SoFi

Are you a parent who is committed to helping your kids get through college and minimizing higher education costs as much as possible? Have you been asking yourself, is private school tuition tax deductible?

The good news is that it may be possible to lower education costs by using tuition tax breaks. Even if the money comes out of your pocket at first, you might be able to recoup some of those dollars come tax time. There are currently two tuition tax credits for parents to consider: the American Opportunity Tax Credit and the Lifetime Learning Credit.

With each of these programs to make private school tuition tax deductible, the parent would need to claim their student as a dependent on their taxes, as well as meet some pretty specific rules for each program. To get started, it’s smart to understand the rules and requirements of each and know that not every filer is going to qualify for these programs.

This article is for informational purposes only, offering a high-level overview of the available tuition-related tax credits and deductions. For parents wanting to take a deep dive into the particulars of tax programs, talking to a licensed tax professional about tax credits and deductions is critical.

What’s the Difference Between a Tax Deduction and Tax Credit?

For those dealing with student loan debt and wondering, can you write off private school tuition?, it’s important to understand the difference between a tax deduction and a tax credit. A deduction can reduce the amount of your taxable income. For example, if you made $80,000 in gross income in a given year and had $15,000 in deductions, you’d have $65,000 in taxable income.

A tax credit, on the other hand, can help provide a dollar-for-dollar reduction in income taxes you owe. For example, a $2,000 tax credit would reduce your tax bill by $2,000.

When compared dollar for dollar, tax credits can sometimes be more valuable than a similar tax deduction. A nonrefundable tax credit qualifies a taxpayer for a reduction up to the amount that they owe. With a refundable credit, a taxpayer could receive a refund even if they do not owe any tax.

The American Opportunity Tax Credit

So, is private school tuition tax deductible? It could be. Parents with a child or children they claim as dependents who are in the first four years of their undergraduate education may qualify for the American Opportunity Tax Credit (AOTC).

The AOTC is a credit for tuition and other qualified educational expenses paid for during an eligible student’s initial four years of their college education. The AOTC doesn’t apply to students in their fifth year and beyond.

The AOTC is worth up to $2,500 per eligible student. Because it is a tax credit, it should directly reduce the filer’s tax bill—not their taxable income. As of this writing, if the credit happens to bring the filer’s tax bill to zero, they may qualify to have 40% of any remaining amount of the credit (up to $1,000) refunded to them.

To qualify for the AOTC, there are additional requirements for both the parent and the student. According to the IRS, for the student to be eligible for the AOTC, they must be pursuing a degree or other recognized educational credential, be enrolled at least half time for at least one academic period beginning in the tax year, not have claimed the AOTC for more than four tax years, and do not have a felony drug conviction at the end of the tax year. Again, the AOTC only applies to undergrad students in their first four years.

To currently qualify as a parent, your modified adjusted gross income must be $80,000 or less ($160,000 or less if married filing jointly) in order to claim the full credit. If your modified adjusted gross income is between $80,000 and $90,000 ($160,000 and $180,000 if married filing jointly), you would be eligible for a reduced credit.

Recommended: Private Student Loans Guide

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) is another possibility for parents paying for school for a child they claim as a dependent.

Like the AOTC, the LLC is a tax credit. The LLC is more expansive in the coursework it covers, which is helpful because college is not for everyone. The LLC credit can be applied to qualified tuition and education expenses for eligible students enrolled in a qualifying educational institution. This includes undergraduate, graduate, and professional schools—including courses to acquire job skills.

In addition, there is no limit on the number of years where a person can claim the LLC, compared to the AOTC’s four years per student.

Similar to the AOTC, there is an income limitation to who qualifies for the LLC credit. To claim the full credit in 2022, a parent’s modified adjusted gross income must be below $80,000 (or $160,000 if married filing jointly). If your modified adjusted gross income is between $80,000 and $90,000 ($10,000 and $180,000 if married filing jointly), you could be eligible for a reduced credit.

