SoFi

Supplemental life insurance is typically an additional policy that you can purchase to augment the group life insurance policy obtained via your employer.

These policies can provide extra peace of mind when it comes to protecting your loved ones, but is more insurance always better? You may wonder whether purchasing this kind of policy is a good idea or not worth the added expense. Let’s take a closer look to see whether supplemental life insurance makes sense for your situation.

Understanding Supplemental Life Insurance

Supplemental life insurance is a policy taken out in addition to basic coverage, which might be term or permanent life insurance. You can often purchase a supplemental policy through an employer to augment what they offer as an employee benefit. However, these policies don’t have to be secured through your job. We’ll learn more about that in a minute.

Some of these policies come with a death benefit, a lump sum payment that goes to the beneficiaries you’ve named (the loved ones who will inherit the money). Others may be a different kind of policy; say, one that pays funds that are earmarked to pay for funeral expenses. Depending on the details of your life, these add-ons may be an inexpensive way to boost your protection and sense of security.


💡 Quick Tip: With life insurance, one size does not fit all. Policies can and should be tailored to fit your specific needs.

Do You Need Supplemental Life Insurance?

Deciding whether or not to buy a supplemental policy is a very personal decision. To help figure out the right answer for your situation, it may help to ask yourself and answer a few questions. Let’s consider some of those here.

Does Your Employer Provide Life Insurance?

Because supplemental insurance is meant to enhance the life insurance policies you already have, check to see if your employer offers basic life insurance as a benefit. If so, how much? Many times, employers offering this insurance will provide a multiple of the employee’s current salary. Other times, it’s significantly less — $10,000 to $25,000 worth of coverage is common. Those are figures that many people will find too low to provide the kind of protection they’d like.

If you feel you don’t have enough protection, you may want to look for ways to boost your coverage so that in a worst-case scenario, you know your loved ones will have enough money to cover their expenses. Perhaps your employer offers supplemental policies that will get you to the level of life insurance coverage that you desire. Otherwise, you can also look on the open market for primary or supplemental policies.

Have Your Compared Life Insurance Rates?

If you haven’t compared prices of life insurance rates in a while (or ever), you might want to give it a try. Just because an employer offers life insurance, including supplemental coverage, you may not want to buy it. You may discover that you can get enough life insurance through a standard policy without adding a supplemental one.

You can quickly get quotes by calling an insurance agent or, to save even more time, from a website that provides them from multiple companies. When looking at the quote that gives you the best coverage for the most affordable premiums, would you still need a supplemental policy? The answer may be no. There’s a good deal of competition in the marketplace and great deals to be found.

Recommended: How to Buy Life Insurance in 9 Steps

How Is Your Health?

First, let’s understand that your health rating is a key factor in buying life insurance on the open market. Rates tend to be lower when you are healthier and younger. Health is typically assessed by the insurer asking you questions about your medical status and possibly having you submit to a brief health exam that involves the collection of blood and urine samples.

While plenty of life insurance policies require health exams and/or medical records, many insurers also offer lab-free options that don’t require medical exams (although you’ll almost certainly need to answer health-related questions). These are often the kind employers offer employees. Typically, these policies are for people who fit into certain age groups and other categories in which they’re likely to be healthy. These lab-free policies are often available for up to $1 million.

Now that you know how this works, understand the implications of your health status. If you have an underlying health condition, are a smoker, or have other qualifying factors, you would probably pay more for life insurance if you went shopping on the open market. In these cases, buying a supplemental policy through your job could be a good way to get coverage at a relatively low cost.

Do You Need Portable Coverage?

Before you sign up for a supplemental policy, consider whether it’s portable. “Portability” is your ability to keep certain benefits if you switch your place of employment or leave the workforce entirely — in this case, your life insurance. If you’re thinking about changing jobs or have reason to believe that you may not work at your current employer for much longer, it’s important to know if your life insurance is portable.

How Much Supplemental Life Insurance Should You Buy?

A common recommendation is to carry 10 to 15 times your annual income in life insurance coverage. Your goal is to choose a policy that would replace the income you would have brought in if you weren’t around to provide for your family. So, if you multiply your salary by those numbers and then subtract what you have in your “regular” life insurance policy, that can be a starting point to determine how much supplemental insurance makes sense.

If you make $50,000 a year and multiply by 10 or 12, that’s $500,000 to $600,000 in coverage you want to purchase. (You might want to bump it up a bit to account for inflation.) So, if you have a term life insurance policy for $500,000, you might decide to get a supplemental policy for $200,000.

Now, factor in your outstanding debt. Life insurance payouts can be used to pay them off, including mortgage loans, car loans, student loans, credit cards, and so forth. So, if you have these debts, you can add their outstanding balances up and consider adding those amounts to your life insurance needs. If, for example, these debts total $300,000, you might bump up the supplement policy example above to $500,000.

