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The growing cost of college means that parents or grandparents who intend to pay part or all of the tab for a child need to chart a course. A tax-advantaged 529 college savings plan is one way to save for future education costs.

Although 529 plans have been around since 1996, many parents still aren’t sure how they work. Yet they are worth knowing about in detail, as they can be used for a variety of educational expenses and are not subject to federal taxes.

Read on to learn more on 529 plans and whether opening one is the right move for you.

529 Plan Basics

A 529 plan is a tax-advantaged savings account designed to help families save for education expenses. Contributions grow tax-free, and withdrawals for qualified expenses, such as tuition, books, and room and board, are also tax-free. Many states offer additional tax benefits for residents who contribute to their state’s plan.

Funds can be used for various educational institutions, including colleges, universities, trade schools, and even some K-12 expenses. 529 plans offer flexibility and can be transferred to other family members, if needed. There are two types of 529 plans: prepaid tuition plans and education savings plans, each with unique benefits.

Prepaid Tuition Plan

A prepaid tuition plan allows you to prepay tuition and fees at certain colleges and universities at today’s prices for a child’s future educational needs. Such plans are usually available only at public schools and for in-state students. Only nine are accepting new applicants, and the funds saved are typically not able to be used for room and board.

The main benefit of a prepaid college plan is that you could save big on the price of college by prepaying before prices go up. And contributions are considered gifts, so deposits up to a certain threshold each year ($19,000 in 2025, or $38,000 for a married couple splitting gifts) qualify for the annual and lifetime gift tax exclusion.

A few special-case guidelines to note:

•   If your child doesn’t attend a participating college or university, you will likely be able to use the funds you set aside at another school. Another option may be to transfer the plan to an eligible sibling. If no one in the family plans on attending college, most plans will refund your money, perhaps minus a cancellation fee.

•   If your state government doesn’t guarantee the plan, you may lose the payments you’ve made if the state runs into budget shortfalls.

•   Prepaid tuition plans may charge an enrollment fee and ongoing administrative fees.

•   Although most of the plans can’t be used for room and board, Florida Prepaid Plans, for example, offer a prepaid dormitory plan of two semesters of dorm fees for each year of state university coverage.

An alternative to the state-sponsored plans is the Private College 529 Plan, which has over 300 participating institutions nationwide. The Private College 529 Plan is a prepaid tuition plan specifically designed for private colleges and universities. It allows families to lock in current tuition rates at participating private institutions, protecting against future tuition increases.

Recommended: Private vs Public College

Education Savings Plan

The second type of 529 plan is an education savings plan. Here’s how it works:

•   You can contribute monthly, quarterly, or annually, or deposit a lump sum. Beyond parents making regular payments, 529 plans can be a clever way for the extended family to give a meaningful gift on birthdays or holidays. There is no limit on how much you can add yearly, but you’ll have to fill out gift tax Form 709 if you contribute more than the annual gift amount.

•   While contributions are not deductible on the federal level, many states provide tax benefits for saving in a 529 plan, such as deducting contributions from state income taxes or giving matching grants. Check your local tax laws to see if you qualify.

•   Once you contribute, you will likely have a range of investment options to choose from. These vary from state to state and may include mutual funds and exchange-traded funds (ETFs).

•   You may want to tailor your choices to the date you expect to withdraw the money. You can possibly be more aggressive if you have a longer timeline, but may sway more conservatively if you only have a few years.

•   Money can be withdrawn tax-free from a 529 savings plan to pay for any “qualified higher education expense,” which includes tuition, fees, books, computers, and room and board.

•   You can make withdrawals as long as your child is enrolled at least half-time at an accredited school, regardless of where in the United States it is, and occasionally abroad. Parents can also withdraw up to $10,000 a year to pay for K-12 tuition expenses and for student loan repayment.

•   If you withdraw money for the above expenses, you won’t have to pay federal income tax, and often state income tax, on your earnings. If you withdraw the funds for other reasons, you’ll have to pay taxes, and you may or may not be able to avoid the 529 withdrawal penalty, a 10% federal tax penalty on the earnings.

•   Starting in 2024, families with leftover savings in a 529 college savings account may be able to roll it to a Roth IRA tax- and penalty-free. That is one of several retirement savings changes that are part of the Secure 2.0 Act.

One last note: It is possible to change the beneficiary of a 529 plan to another eligible family member. For example, you can switch to a younger child if your oldest got a scholarship.