Parents cannot file for both the LLC and the AOTC for the same student in the same tax year, so it is a choice between one or the other. Also, a student can’t file for either of these if their parents have already filed for a credit for the same expenses.

Recommended: Are Student Loans Tax Deductible?

Other Education-Related Deductions

Parents who have taken out loans for their child’s education and put money toward student loans may also qualify to deduct the interest payments on those loans.

One of the basics of student loans is that borrowers pay interest on the loans. The deduction includes both required and voluntary interest payments.

Filers may be able to deduct up to $2,500 in student loan interest expenses. You do not need to itemize your taxes in order to qualify for the deduction.

Aside from deductions, another way to possibly lower your student loan payments is by refinancing student loans. When you refinance, you replace your current student loans with a new loan.

One of the advantages of refinancing is that you may be able to get a lower interest rate or better terms that could lower your monthly payments. However, be aware that if you refinance student loans, they become ineligible for federal protections and programs like income-driven repayment. Also be aware that you may pay more interest over the life of the loan if you refinance with an extended term.

If you decide that refinancing is an option that might help you save on student loan payments, SoFi offers loans with flexible terms, low fixed or variable interest rates, and no fees.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Figuring out how to save money for grad school can feel overwhelming, but it doesn’t have to be. In fact, it’s possible to save for grad school without picking up a side hustle or taking on more debt — if you plan ahead and adjust your current budget.

Here’s how to save money for grad school and help make it more affordable.

Strategies to Save Up for Grad School

1. Splitting Up Your Paycheck

If you are currently working and get regular paychecks, one of the simplest ways to start saving for grad school is to automate as much of the process as possible. If your workplace has direct deposit, you could contact HR and see if you are able to add another bank account, and designate a certain amount from every paycheck to go into your savings account.

It can be as much or as little as you’d like, but putting the money directly into savings makes it harder to spend right away. By automating your savings account, you eliminate the hassle of manually parting with it.

If your company doesn’t offer the option to split your paycheck to multiple accounts, you can contact your bank directly or check online to see if they offer a recurring transfer. Banks are typically able to set up transfers for you automatically on your payday.

To decide how much to save for grad school, review your monthly budget before starting. If you don’t have one, put one together.

2. Opening a Separate Savings Account

While you shouldn’t necessarily open a new account for every savings goal in your life, as that could get messy fast, setting up a new, separate savings account with your bank for grad school is another way to potentially maximize your money.

Opening a new account with a specific goal of how much to save for grad school could help you keep track of the goal and make your progress tangible. Having a separate account specifically for school can also help you manage and keep track of spending on books and other school-related costs.

These first two ideas can work together to get you progressing on your savings goal. It can be intimidating to commit to allocating some of your budget for savings, but if you make the process regular and automatic, you may be surprised to find how little you miss that extra cash.

3. Don’t Forget Financial Aid

The Free Application for Federal Student Aid is not just for student loans—you could also receive work-study and grants by filling out the FAFSA®. Just like undergraduate applications for federal financial aid, students must demonstrate need, be a U.S. citizen or eligible noncitizen, and be enrolled or accepted as a regular student pursuing a degree beyond a bachelor’s.

However, when graduate students fill out the FAFSA, they may be considered independent, meaning their parents’ income is no longer taken into consideration.

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

For some people, this might actually mean they are eligible for more financial aid as an independent individual. The amount a student is awarded will be based on factors including their income and financial assets. Students cannot be in default on a prior student loan to be eligible for additional aid.

Regardless of dependency status, graduate students may be eligible to receive PLUS Loans. These unsubsidized loans can be taken out in amounts up to the cost of attendance, but be aware you can’t have an adverse credit history to qualify.

There’s also the option of financial aid that isn’t typically repaid, in the form of scholarships or other grants, or scholarships from your state based on field of study, interest, or school type.

File your FAFSA as soon as possible after October 1, the year before each enrollment period. Since there are limited funds, the sooner you file, the better chance you may have of getting the most aid possible.

