather than later.

Interest. Interest. Interest.

Interest continues to accrue for the life of most student loans. (Note: The timetable of when interest starts to accrue on your student loans depends on the type of student loans you’ve been awarded. Contact your lender for all the details.) The sooner you pay off your loans, the sooner you stop interest from accruing.

Student loan interest does qualify for a tax deduction. But only $2,500 of the interest can be deducted each year — less if your modified adjusted gross income is greater than $70,000 a year.

Your Debt-to-Income Ratio May Be Lowered

When borrowing a mortgage or a car loan, the lender will usually consider the applicant’s debt-to-income ratio. And the lower it is, the better it looks from a financial perspective. Do you need a new car? Want to buy a house? Start a family? The sooner you get your student loan debt paid off, the more money you will likely have to put toward those dreams being realized.

Your Credit Score Could Strengthen

Your FICO® credit score is a powerful component of your total financial picture; tend it like a garden, and it could grow. There’s something to be said for the fact that if you’re managing an open debt responsibly by making on-time payments, that may have a positive impact on your credit score. And a higher FICO® score can help you get a better interest rate on a loan you might need for a home or car.

It’s Easier to Save Money When You’re Not Paying Down Debt

The conventional wisdom is the less debt you have, the more money you likely have to save. Think of successfully managing and paying off debt as a necessary exercise routine, like working your core. As your financial “core” gets stronger, you’re likely to become better able to balance your finances and save more money.

When you’ve repaid your student loans, the money you were spending each month on loan payments can instead be used to help you reach financial goals like starting an emergency fund, saving for a down payment on a house, or more.


💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

How to Accelerate Your Student Loan Payments

You may be able to pay off your student loan debt more quickly by setting reasonable goals, including payments larger than the student loan repayment minimum required. As mentioned, both federal and private student loans generally allow for penalty-free prepayment but be sure to contact your loan provider before doing so to ensure your prepayments are being applied in the way that you want them to be. Here is a checklist that may help you eliminate your student loan debt sooner.

Calculating Your Costs

Make a list or spreadsheet of all your student loans. You can use a student loan calculator to help determine how much you ultimately owe (including interest) and when, ideally, you’d like to complete your student loan payments.

Making a Budget

Track your spending and make a realistic budget of your monthly and annual expenses. And leave some wiggle room for unexpected expenditures. Be honest with yourself. If you feel you’re spending too much on unnecessary expenses, maybe it’s time to skip your next urge to splurge.

Setting Manageable Goals

Now that you know how much money you have coming in and where it’s going, it might be time to make some uncomfortable, but fair, spending decisions with the intention of eliminating your student loans by your goal date. That means you may want to sacrifice some unnecessary expenses. Cutting back on non-necessities isn’t fun, but it may make it easier for you to save.

Paying Beyond the Minimum Required

As we mentioned, you can accelerate your loan payoff by paying more than the minimum student loan payment required by your loan provider. It’s okay to start small — even an extra $25 a month can start to add up. Paying more each month can also save you money on interest. You can ask your loan provider to put that extra cash toward the principal.

Avoiding Late Fees

An easy way to help ensure you pay at the same time every month is to set up an auto-draft from your checking or savings account. Some lenders may even offer a rate discount to student loan borrowers who enroll in automatic payments.

Maximizing “Surprise” Money

Are you doing so well at work that you got a raise or bonus? Rather than splurging on something new, lighten the burden of your current reality by putting that money toward your student loan debt.

Finding Extra Work

Every little bit of extra income can help. A part-time job could get you closer to your goal more quickly. If fitting in an extra 15 or 20 scheduled hours a week isn’t feasible, try finding a side hustle where you can make your own hours. You can work as a dog walker, become a rideshare driver, or even recharge electric scooters — all through an app.

Recommended: What is the Average Student Loan Debt After College?

Refinancing Your Student Loans

Refinancing your student loans might offer yet another step closer to your goal. Student loan refinancing is when you borrow a new loan (which is used to pay off your original loans) at a new interest rate and/or a new loan term.

One potential benefit of refinancing is the possibility of securing a lower interest rate. You could also potentially shorten your loan repayment term. But opting to shorten your loan term generally means paying more each month.

If you have a combination of private and federal loans, it’s possible to roll them into a single refinanced loan, which means having one monthly payment instead of multiple payments to multiple lenders. This is what is known as loan consolidation.

However, it’s very important to understand that by refinancing your federal loans, you lose federal student loan protections such as deferment and forbearance, and access to income-driven repayment programs. Take this into very careful consideration before moving forward with student loan refinancing with a private lender.