Recommended: Life Insurance Definitions

Types of Supplemental Life Insurance

We’ve been focusing on one kind of supplemental insurance, a popular option that lets you increase the overall life insurance coverage you own. This kind of policy would pay a lump-sum death benefit to your beneficiaries. If you purchase this, it’s an employee benefit that can increase the amount of coverage that you own (although you may be responsible for part of all of those premiums albeit at a group rate).

But let’s consider some other possibilities that may be offered:

•   Supplemental spouse life insurance. This kind of insurance provides a death benefit if the employee’s spouse dies and may also be called supplemental family life insurance. Employees may also have the option to buy supplemental child life insurance to cover the death of a child or other dependent who qualifies.

•   Accidental death and dismemberment. This provides coverage to your beneficiaries if you are killed or lose physical function in a type of accident that’s covered in the policy. Depending on the kind of work you do or the pastimes you pursue, this may or may not suit your needs. With AD&D insurance, you could receive a benefit, say, if you were to lose your eyesight, your hearing, or limb in an accident. But it won’t provide any benefit if you die due to other medical conditions, which are more likely to occur.

•   Final expenses. These policies pay a small benefit (typically between $5,000 and $35,000) to cover end-of-life expenses, such as funeral and burial costs. Some people like to have this kind of coverage, which means your loved ones wouldn’t have to pay out of pocket for these charges.

How Much Coverage Can You Get Through Work?

It’s worthwhile to evaluate what life insurance options are available through your work. Employers may offer lower rates since they get a group insurance rate. Also, it’s also possible that your employer would pay part of your premiums. It’s typically easier to get insured through a group plan. While you may need to answer medical questions, it’s less likely that you’ll need a medical exam for group insurance.

Group plans through your employer, though, are usually not portable. This means that if you leave that employer, the coverage ends and then you’ll need to shop around again — now at an older (although not necessarily old) age and perhaps with new health conditions. Plus, these plans aren’t as customizable as you might get on your own.

How Much Does Supplemental Life Insurance Cost?

If your employer offers this benefit as part of a group policy, the cost may be minimal, especially if the workplace subsidizes the premiums.

Otherwise, it can make sense to get personalized quotes, given that age, gender, health conditions, amount of the policy, term, and more can impact the price. There are online calculators that can help you do the math and see how the numbers add up.


💡 Quick Tip: Term life insurance coverage can range from $100K to $8 million. As your life changes, you can increase or decrease your coverage.

The Takeaway

To recap: What is supplemental life insurance? It’s a policy that enhances a person’s primary life insurance policy. It helps to ensure that they have enough financial benefit to protect their loved ones if they weren’t there to provide for them.

While supplemental policies through your employer can be affordable, they may not deliver the level of coverage you need. Take a close look at your options, and take advantage of the simple online tools that can help you find the kind of policy you need at the right price.

SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. Apply in just minutes and get an instant decision. As your circumstances change, you can update or cancel your policy with no fees and no hassles.

Photo credit: iStock/Kemal Yildirim

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

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.

SOPT0224003

The office of Federal Student Aid provides over 10 million college students with more than $112 billion in grant, work-study, and student loan funds each year to help pay for college or career school. However, there are situations where students can lose their financial aid.

Students will want to consider how their grades affect financial aid to avoid having federal college aid taken away. Generally, you’ll need to make satisfactory academic progress (SAP) each term to continue receiving federal financial aid, but you may be able to regain lost aid by filing a financial aid appeal.

If you’ve received aid through private scholarships or grants, you may need to meet their minimum requirements to remain eligible for gift aid. Private lenders may also have minimum GPA requirements, but these vary by lender.

Types of Financial Aid

There are many types of financial aid available to college students from the federal government, states, schools, and private sources. These sources can be used to cover most higher education costs, such as tuition and fees, room and board, and books.

According to the annual Sallie Mae/Ipsos survey How America Pays for College, the 2023 survey found that while parent income and savings covered 50% of college costs, families still heavily relied on financial aid to cover the other half.

Grants & Scholarships

College grants and scholarships are a form of financial aid that can help make college more affordable because they don’t usually need to be repaid. The U.S. Department of Education, colleges, and universities award an estimated $95 billion in grant and scholarship money to students each year. The Sallie Mae survey also found that scholarships and grants covered approximately 29% of school costs for families during the 2022-2023 academic year.

The biggest differences between college grants and scholarships are where the funds come from, eligibility requirements, and the application process. Grants are typically given based on financial need while most scholarships are merit-based. Scholarships are awarded to students based on their academic or athletic achievements, extracurricular activities, fields of study, and more.


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

Federal Work-Study

Federal work-study is a form of financial aid that offers students funds for part-time employment on campus. Several factors determine whether a student is eligible to participate in the federal work-study program, including their family’s income and the student’s enrollment status at the school.