4. Checking With Your Current Employer

Even if you are not in a career where your employer is expected to pay for a graduate degree, a lot of companies may offer some contribution to ongoing education if it’s possible to show that it will be relevant to your job.

Tuition reimbursement varies depending on your company and industry, but some may offer tuition assistance to their employees. While it might not cover your entire graduate school cost, a tuition reimbursement benefit from your company could significantly lower the amount you need for school, which in turn could lower your dependence on loans.

If you have existing student loan debt from your undergraduate education, check to see if your company offers employees a match (up to a certain amount yearly) on payments made toward student loan debt every year. In this way, employers can make a regular contribution to help with your student loan balance, while you make your regular payments, too.

5. Considering Schools Abroad

Schools in Europe, South America, and Africa may be significantly less expensive than universities in the United States, which can help with saving for grad school. But, before enrolling in graduate school abroad, make sure you understand how your industry will accept and transfer over any foreign degrees. You’ll want to make sure that your grad school degree is a decent ROI.

While the cost of living might be higher in some other countries, international graduate programs can also save you time; some PhD programs in Europe are only three to four years, as compared to six or seven in the U.S.

6. Refinancing Current Student Loans

If you are currently paying off undergraduate student loans, the idea of juggling paying for grad school and paying off undergrad loans may seem daunting. It’s helpful to get your current debt situation under control before saving for grad school. One option you might want to consider that could potentially result in monthly savings is student loan refinancing.

Refinancing your student loans could possibly result in a lower interest rate, which could mean lower monthly payments (depending on the loan term), potentially freeing up room in your monthly budget. A lower interest rate might also mean spending less money over the life of the loan. Note: You may pay more interest over the life of the loan if you refinance with an extended term.

However, it’s important to know that loan refinancing means you’re no longer eligible for federal student loan forgiveness, deferment, and income-driven repayment.

A lower overall interest rate could help you with your goal of saving money to pay for graduate school, helping to make your savings goals more manageable as you embark on this exciting next step in your career. A student loan refinance calculator can help you figure out if refinancing makes sense for your situation.

The Takeaway

Graduate school doesn’t necessarily mean taking on more debt. Those looking to focus their savings plan for graduate school can review their monthly budget and automate as much of their savings as possible.

Additional options to pay for college include federal student aid including federal student loans, scholarships, grants, and work-study. Some students may even consider pursuing their graduate degree abroad to attend a more affordable university. And refinancing is an option that could help some students with undergraduate loans reduce their 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.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSL0423022

We take our household appliances for granted. Ovens, refrigerators, dishwashers, washers, and dryers — they’re all essential for everyday life, but we just always expect them to work. When one finally breaks down and we realize it’s time to buy a new, expensive replacement, it can be a bitter pill to swallow.

But what if you don’t have the cash on hand to pay for a new appliance? That’s where appliance financing, also called an appliance loan, comes in.

What Is Appliance Financing?

Appliance financing refers to buying a new appliance on credit. Rather than paying out of pocket for a new appliance, you’ll pay it off over time in monthly increments, like a house or car payment.

While this means you don’t have to spend money from your emergency fund or borrow money from a relative to pay for a replacement fridge or washer, it does mean you might face additional fees, like interest.

You can get appliance financing in a number of ways, including taking out a personal loan, paying for the appliance with your credit card, and exploring in-store financing, such as in-store appliance loans or rent-to-own options.

How Does Appliance Financing Work?

When you can’t afford a new appliance but need one because your old one has broken down and is beyond repair (or not worth the cost of repair), you can take out an appliance loan. How this type of financing works depends on the method of financing you use.

For example, if you pay for the appliance with a credit card, you’ll simply make your credit card payments as you would for any other purchase. But if you take out a personal loan from a bank or credit union, you’ll have a set number of years to pay off the loan, and there may be certain fees on top of the interest charged.

Methods of Appliance Financing

There are a few key ways of paying for an expensive appliance you can’t afford.