The Takeaway

Making more than the minimum student loan payments each month can help borrowers speed up their loan repayment and spend less in interest over the life of their loan. Lenders generally do not charge any fees for prepayment. To make the most of your extra payments, contact your lender to be sure they are being made to the principal value of the loan.

Refinancing could be another option for some borrowers to consider if they are interested in securing a lower interest rate on their loan — and provided that they don’t need access to federal programs or protections.

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.

FAQ

What happens if I only pay the minimum on my student loans?

Making the minimum monthly payments on your student loan will generally result in your loan being paid off according to the original terms of the loan.

Is it worth paying off student loans early?

Paying off student loans ahead of schedule can make borrowing less expensive, because the borrower will likely spend less in interest over the life of the loan. Repaying student loans early could also have benefits like improving an individual’s debt-to-income ratio. Without the burden of student loans, borrowers might also be able to focus on other financial goals.

What is the average minimum student loan payment?

A borrower’s average monthly minimum federal student loan payment depends on factors including the total amount they owe, their interest rate, and the type of payment plan they’re enrolled in. For instance, on the Standard Repayment Plan, your payments are a fixed minimum amount of at least $50 a month.

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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.

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SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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 .

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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12
2023
What Happens if You Just Stop Paying Your Student Loans

What Happens if You Just Stop Paying Your Student Loans

By | Student Loans, student_loan | No Comments

If your student loan payments seem overwhelming, you’re not alone. U.S. borrowers owe a combined $1.77 trillion in student loan debt, and one in ten Americans has defaulted on a student loan, according to the Education Data Initiative.

And now, for the first time in a long time, many student loan borrowers are faced with making payments again. The reason: The end of the three-year pause on federal student loan payments, which requires interest accrual to resume on September 1, 2023 and payments to resume on October 1, 2023. This resumption in federal student loan payments was part of the debt ceiling bill that President Biden signed into law in early June 2023.

In addition, the Supreme Court’s ruling against the President’s plan to forgive up to $20,000 in federal student loan debt means that student loan borrowers who may have been hoping for that forgiveness now don’t have that option.

You may be thinking, I haven’t paid my student loans in years – do I really have to start now? What happens if I just don’t pay?

The answer is that borrowers do indeed have to start paying their student loans again, and simply not paying can have consequences. Late or missed “delinquent” payments can make it harder to get a credit card, car loan, or apartment lease. And if you default on a loan, the balance of the loan will become immediately due, your wages may be garnished, and your tax refund can be withheld, among other serious consequences.

There are several options that can help you avoid defaulting on your student loan, such as deferment, forbearance, and income-driven repayment plans. Here’s what to know before you stop making payments on your student loans.

Key Points

•   Stopping student loan payments can lead to delinquency and default, affecting credit and future loan approvals.

•   Delinquent payments can hinder the ability to secure credit cards, car loans, or apartment leases.

•   Defaulting on a loan triggers the entire balance due, potential wage garnishment, and withholding of tax refunds.

•   Several options like deferment, forbearance, and income-driven repayment plans can prevent default.

•   It’s essential to compare these options to determine the best course for managing student loan debt.

Do Student Loans Ever Go Away?

The short answer to the question of do student loans ever go away? is no, unless you’re part of the Public Service Loan Forgiveness Program. Unlike other forms of debt, such as home and auto loans, student loans generally cannot be discharged during bankruptcy. Borrowers are still required to repay student loans even if they don’t graduate or are struggling to find a job.

So what happens if you don’t pay student loans? In addition to the interest that accrues over time and increases in the amount you owe, failing to repay a student loan on time can result in additional fees if your debt gets moved into collections.

Because on-time payments account for a portion of a borrower’s credit score, failing to make payments can negatively impact a person’s credit score. Having a low credit score can impact your ability to get a mortgage, car loan, credit card, or apartment lease.

If you default on federal student loans, the government can take your tax refund or up to 15% of your wages. You can also be sued, though this is more common with private loans.


💡 Quick Tip: Often, the main goal of refinancing student loans is to lower the interest rate — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.

Is There a Student Loan Statute of Limitations?

There is no statute of limitations for federal student loans. That means you can be sued at any point for not paying your loans.

There is a statute of limitations for private student loans, which is set by individual states and generally ranges from three to 10 years. But even this limit just means the lender can’t sue you anymore — it doesn’t mean the loan goes away or they stop trying to collect what is owed.

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Is Getting Out of Paying Student Loans Possible?

There are options that allow borrowers to temporarily stop making student loan payments. Here’s what happens if you don’t pay your student loans because you’ve been approved for one of these plans.