As with other forms of federal financial aid, a student’s grades affect their eligibility. Students are expected to make SAP, which is a school’s standard for satisfactory academic progress toward a degree or certificate.

Student Loans

Student loans can either come from the federal government or private lenders. To qualify for a federal student loan, students must demonstrate financial need, fill out the Free Application for Federal Student Aid (FAFSA®), be enrolled in an eligible degree or certificate program at least half-time, and maintain SAP.

Another option is to take out a private student loan; however, this is generally only considered after all other options have been exhausted. Private student loans don’t have the same criteria as federal student loans and may lack borrower protections, like options for deferment. Private lenders can set their own terms and repayment plans so you should read the loan terms closely before making any borrowing decisions.

Recommended: How to Pay for College

How Grades May Affect Financial Aid

Academic goals in college are common, and if you find yourself struggling in school, you may be wondering how grades affect financial aid.

State and federal financial aid, such as grants, loans, and work-study, require students to maintain satisfactory academic progress while working toward a degree. Academic performance is evaluated based on each school’s individual policy.

Your school’s policy will tell you what grade point average (GPA) or equivalent you must maintain, the minimum number of credit hours you need, the required pace of course completion, maximum time frame allowed, and more.

As far as how grades affect financial aid, federal regulations state that students must maintain a 2.0 cumulative GPA, or a grade of “C”, on a 4.0 scale. Additionally, students must complete at least 67% of cumulative credits attempted, and progress through their undergraduate program no longer than 150% of the published length of the educational program.

Private scholarships and grants may have their own academic requirements. Dropping below the minimum requirements could result in termination of the scholarship or grant money for the following term but typically does not require repayment. If you receive a scholarship or grant, make sure you read the fine print to see if your grades affect your financial aid.


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

Do Grades Affect Private Student Loans?

Typically, no. However, each lender has different eligibility criteria for student borrowers. Similar to other types of loans, private student loans are given based on factors including your finances and credit history and, depending on the lender, there may or may not be a GPA requirement. Private lenders usually care more about your ability to repay the loan than your grades, but again, each lender is different.

If you’re interested in a private student loan, check with the lender to see if there are any student loan GPA requirements before making your decision.

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

Regaining Lost Financial Aid Due to Low Grades

Have you lost financial aid due to low grades? You may still be able to get it back. Losing financial aid due to low grades means you aren’t satisfying your school’s SAP requirements.

Visit a Financial Aid Office

One of the first things to do after losing financial aid due to low grades is to visit your school’s financial aid office to discuss your options. Your financial aid office can help you formulate a plan to improve your grades so that your financial aid can be reinstated.

Make sure to ask about the requirements for the financial aid that you are or were receiving and find out if you’re able to file a financial aid appeal.

File a Financial Aid Appeal

You can file a financial aid appeal, or a SAP appeal, if your school allows it and if the poor performance was due to circumstances outside of your control. There must be a link between poor performance and the special circumstance. Some acceptable situations include:

•   Death of a relative

•   Severe personal injury or illness

•   Other special circumstances determined by the school

If you can prove your lower grade directly correlates to one of these situations, then it may be possible for you to regain your financial aid. Check your college’s website for directions and for more information on filing a SAP appeal.

Explore Private Student Loans from SoFi

Your grades do affect your financial aid and federal student loans. If your cumulative GPA dips below a 2.0, you will no longer be considered to be in good academic standing. However, if your low grades are due to extenuating circumstances, you can try to appeal. Other forms of financial aid, like private grants and scholarships, may also have their own set of academic requirements.

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

FAQ

Can financial aid be taken away for bad grades?

Grades can affect your financial aid, and academic performance is evaluated based on each school’s individual SAP policy. You must remain in good academic standing to keep any type of state or federal financial aid, such as grants, loans, and work-study. Private scholarships and grants may also have their own set of requirements to keep any gift aid.

While private lenders typically don’t have any student loan GPA requirements, each lender is different.

Do you get more financial aid if you get good grades?

Most federal financial aid programs do not take your grades into consideration when determining how much financial aid to give. However, bad grades can hurt your federal financial aid availability.

Good grades are even more important to recipients of merit scholarships and some grants but there are scholarships that do not take grades or GPA into consideration.

Will my FAFSA be affected if I fail a class?

As long as you make SAP, one failed class won’t affect your FAFSA.

Photo credit: iStock/harunhalici

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

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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

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.

SOIS0224002

There are typically no withdrawal penalties associated with leaving leftover funds in a 529 plan after college. In fact, 529 plans allow you to withdraw up to $10,000 per year, per student.

But still, the earnings portion of a non-qualified 529 plan distribution can be subject to income tax and a 10% penalty for 529 withdrawal.

Keep reading to learn more about what a 529 plan withdrawal penalty is, which 529 withdrawal penalty exceptions exist, and a few other college financing options for students and parents without 529 plans.

What Is a 529 Plan?