Personal Appliance Loans

You can take out a personal loan from a financial institution for almost anything, including home renovations, a wedding or vacation, debt consolidation, and, yes, even a new appliance.

Credit score requirements for a personal loan vary depending on the lender. Often, borrowers with bad credit can still qualify for personal loans, but interest rates and fees may be higher.

Additionally, lenders might have origination and prepayment fees, so it’s a good idea to read a lender’s loan details thoroughly before signing on the dotted line.

Personal loan terms generally range from two to seven years. Monthly payments will be higher on a shorter loan, but interest rates are typically lower — meaning you’ll spend less on interest over the life of the loan.

Recommended: What Is a Signature Loan?

Credit Cards

If you have a credit card with a high enough limit, you can also pay for an appliance with your card. Just keep in mind your credit card’s APR, or annual percentage rate — if you can’t pay off the balance in full by the due date, you may rack up interest charges quickly.

If you have a cash back or travel credit card, you could earn significant rewards by paying for an appliance on credit. For instance, refrigerators cost anywhere from $430 to $10,600. A 3% cash-back rewards card would earn you $318 on the purchase of a $10,600 fridge.

In-Store Financing

Many retailers offer their own financing options for large appliances, often via a store credit card. Unlike other credit cards, these cards are closed-loop, meaning you can only use them at that store.

These stores, like Lowe’s and Home Depot, may offer special perks for financing with them. This could include no interest if you pay in full within a set number of months or a percentage discount off the purchase price.

Some retailers may also offer rent-to-own options. In this scenario, you’d make a weekly or monthly payment until you’ve paid off the appliance. If you miss a payment, the store will take the appliance back. Rent-to-own fees can be high, making it more expensive for consumers by the time the appliance is paid off.

What Can Appliance Financing Be Used For?

You can use appliance financing for any kind of home appliance, but it’s generally not a good idea to take out a loan for luxury appliances like espresso makers and immersion blenders. Instead, experts advise only taking on loans for appliances that are considered more of a necessity, like:

•   Ovens and stovetops

•   Microwaves

•   Dishwashers

•   Refrigerators

•   Kitchen sinks

•   Washing machines

•   Dryers

Pros and Cons of Appliance Financing

Thinking about using appliance financing for your next household purchase? Let’s weigh the pros and cons:

Pros

Appliance financing offers the following upsides:

•   No waiting: When your washer or oven breaks down, you need a replacement. Sure, you can go to the laundromat and rely on microwave dinners temporarily, but ultimately, you’ll need to purchase a new appliance. If you don’t have the money in your bank account or are saving for other goals, you can instead take out an appliance loan or pay with your credit card to ensure you get the appliance you need without having to wait.

•   Home renovation: If you’re doing a larger home renovation, like remodeling your kitchen, you may be purchasing all-new appliances. Those costs can add up quickly. By using a personal loan for appliances — or even a home renovation loan for the entire project — you can get everything you need, rather than replacing appliances one at a time.

•   Rewards: If you finance your appliance with a rewards credit card, you may earn cash back or miles on your purchase. Or, if you use in-house financing from the store, you may qualify for special terms or even a discount.

Cons

Meanwhile, consider these downsides of appliance financing as well:

•   Higher cost: When you take out a loan for home appliances, you’ll likely pay more for the appliance through interest and fees. Even if you put it on a credit card, you could incur fees if you don’t pay off the balance in full by your next statement due date.

•   Credit score requirements: While bad-credit borrowers can typically get a personal loan, some consumers with low credit scores may have trouble qualifying for in-house financing or credit cards without high fees.

•   Temptation to spend beyond means: Making a low monthly payment instead of paying the full price upfront can create the illusion of affordability. That means you might be tempted to buy an expensive appliance that’s actually outside your budget — after all, the monthly payment looks manageable. Just remember that you’ll have to make that monthly payment for several years.