Relief for Federal Student Loans

If you have federal student loans, the end of the federal payment pause requires payments to resume on October 1, 2023. To help borrowers, the Department of Education is launching a 12-month “on-ramp” to repayment, running from October 1, 2023 to September 30, 2024, so that financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.

Federal student loan borrowers can also temporarily pause payments by requesting a deferment or forbearance. You might qualify if you’re still in school at least part-time, unable to find a full-time job, facing high medical expenses, or dealing with another financial hardship. The type of loan held by the borrower will determine whether they can apply for a deferment or forbearance.

Federal student loans can be deferred for up to three years. There are two types of forbearance; general and mandatory. Borrowers facing financial difficulties can request a general forbearance, and their loan servicer determines whether they qualify. General forbearance is awarded in 12-month increments and can be extended for a total of three years.

You can temporarily pause payments on your federal loans by requesting a deferment or forbearance.

Loan servicers are required to award qualifying borrowers a mandatory forbearance. Qualifications include participating in AmeriCorps, National Guard duty, or medical or dental residency. The Federal Student Aid website has a full list of criteria for mandatory forbearance. Mandatory forbearances are also granted in 12-month increments but can be extended so long as the borrower still meets the criteria to qualify for mandatory forbearance.

Borrowers who enroll in an income-based repayment plan can qualify to have their loan balance forgiven after a certain amount of time; the amount of time depends on the plan. (Keep in mind, you’d still have to pay taxes on the amount forgiven.)

For instance, under President Biden’s new SAVE Plan, which is based on income and family size, qualifying federal student loan borrowers with undergraduate federal loans can get their monthly payments reduced by half — from 10% to 5% of their discretionary income.

In rare cases, certain loans can be canceled or discharged, if your school closes while you’re enrolled or you are permanently disabled. For obvious reasons, these aren’t options to count on, so you can assume your loans will be sticking with you.


💡 Quick Tip: When rates are low, refinancing student loans could make a lot of sense. How much could you save? Find out using our student loan refi calculator.

Consequences of Defaulting on Your Student Loans

As mentioned earlier, what happens when you stop paying student loans is that the loan is at risk of going into default. The national default rate was 2.3% for fiscal year 2019 (the most recent year for which numbers are available), according to the U.S. Department of Education. (Because of the pause on federal student loans payments during the pandemic, the default rate dropped significantly from 7.3% in 2018.)

There are serious financial repercussions for defaulting on a student loan.

For federal student loans, if a borrower fails to make payments for more than 270 days on a loan from the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, the loan will go into default. (For loans made under the Federal Perkins Loan Program, the loan can be declared in default after the first missed payment.)

At this point, the balance of your loan becomes due immediately through a process called “acceleration.” You’ll also lose eligibility for federal programs such as deferment, forbearance, income-driven repayment plays, and additional federal aid.

Recommended: Student Loan Refinancing Guide

Your wages may be garnished (meaning that your employer may be required to hold back a portion of your paycheck) and any tax refunds or federal benefit payments may be withheld.

Defaulting on a student loan will damage your credit rating and you may not be able to buy or sell certain assets, such as real estate. If your loan holder sues you, you may also be charged related expenses such as attorney fees.

Temporary Relief for Private Student Loans

Private lenders sometimes offer relief like forbearance when you’re dealing with financial hardship, but they aren’t required to. If you have a private student loan, check with your lender directly to see what temporary relief programs or policies they may have.

Private student loans generally go into default after 90 days. Private lenders may also take you to court or use collection agencies to collect your student loan debt. Whether you have federal or private student loans, contact your loan servicer immediately if your loan is delinquent so you can understand what options are available to you before your loan goes into default.

Recommended: Should You Refinance Your Student Loans?

The Takeaway

Because student loans don’t disappear, it’s important to stay on top of payments, especially with federal student loan payments resuming on October 1, 2023. Borrowers with federal student loans may be able to take advantage of the Department of Education’s 12-month on-ramp to repayment until September 30, 2024. Or they might qualify for deferment, forbearance, or income-based repayment options which can provide some temporary relief or help make monthly payments more manageable.

Options available for borrowers facing financial hardships with private student loans vary by lender.

For some borrowers, student loan refinancing may be a way to lower interest rates, reduce monthly payments, and combine all your loans into a single monthly payment. Reducing monthly student loan payments by extending the life of the loan may result in more interest over the life of the loan. If you qualify for a lower interest rate, you could save money over the life of the loan.

It’s also possible to refinance both federal or private loans, or a combination of the two. However, it’s very important to understand that if you refinance federal loans, you’ll lose access to federal benefits and protections, including deferment, forbearance, income-driven repayment, and loan forgiveness for public service, so it’s not recommended for borrowers who are planning to take advantage of those programs.

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.

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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Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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