A 529 plan is a college savings investment account that comes with unique tax benefits if it’s used to pay for qualified education expenses. It can help cover the costs of a beneficiary attending college, K-12 school, an apprenticeship program, or even to pay back student loans.

When someone uses a 529 plan to save up for college, the funds generally have little impact on their ability to receive financial aid.

In addition, there are several other benefits to using a 529 plan:

•   Funds in the account are invested and grow over time.

•   Depending on the type of 529 plan, beneficiaries can prepay for college in advance to lock in current tuition prices before they go up.

•   529 college savings accounts are listed as assets when the beneficiary applies for Federal Student Aid.

•   Certain 529 plans let beneficiaries deduct their contributions on their state income taxes.

•   529 plan contributions can be considered “completed gifts” to the beneficiary, allowing families to use them as estate planning vehicles. For 2023, the annual gift tax exclusion can be applied up to $17,000 per donor, per beneficiary and in 2022 the annual exclusion was $16,000.

What Are Qualified 529 Plan Distributions?

Let’s start with the education expenses that are considered qualified within a 529 plan:

•   Tuition and associated fees

•   Room and board (if the student is enrolled at least half-time)

•   Books

•   Technological equipment and computers

•   Equipment for special needs

•   Student loan payments

•   Up to $10,000 per year, per beneficiary in eligible K-12 expenses

•   Apprenticeship program tuition and fees

•   Up to $10,000 in K-12 tuition expenses (per year, per beneficiary)

Recommended: Using Student Loans for Living Expenses and Housing

What Are Non-Qualified 529 Plan Distributions?

Non-qualified 529 plan distributions describe any portion of a plan withdrawal in which the funds were not used to pay for qualified education expenses like the ones listed above.

As such, here are some of the education expenses that are considered non-qualified:

•   Costs associated with transportation

•   Costs associated with college application and testing

•   Costs associated with extracurricular activities

•   Health insurance costs

•   Any cost that doesn’t fall under the umbrella of the qualified education expenses listed above

Are Distributions Taxable?

Generally, contributions can be withdrawn tax-free because taxes are paid at the time of contribution. The earnings portion (the money earned from investments) of a non-qualified 529 program plan distribution could be subject to a 10% federal income tax penalty on top of any associated income taxes that may be due. It would be taxable to whomever received the payment, whether that’s the account owner or the designated beneficiary.

If the non-qualified distribution is not paid out to either the designated beneficiary or the eligible educational institution, it’s assumed to have been given to the account owner who will be subject to the 10% withdrawal penalty and tax.

What Is a 529 Early Withdrawal Penalty?

A 529 early withdrawal penalty occurs when investment gains are withdrawn from a 529 account before the beneficiary incurs any qualifying expenses, or if they withdraw funds for any of the non-qualified reasons listed above.

When this happens, the IRS can assess a steep early withdrawal penalty of 10%.

In California, an extra 2.5% state income tax penalty is imposed on the earnings portion of non-qualified 529 plan distributions.

Can I Make a Withdrawal From 529 Without Penalty?

In certain cases, it’s possible to execute a withdrawal from 529 without penalty, such as if:

•   A plan beneficiary passes away, becomes disabled or decides to attend a U.S. Military Academy.

•   A family must pay income tax on a portion of their 529 withdrawal due to their claiming the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC).

•   A plan beneficiary receives certain other types of educational assistance, such as a scholarship exception.

529 Withdrawal Penalty Exceptions

Here are a couple of circumstances in which a 529 withdrawal penalty may not apply to a non-qualified distribution.

Scholarship

It may come as a surprise to learn that the 10% 529 early withdrawal penalty doesn’t apply when a beneficiary no longer needs to use their 529 funds because they received a scholarship.

This particular 529 withdrawal penalty exception allows funds to be withdrawn from the 529 plan without penalty up to the amount of the scholarship itself.

While this is one way to avoid a penalty for 529 withdrawal, account owners will still owe taxes on the earnings after the initiation of the withdrawal if they are used on non-qualified expenses.

Death or Disability of Account Beneficiary

If the 529 account beneficiary passes away, the withdrawal fees are generally waived.

The additional fee is also generally waived in the event that the designated beneficiary becomes disabled. According to the IRS, someone is considered disabled if they are able to prove that they are unable to participate in any significant gainful activity due to a physical or mental condition.

Recommended: Student Loan Disability Discharge Eligibility

Beneficiary Enrolls in a US Service Academy

If the designated beneficiary enrolls in a U.S. service academy, such as the United States Naval Academy at Annapolis, the withdrawal fee may be waived. Note that the exception to the withdrawal fee only applies so long as the distribution amount does not exceed the cost of attendance as defined by the IRS.

Time Limit

There’s a decent amount of debate around the timing of a 529 plan distribution when it’s based on a scholarship. There are no clear instructions from Congress or the IRS, which means tax professionals and other financial experts may vary in their guidance. If you have specific questions, consider consulting with a tax professional who can provide a personalized recommendation.