Recommended: How to Pay for Emergency Home Repairs

The Takeaway

Appliance financing makes it possible to purchase a new appliance when your old one breaks down and you don’t have the cash on hand. Whether you need a new refrigerator, washer and dryer, oven, or dishwasher, an appliance personal loan, in-store financing, or credit card might be the way to go.

Thinking about funding your new appliance with a personal loan from SoFi? You’ll enjoy competitive SoFi personal loan interest rates, and same-day funding. Check out your personal loan rate in just 60 seconds.

FAQ

Which appliances can be financed?

You can finance virtually any appliance if you qualify for a personal loan or pay with a credit card. Retailers that offer in-house financing may only offer their programs for specific appliances, however. Before financing, just keep in mind that it’s not a good idea to finance luxury appliances that you don’t need or can’t afford. Instead, most experts advise using appliance financing for necessary appliances priced within your means, such as a refrigerator or washing machine.

What is the credit requirement for an appliance loan?

Credit requirements for appliance loans vary depending on the type of loan. Borrowers with bad credit typically can find personal loans for appliances, though these will come with high interest and fees. Rent-to-own programs don’t have a credit check. But if you want to take advantage of a retailer’s in-house financing, you may need a credit score of 580 or higher, though requirements vary by store.

Photo credit: iStock/Talaj

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.

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

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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SOPL0323005

Legal fees can get expensive. Whether you need to hire an attorney for a divorce case, to represent you against criminal charges, or to guide you through the adoption process, the cost can be prohibitive — but that doesn’t mean you should move forward without legal counsel.

Instead, there are a few different ways to pay for a lawyer, including personal loans. We’ll review how to get a loan for legal fees, as well as other options available to you.

What Are Loans for Legal Fees?

While you cannot find a loan designed specifically for legal fees, you can take out a personal loan to cover your legal costs. If your lawyer mentions taking out a loan for payment, they’re likely referring to a personal loan.

How Do Loans for Legal Fees Work?

Personal loans for legal fees work much like how a personal loan works typically. Personal loan rates and terms vary by financial institution. In general, the longer the loan term, the higher your annual percentage rate (APR) will be, but because the repayment is spread out over more years, the monthly payments will be lower. Generally, personal loan terms range between one and seven years.

When you get a personal loan for legal fees, you’ll get the lump sum from the lending institution to pay your lawyer. Some banks offer same-day funding. Then, rather than owing the lawyer, you’ll owe the lender until the loan is paid off in full.

Keep in mind that, in addition to interest, some personal loans include origination fees and prepayment penalties.

Typical Legal Loan Requirements

When you go to apply, the lender may have a few personal loan requirements that you’ll have to meet. These may vary by financial institution.

Credit Score

A key factor in getting approved for a legal loan is your credit score. In general, the higher your credit score, the better your chances of approval (and at a lower interest rate, which means lower personal loan rates).

The credit score you need for a personal loan will vary by institution. Some lenders may even grant personal loans to borrowers with bad credit. In those cases, fees and APRs are typically very high.

Speaking of your credit score, most lenders offer soft pulls for personal loans to see if you’re qualified. But once you apply, expect a hard inquiry on your credit report, which will temporarily lower your score.

Debt-to-Income Ratio

Lenders also factor in your debt-to-income (DTI) ratio when considering your loan application. Your DTI ratio is the total amount of your monthly debts (think car payment, student loan payments, credit card bills, mortgage, etc.) divided by your monthly income.

The lower your DTI ratio, the better your chances of getting approved for a personal loan for legal fees with favorable rates and terms.

Proof of Income and Employment

To get a legal fee loan, you’ll need to demonstrate your ability to repay it to the lender. That means that lenders often want to see proof of income and employment, such as a signed letter from your employer, pay stubs, and/or W-2 forms.

Self-employed and need a personal loan? You’re not out of luck. Lenders may just want to see your tax returns and/or bank deposit info.

Origination Fees

Some lenders charge a loan origination fee when you take out a personal loan. This is a one-time fee at the start of the loan that covers the administrative costs of processing the loan. (If you’ve ever bought a house, you likely paid a mortgage origination fee as part of your closing costs.)