What if My Child Doesn’t Go to College?

If you’re a parent who’s saving for your child’s college tuition and they don’t decide to go to college, there are certain specifications and limitations around what else the 529 funds can be used for.

For example, in some states, 529 funds can be used to cover K-12 expenses or professional schools.

That said, if the beneficiary decides to take a gap year to travel or join the armed forces, the funds can’t be withdrawn for personal use by the parents for something like a major renovation.

Still, there are a few ways to take advantage of 529 savings when the intended dependent doesn’t want to attend a college or university:

Changing the Beneficiary

In instances where the account owner has more than one dependent, they may be able to change the beneficiary of the existing 529 plan from one child to another. All they need to do is fill out the associated paperwork, which can typically be found on the 529 plan provider’s website, or give them a call and have them send it in the mail.

Apprenticeships

In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act expanded the scope of qualified educational expenses for 529 plans to include student loan repayment and registered apprenticeships.

If an apprenticeship is registered and certified with the U.S. Secretary of Labor , it is considered a qualified higher education expense and, as such, associated program fees, supplies, books, and equipment may be considered qualified higher education expenses as well.

Recommended: What Is an Apprenticeship? Do They Pay? Pros & Cons

Repay Student Loans

As briefly mentioned above, student loan repayment is now included as a qualified education expense for 529 plans. Under the SECURE Act, it is possible to use a lifetime maximum of $10,000 from a 529 plan to pay down student loan debt. This money can be used to repay student loan debt that belongs to the 529 plan account holder, their spouse, children, or grandchildren.

Other College Financing Options

If you or a dependent missed the boat on setting aside funds in a 529 college savings plan, there are still plenty of options to secure financial support.

If you’re looking for another way to pay for your child’s college education, you might consider:

•   Federal student loans. There are many types of federal student loans funded by the federal government and, in order to qualify, you must fill out the Free Application for Federal Student Aid (FAFSA®) form every year you want to receive federal student loans. Federal loans offer an array of flexible payment options, the ability to earn student loan forgiveness, and the option to defer payments or put the loan into forbearance.

•   Parent Plus loans. A Parent Plus Loan is a federally funded student loan that can be taken out by parents to help their undergraduate dependents pay for college. There are no annual or lifetime borrowing limits and, with the Parent Plus Loan Forgiveness Program, borrowers are eligible for an income-contingent repayment plan or relief from the Public Service Loan Forgiveness program. There is no federal program that allows for parents to transfer a parent plus loan to the student.

•   Private student loans. A private loan for students can help cover the cost of a college education based on the borrower’s credit score and can be obtained from a variety of private lenders.

When you opt for a private student loan with SoFi, you can check your rate instantly, apply in minutes, and there are no hidden fees. While private student loans can help fill funding gaps for students who are paying for college, they don’t always offer the same borrower benefits or protections as federal student loans, such as the option to pursue Public Service Loan Forgiveness or deferment options. For this reason, they are generally borrowed only after all sources of financing have been thoroughly reviewed.

Recommended: A Guide to Unclaimed Scholarships and Grants

The Takeaway

A 529 plan is a college savings investment account that comes with unique tax benefits if it’s used to pay for qualified education expenses. Qualified expenses include tuition, fees, school supplies, and room and board. Non-qualified expenses include health insurance, extra-curricular activities, and fees for applications and testing — to name a few.

When someone withdraws funds from their 529 plan for non-qualified expenses, they are subject to a 10% early withdrawal penalty. In some cases, though, there are 529 withdrawal penalty exceptions, including when a plan beneficiary passes away, claims a specific tax credit, or receives a scholarship.

In cases where a dependent decides not to go to college, 529 plan account owners have the option to change the plan beneficiary to another dependent, use the funds for a dependent’s apprenticeship, or cover K-12 expenses.

Other college financing options include federal student loans, Parent Plus Loans, and private student loans.

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

Photo credit: iStock/FG Trade

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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

SOIS0124006

Student loans are considered installment loans, or loans that are repaid through regularly scheduled payments or installments.

Revolving options, like credit cards, let borrowers take out varying amounts of money each month, repay it, and take out more money as they go. Learn more about installment loans and revolving credit below.

Learn more about installment loans and revolving credit below.

What Is Revolving Credit?

Revolving credit is an agreement between a lender and an account holder that allows you to borrow money up to a set maximum amount. The account holder can choose to pay off the balance in full or make minimum monthly payments on the account.

As the account holder makes repayments, the amount available to borrow is renewed. Account holders can continue to borrow up to the maximum amount through the term of the agreement. Examples of revolving credit include credit cards and home equity lines of credit (HELOCs).

Recommended: The Different Types Of Home Equity Loans

What Is Installment Credit?

Installment is a type of credit that allows a borrower to make fixed payments on a loan over a set period of time. Before the borrower signs the installment loan agreement, the lender will decide on the interest rate, fees, and repayment terms, which will determine how much the borrower pays each month.

Common examples of installment loans include student loans, mortgages, auto loans, and personal loans.


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

Revolving Credit vs Installment Credit

Here’s a high level overview on the differences between revolving credit and installment credit.

Revolving Credit

Revolving credit is a more open-ended form of credit obligation. Let’s use the example of a credit card:

1.    The cardholder uses the card to make purchases as they please, pays them off either in-full or partially each month, and continues to make charges on the line of credit.

2.    The amount of money the cardholder spends is their decision (up to their credit limit), and the amount of money they repay each month isn’t set in advance by the lender.

3.    The cardholder can pay off the account balance in full each month, or they can opt to pay the minimum and “revolve” the balance over to the next month (though this will accrue interest on the account).

An important note: To avoid any late fees or potential dings to their credit score, people who are borrowing from revolving credit are advised to pay their monthly bill on time. Revolving credit can play a major role in calculating a person’s credit utilization rate, which is considered the second biggest factor in determining their credit score. For FICO® scores, it is generally suggested that borrowers use no more than 30% of their available credit.

Installment Credit

Installment credit is less open-ended than revolving credit. Installment credit is a loan that offers a borrower a fixed amount of money over a predetermined period of time. When a borrower signs the loan agreement, they know exactly what the monthly payments will be.

Let’s use the example of a student loan:

1.    The student borrows a specific dollar amount. The lender specifies the interest rate and repayment terms. In the case of federal student loans, interest rates and terms are set by federal law.

2.    The predetermined funds are released to the borrower. Typically, the funds are released in a single lump sum payment.

3.    The borrower repays the loan based on the agreed upon terms. Terms will be set by the lender, for private student loans, or by law for federal student loans.

An important note: Having an installment loan on their credit report can help some borrowers diversify their credit mix, which is a factor in determining an individual’s credit score. The amount of the installment loan, however, won’t play a major role in the borrower’s credit utilization rate (versus with revolving credit).

Is a Student Loan an Installment Loan?

Student loans for undergraduate school are considered installment loans, which means they come with a starting balance, are disbursed to the qualifying borrower, and are repaid over a set amount of time through a fixed number of payments.


💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.

Pros and Cons of Installment Credit

There are advantages and disadvantages to taking out an installment loan:

Pros of Installment Credit

Here’s a brief breakdown of a few installment credit pros:

Payments

Installment credit payments are made on a set schedule that’s determined by the lender. This makes them a predictable, long-term strategy for paying off debt, and also makes it easier to factor them into your budget, especially if the installment loan has fixed interest rates.

The monthly payment for an installment loan with a variable interest rate may change from month to month, depending on how the variable interest rate changes.

Borrowing Cost

In terms of the loan amount and length of the loan, installment loans can be tailored to the borrower’s specific financial circumstances. This means the cost of the installment loan is fairly flexible based on what the borrower needs. Additionally, interest rates are generally lower on installment loans than with revolving credit, so borrowers may find that borrowing an installment loan with a competitive interest rate is a more affordable option.

Cons of Installment Credit

And here’s more info on the cons of installment credit:

Expensive

If the borrower takes out an installment loan over a longer period of time, they may end up making payments at an interest rate that’s higher than the current market rate, unless they’re able to refinance the loan.

Either way, the borrower is locked into a long-term financial contract with an installment loan. If they encounter a financial pitfall, they may be unable to make the scheduled payments or risk defaulting on the loan and damaging their credit.

Prepayment Penalty

Some loans impose prepayment penalties if a borrower pays their loan off early. This isn’t necessarily the case for all installment loans, but it’s important to read the fine print in the loan agreement to determine whether a prepayment fee will be triggered if the loan is paid off early.

Recommended: How to Avoid Paying a Prepayment Penalty

Ways to Pay for School

When looking for ways to pay for school, undergrads and grad students often look to installment loans. Tuition and living expenses may also be covered by savings and scholarships and grants.

Recommended: How to Pay for College

Federal Student Loans

Federal student loans are installment loans available to students. To apply, students fill out the Free Application for Federal Student Aid (FAFSA®) each year. Federal student loans have fixed interest rates that are set annually by Congress, offer flexible repayment options, and have some borrower protections and benefits such as deferment and the option to pursue Public Service Loan Forgiveness.

However, there are borrowing limits for federal student loans, so students may need to review other sources of financing when determining how they’ll pay for college.

Recommended: FAFSA 101: How to Complete the FAFSA

Private Student Loans

Private student loans are installment loans you can use to pay for a college education. Private student loans are not funded by the federal government. To apply for them, borrowers can browse the offerings of individual lenders like banks, credit unions, and online lenders and decide which private student loan works best for their finances. As a part of the application process, lenders will generally review the applicant’s credit history and credit score among other factors.