Personal loan origination fees might be flat fees or a percentage of the loan amount. Not every lender charges these fees.

Collateral

Loans for legal fees are usually unsecured personal loans, meaning they’re not backed by any collateral. Other examples of unsecured loans are traditional credit cards and student loans, where you can borrow money without putting up assets as collateral. Because there’s no collateral, fees and interest rates tend to be higher.

That being said, personal loans can be secured in some instances, meaning you’d have to put up some kind of collateral, like a car or house. Secured personal loans may have lower fees and interest rates, but costs vary by lender.

If you get a secured personal loan for your legal fees, you’ll need to offer some kind of collateral to the lender.

Pros and Cons of Using a Loan to Cover the Cost of Legal Fees

Thinking about using a personal loan to cover legal fees? Here are the pros and cons to consider:

How Legal Fees Are Billed

Legal fees can run the gamut. Your attorney may charge you several types of fees during the course of their representation. Here’s a quick look at some of the fees you might incur when hiring a lawyer:

•   Hourly fees: A lawyer will likely charge you by the hour for their services — and that’s not just the hours you spend consulting with them. Lawyers do a lot of work on your case behind the scenes, and they’ll bill you for every one. Hourly rates can range from as little as $50 to $100 an hour to as much as several thousand dollars an hour, depending on the lawyer’s experience, the complexity of the case, and geographic location. The average hourly rate for a lawyer in 2022 was $313, according to the Clio 2022 Legal Trends Report.

•   Flat rates: Sometimes, a lawyer might charge you a simple fixed fee for a specific service. This is typically for less involved work (i.e., no court representation). For instance, they may charge a set rate to prepare your will or help you with a real estate transaction, bankruptcy filing, or uncontested divorce.

•   Contingency fees: As the name implies, these fees are contingent. You’ll only pay them if you win your case and are awarded a monetary sum. Often, a lawyer’s contingency fees are a percentage of that sum.

•   Litigation fees: Your lawyer may include this as a line item on your invoice, but really, it’s a catch-all for several fees. These include court filing fees, attorney’s fees, expert witness fees, fees for re-creating an accident or accessing records, copy fees, and others.

Recommended: The Cost of a Divorce

Alternatives to Legal Loans

A legal loan is not your only option for covering legal fees. If you don’t want to take out a personal loan or don’t qualify, consider these other options. Just make sure to steer clear of predatory lending.

Credit Cards

Many lawyers accept credit cards as a payment method for their services. If that’s your preferred payment method, ask a lawyer if they accept credit card payments. If they say no, keep looking for a different option.

Just keep in mind that credit cards may have higher interest rates than a personal loan. Check your credit card’s APR to calculate how much you might owe in interest if you don’t pay off your credit card balance quickly.

Legal Payment Plans

Some law offices may offer payment plans to their clients. In this case, you would pay your lawyer in monthly installments rather than in one lump sum.

While not every lawyer offers this option, it never hurts to ask. This is another question you can ask upfront before hiring a lawyer.

Crowdfunding

Asking friends and family for financial help is never easy, but loved ones may chip in if you’re in a bind.

Alternatively, you can seek a wider net of potential benefactors by crowdfunding on social media or using official crowdfund platforms. Just keep in mind that such platforms often keep a percentage of the funds as payment.

Taking Out a Personal Loan With SoFi

Paying for costly legal fees with a personal loan can ease the process and make legal counsel more accessible, whether you’re adopting a child, getting a divorce, fighting criminal charges, or suing a person or business as a victim. SoFi offers personal loans at competitive rates.

Tackle your legal fees with a personal loan from SoFi.

FAQ

Is it legal to take out a loan for legal fees?

Yes, it is legal to take out a loan for legal fees. Legal funding loans are simply personal loans that you take out with a lender to cover the cost of hiring a lawyer.

Can legal fees be tax deductible?