Private student loans can help fill the gap between the cost of college and their total financial aid, like federal loans, grants, and scholarships. However, private loans are generally considered only after all other options have been depleted. This is because private lenders are not required to offer the same borrower protections as federal student loans. If you think private student loans are an option for you, shop around to find competitive terms and interest rates, and be sure to read the terms and fine print closely.

Personal Savings

Using personal savings to pay for college means less debt and more flexibility. Not only that, but it costs significantly more to borrow money to pay for college than it does to use personal savings.

Still, this isn’t financially feasible for everyone, as evidenced by the fact that there are 43.2 million student loan borrowers in the U.S. as of the first quarter of 2024. Sometimes, going into debt is the only reasonable option.

Grants

Unlike student loans, which require repayment, and work-study programs, which allow students to work on campus, grants are a type of financial aid that doesn’t require repayment.

Grants may be awarded by the federal government, states, or colleges. The amount of aid a student receives depends on a number of factors, such as the student’s financial needs and the type of school they’re attending.

Recommended: The Differences Between Grants, Scholarships, and Loans

Scholarships

A scholarship is a lump sum of funds that can be used to help someone pay for school. The key stipulations with scholarships are that a) they’re contingent on a particular qualification, i.e. a grade point average (GPA), act of service, or athletic performance, and b) they never have to be repaid.

Scholarships are usually awarded by colleges, universities, corporations or organizations.

The Takeaway

Student loans are installment loans, meaning borrowers receive a set amount of money from a lender and are required to repay the loan over a fixed period of time.

For those looking for ways to pay for college, there are other alternatives to installment student loans — such as scholarships, grants, personal savings, and private student loans.

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

FAQ

Is a student loan an installment loan?

Yes, a student loan is a type of installment loan, which means you pay it back in set amounts, over a fixed period of time, and it shows up on your credit report.

Is a student loan a revolving loan?

No, a student loan is not a revolving loan. It is considered an installment loan.

What are the benefits of an installment student loan?

A few of the benefits of installment student loans include being able to easily factor the loan into your monthly budget, the same payment terms for the life of the loan, and a longer period of time to pay off the loan.

Photo credit: iStock/SDI Productions

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

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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

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.

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.

SOIS0224001

There are many types of scholarships, from academic to athletic and need-based to identity-specific scholarship programs. Recipients typically don’t need to repay the funds they receive in the form of scholarships, which makes this type of funding particularly appealing.

In a 2023 Sallie Mae survey, How America Pays for College, it found that 61% of U.S. families used scholarship funds to partly pay for college. The average scholarship award amount across school, state, and company or nonprofit sources was $8,005.

Despite this available aid, 29% of students who didn’t use scholarship funding said they didn’t apply because winning didn’t seem plausible. However, with so many different types of scholarships available, you might find one that can help you pay for school.

1. Academic Scholarships

Academic scholarships, also referred to as merit scholarships, are awarded to students who’ve demonstrated academic excellence or exceptional skill in an area. For example, a merit-based scholarship might be based on an applicant’s cumulative GPA.

This kind of scholarship is provided by numerous sources, including:

Schools

Some high schools provide academic scholarships to their top graduating seniors. Additionally, the college you’re attending might have scholarships available.

Federal

Nationally recognized organizations offer federal academic scholarships based on different criteria and specifications.

Local

Students might also find scholarships sponsored by their state, county, city, or local associations.

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

2. Athletic Scholarships

Athletic scholarships are offered to student-athletes by their college. These full- and partial-scholarship programs are offered to a select few students who have shown exceptional skill in their sport.

Typically, when participating in an athletic scholarship you’re expected to maintain satisfactory academic performance to continue receiving funding. Note that fewer than 2% of high school athletes are awarded athletics scholarships to compete in college.

Recommended: Balancing Being a Student Athlete & Academics in College

3. Scholarships for Extracurriculars

Students who participate in extracurricular activities might be able to find scholarship opportunities for their unique interests. For example, scholarships for students who dance, act, draw, or participate in Boy Scouts, Key Club, and more exist.

💡 Recommended: Looking for scholarships? Use SoFi’s Scholarship Search Tool for college scholarships in every state, along with fellowships, grants, and other financial aid award opportunities.

4. Student Specific Scholarships

There are many types of scholarships that are based on the student’s personal situation or affiliation. Some of these kinds of scholarships include:

Religious Scholarships

For example, your specific religious denomination. These scholarships are generally available to students who are actively involved in a faith-based community, or who are pursuing religion-based college courses.

First-Generation Scholarships

Students who are the first in their family to attend college may qualify for specific scholarships.

Legacy Scholarships

These scholarships are exclusively for students whose parents or close family members are alumni of the same institution.

Identity-Based Scholarships

In addition to the student-specific scholarships discussed above, scholarship programs are also available based on a student’s personal identity. Some identity-based categories include BIPOC, Women, and LGBTQIA+.

Hispanic Heritage

Scholarships are available based on heritage. Students of Hispanic or Latinx heritage may be able to qualify for specific heritage-based scholarships like those offered by the Hispanic Scholarship Fund.

African American

Specific scholarships are available for African American students as well.

Women

Scholarships for women are another subset of options.

LGBTQIA+

LGBTQIA+ identifying students may be eligible for scholarships as well.

Learning Disabilities

These scholarships are available to select students who have diagnosed learning and attention issues. For example, the National Center for Learning Disabilities offers scholarships.

5. Need-Based Scholarships

One of the most popular types of scholarships for college are need-based. These scholarships are accessible to applicants who have a demonstrated financial need, and a program might ask for proof, such as income documentation or FAFSA® information.

You can find need-based scholarships from national organizations, as well as within your state, local community, and even through your own school.

Recommended: What is Need-Based Financial Aid?

6. Employer Scholarships

Employer scholarships are offered to employees of a company or an employee’s college bound student. Aside from having an affiliation with the employer, students might need to meet other eligibility criteria to be selected for an award.

7. Military Scholarships

Private and public entities sponsor military scholarships for students who currently serve or have served in the U.S. armed forces. If you’re a first-time freshman and participated in Reserve Officer Training Corps, consider reaching out to your school’s ROTC officer to learn about your options.

8. STEM Scholarships

STEM scholarships are accessible to students who are pursuing a college education in a science, technology, engineering, or math discipline. Some scholarships programs are offered specifically to students who identify with a particular group; for example, STEM scholarships for minority students.

9. Scholarships Based on Major

Regardless of what you’ve chosen as your college major, there’s likely a scholarship suited for you. These scholarships are provided by some college departments, the school itself, or private organizations who want to encourage students to pursue a particular area of study.

10. No Essay Scholarships

This kind of scholarship explicitly doesn’t include a written essay or personal statement component. You might prefer this type of scholarship if writing isn’t your forte, but there might be another required component in its place, such as a video or other creative submission.

Applying for Scholarships

There are various types of scholarships for college, which means there are just as many different requirements and deadlines to stay on top of. When applying to a scholarship, double check that you meet the basic eligibility criteria as a student.

Depending on the type of scholarship, it might require a minimum GPA, or it might ask for proof that you have financial needs, for example. After confirming that you meet the applicant requirements, review the steps needed to apply.

Some scholarship programs might ask for a personal statement or other academic or creative submissions. Similarly, some might request additional paperwork as part of your application, like a copy of your school transcripts.

Finally, make sure you note each scholarship’s deadline and submit your application on time. The last thing you want is to have done all of the work only to be denied because of a missed deadline.

You can also look into $2,500 SoFi Scholarship Sweepstakes to help cover the costs of college.

Alternatives to Scholarships

If you’d like to diversify your financial aid sources, there are alternative aid options, like loans for undergraduates and graduate students, as well as grants. To apply for federal financial aid, fill out the Free Application for Federal Student Aid (FAFSA) each year. Schools may also use the information provided on the FAFSA to award school-specific scholarships. Here are a few other options for paying for college.

Grants

Grants are provided by federal, state, school, and private sources. Like scholarships, they typically don’t need to be repaid.

Federal Student Loans

Federal student loans are available to undergraduate and graduate students, as well as parents of dependent undergrads. They’re funded by the U.S. government, and most federal loans don’t require a credit check. In addition to offering fixed rates, they provide access to income-driven repayment plans and loan forgiveness programs.

Private Student Loans

When scholarships, grants, and federal student loans aren’t enough to cover the total cost of college, a private student loan could help. These loans are funded by private lenders, and offer fixed- or variable-rate loans at different terms. These loans typically require a credit check or the addition of a creditworthy cosigner. Keep in mind that private student loans aren’t required to offer the same benefits, like income-driven repayment plans, as federal student loans.

The Takeaway

If you’re short on aid for your upcoming academic year, consider searching for unclaimed scholarships. There are a variety of scholarship types to consider, so you’ll likely come across at least a handful that you’re eligible for.

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

FAQ

What are the three most common types of scholarships?

Common types of scholarships for college are merit-based scholarships, need-based scholarships, and athletic scholarships. However, within these categories are sub-categories of scholarships based on specific eligibility factors.

How many different scholarships are there?

There are millions of scholarships being offered each year. According to Educationdata.org, more than 1.7 million scholarships are awarded annually.

What are competitive scholarships?

Competitive scholarships are prestigious national scholarship programs. They are often merit-based and are awarded to exceptional students who’ve demonstrated academic excellence, leadership, and who are considered the nation’s top students.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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.

Photo credit: iStock/Edwin Tan
SOIS0324001