If you’re a business owner who incurs legal fees for your business, you can deduct the cost on your taxes. This applies to property owners who incur legal fees when renting out their property to tenants. In addition, legal fees related to adopting a child are tax-deductible through the federal adoption tax credit.

Can legal fees be paid in installments?

Many law firms offer payment plans to their clients that allow them to make payments in installments. If your lawyer doesn’t offer this and you can’t pay out of pocket, you can also look for a legal finance loan (a personal loan) to cover the cost. While you’ll pay the lawyer in a lump sum, you’ll pay off the loan in installments.

Photo credit: iStock/Andrii Yalanskyi

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.

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

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 .

SOPL0323008

Net income (NI), or net earnings, is the amount of money a company has left after subtracting operating expenses from revenue. Retained earnings goes a step further, subtracting dividend payouts to shareholders.

Companies have several different types of earnings, each of which provide different information about their revenues and insight into their financial health. On a company’s balance sheet — which is a key piece of information in evaluating a company’s stock value — it will report details about its expenses and earnings, including retained earnings and net income.

What Is Net Income?

Net income (NI) is an indication of how profitable a company is. It is a basic calculation showing the difference between its earnings and expenses, which can include labor, marketing, depreciation, interest, taxes, operational expenses, and the cost of making products.

How to Calculate Net Income

The net income formula below can be used to calculate the net income of a company:

Net Income = Revenue – Expenses

For example, if a company makes $50,000 in revenue during an accounting period and has $30,000 in expenses, their net income is $20,000.

Understanding Net Income

Net income is often referred to as the bottom line, since it appears on the bottom line of a company’s balance sheet and is the basic calculation of a company’s profit.

NI is used when calculating earnings per share, and is one of the key figures investors use when evaluating companies. When people talk about a company being in the red or in the black, they are referring to whether the company has a positive or negative net income.

It’s important to note that net income can be manipulated through the hiding of expenses and other means. It can be hard to figure out if this is happening, but investors might want to be wary of this and look into what numbers are being used in the net income calculation, and a good time to do so may be around a company’s earnings call.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

What Are Retained Earnings?

Retained earnings (RE) may also be referred to as unappropriated profit, uncovered loss, member capital, earnings surplus, or accumulated earnings.

Profitable companies try to strike a balance between reinvesting in their business and paying out dividends to please shareholders. After a company completes dividend payouts, they retain the amount of earnings that are left, and may decide to reinvest them into the business to continue to grow, pay off loans, or pay additional dividends.

It’s useful to understand RE when looking into companies to invest in, because they show whether a company is profitable or if all of their earnings are going towards dividends. If a company’s retained earnings are positive, this means they have money available to invest and put towards growth.

On the other hand, if a company has negative retained earnings, it means they are in debt, which is generally not a good sign.

How to Calculate Retained Earnings

Use the following formula to calculate the retained earnings of a company:

Retained earnings = Beginning retained earnings + Net income or loss – Dividends paid (cash and stock)

All of this information is available on a company’s balance sheet. In order to find beginning retained earnings one will need to look at the previous period’s balance sheet.

For example, if a company starts with $8,000 in retained earnings from the previous accounting period, these are the beginning retained earnings for the calculation. If the company makes $5,000 in net income and pays out $2,000 in dividends to shareholders, the calculation would be:

$8,000 + $5,000 – $2,000 = $11,000 in retained earnings for this accounting period. Since retained earnings carry over into each new accounting period, profitable companies generally have increasing retained earnings over time, unless they decide to spend them.

Understanding Retained Earnings

The calculated retained earnings show a company’s profit after they have paid out dividends to shareholders. If the calculation shows positive retained earnings, this means the company was profitable during the specified period of time. If the retained earnings are negative, this means the company has more debt than earnings.

Companies can use this figure to help decide how much to pay out in dividends and how much they have available to reinvest.

Although negative RI isn’t ideal, investors should consider the company’s individual circumstances when evaluating the results of the calculation. There are some instances in which negative retained earnings are fairly normal and not necessarily a reason to avoid investing.

How To Assess Retained Earnings

When assessing the retained earnings of a company, the following factors should be taken into account:

•   The company’s age. If a company is only a few years old, it may be normal for it to have low or even negative retained earnings, since it must make capital investments in order to build the business before it has made many sales. Older companies tend to have higher retained earnings. If a company has been around for many years and has low or negative retained earnings, this may indicate that the company is in financial trouble.

•   The company’s dividend policy. Some companies don’t pay out any dividends, while others regularly pay out high dividends. This will affect their retained earnings. In general, publicly-held companies tend to pay out more dividends than privately-held companies.

•   The period of time used in the calculation. Some companies are more profitable at certain times of year, such as retail businesses. If one looks at retained earnings during the holiday season or other popular times for retail, the company may save up their profits from those times in order to get through slower times. For this reason, the same company might show different retained earnings depending on what time period is used in the calculation.

•   The company’s profitability. More profitable companies tend to have higher retained earnings.

What’s the Difference Between Retained Earnings and Net Income?

Although retained earnings and net income are related, they are not the same.

Similarities

Both metrics help investors understand a company’s profitability, which is a chief similarity. They’re both calculated in similar ways, too, though obviously, calculating retained earnings requires some extra steps. Net income also has a direct impact on retained earnings.

Differences

There are differences to keep in mind. For one, you may not find retained earnings on a company’s income statement, and calculating retained earnings will differ from company to company as not all firms pay out the same dividends.

Note, too, that while net income helps with understanding profit, retained earnings help with understanding both profit and growth over time.

Example of Retained Earnings vs Net Income Differences

At times, a company may have negative retained earnings but positive net income — providing a good example of the difference between the two. This is what is known as an accumulated deficit. Or the opposite may occur. For example, if a company earned $60,000 in revenue and they have $40,000 in expenses, their net income is $20,000. If they then pay out $10,000 in dividends to shareholders, the retained earnings calculation would be:

$0 + $20,000 – $10,000 = $10,000 in retained earnings

If a company has a healthy net income and retained earnings, this may be a good time for them to reinvest some of their money into growing the business. In some cases, retained earnings and net income may be the same — as when a company doesn’t pay out dividends and has no retained earnings carried over from the previous period.


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Why Do Retained Earnings and Net Income Matter?

Investors are often interested in retained earnings and net income because they help show the long-term financial health of a company. Figures such as revenue and expenses vary with each accounting period, and they don’t give as accurate a picture of debt and opportunity for growth.

Understanding how much profit a company really has after dividend payouts and expenses can better help investors assess the risk and opportunity involved with investing in a company. Since RI carry over into each new accounting period, they show how much a company has saved, earned, and spent over time. (Another calculation used for evaluating a company’s profitability and debt is the debt-to-equity ratio, which is a measure of how much debt it takes for a company to run its business.)

Retained earnings are also useful for companies to help determine how to spend their money. If retained earnings and/or net income are low, it might be best for the company to save their money rather than reinvesting it or paying out dividends. If the numbers are high, they can consider spending it.

The Takeaway

Net income and retained earnings are two useful calculations that can help investors assess a company’s health, and that can help a company decide what to do with their earnings. They’re a key part of a company’s overall financial picture.

The big difference between the two figures is that while net income looks at revenue minus operating expenses, retained earnings further deducts dividend payouts from NI. Both can help form an overall view of the profitability and risk of a company.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

Should retained earnings be higher than net income?

No, because retained earnings are derived from net income. Net income is a larger number, and retained earnings are calculated from net income.

Does retained earnings mean net income?

No, the two are similar metrics, but not the same. Net income is a company’s revenue minus expenses, and retained earnings incorporate expenses and dividends paid out.

How does net income flow to retained earnings?

Broadly speaking, retained earnings are the remainder of net income after the amount of dividends paid out to shareholders has been factored into the equation.

SoFi Invest®