How 529 Savings Plans Compare With Other Options

When planning for education expenses, 529 savings plans are a popular choice due to their tax advantages and flexibility. However, other options are available, each with unique benefits and limitations. Comparing a 529 plan to alternatives like a Coverdell Education Savings Account, basic brokerage account, traditional IRA, Roth IRA, or UGMA/UTMA account can help families choose the best strategy.

Recommended: Financial Aid for Higher-Income Families

Coverdell Account

Like a 529 plan, a Coverdell account, also called an Education Savings Account (ESA), is a tax-advantaged savings account to pay for qualified education expenses.

Unlike a 529 account, total contributions from all sources to a Coverdell account cannot exceed $2,000 annually per beneficiary. Another difference is income limits: You can only use an ESA if your modified adjusted gross income is less than $110,000 (singles) or $220,000 (married couples filing jointly).

You can only make contributions until the child reaches age 18, and all funds must be withdrawn by the time the beneficiary reaches age 30. A 529 plan generally does not restrict the age of the beneficiary.

Basic Brokerage Account

Instead of a 529 plan, some families may favor a brokerage account, which affords the freedom to choose whatever investments they want and the ability to use proceeds for any need a young person has.

The main benefit of a 529 plan is that you don’t have to pay capital gains tax on any distributions used for qualified education expenses. Many families, however, pay a 0% long-term capital gains tax rate anyway. (Long-term capital gains apply to a security held for a year or more. The day-to-day increases or decreases in an asset’s value before it is sold are unrealized gains and losses.)

For 2025, married couples filing jointly with taxable income of $96,700 or less and single filers making $48,350 or less may qualify for the 0% long-term capital gains rate.

A 529 account, then, may be of greatest use to families that need an additional tax shelter.

Recommended: How to Reduce Taxable Income for High Earners

Traditional IRA

Withdrawals from a traditional IRA before age 59 ½ that are used for qualified higher education expenses are not subject to the 10% early distribution penalty — but you will still pay income tax on the distribution.

Money in a qualified retirement plan is not reported on the FAFSA®, but distributions may be reported as untaxed income, and income is weighted much more heavily than assets for financial aid. Remember that a 529 savings plan will have a limited impact on the financial aid offer a student receives.

It is generally thought that retirement plans should be used for just that, and not for college expenses.

Recommended: How College Financial Aid Works

Roth IRA

With a Roth IRA, you can withdraw contributions tax- and penalty-free at any time, but distributions will be reported as untaxed income on the FAFSA, reducing eligibility for need-based financial aid.

You generally must be at least age 59½ and have had the Roth account for at least five years to withdraw earnings tax- and penalty-free. If you are under 59½, you may be able to avoid a penalty (but not taxes) if you withdraw earnings to pay for qualified education expenses.

Some people opt to max out their Roth IRA contributions and then invest additional money in a 529 plan.

UGMA and UTMA Accounts

You can open a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account on behalf of a child under age 18. The adult custodian controls the money, but gifts and transfers irrevocably become the property of the child.

As with a 529 plan, annual contributions to a UGMA or UTMA account are unlimited, and gifts below the annual gift threshold do not need to be reported to the IRS on gift tax Form 709.

Unlike college savings plans, there is no penalty if the account assets aren’t used to pay for college. Once the minor reaches adulthood, the money is turned over to the former minor, who can use the assets for college or anything else.

But custodial accounts have drawbacks when compared with 529 savings plans: The accounts offer no tax benefits when contributions are made. Earnings are subject to taxes. A custodial account is also counted as a student asset on the FAFSA and will weigh more heavily against financial aid eligibility than parents’ assets or assets held in a 529 account or an ESA.

Choosing a 529 Savings Plan

Every state offers a 529 savings plan, but not all are created equal. When trying to find the best 529 college savings plan, you may want to think about the tax benefits and the fees.

First, you may want to understand whether you qualify for a state income tax deduction or credit for your contributions, based on your state of residence and the plan. Check your state laws and consult a tax professional to learn more about your particular situation.

The next thing you could consider are the fees associated with your plan, which could include enrollment fees, annual maintenance fees, and asset management fees. Some states let you save on fees if you have a large balance, contribute automatically, are a state resident, or opt for electronic-only documents.

The Takeaway

For many students, the cost of college can be eased with a tax-advantaged 529 savings plan. The accounts allow for tax-free growth of funds that can help dreams of affording higher education come true.

529 plans are still rarely used, though, as most college students take on loans to get through school. Students can rely on both federal and private student loans, in addition to cash savings, scholarships, and grants.

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

Are 529 plans worth it?

A 529 plan can be a worthwhile college savings vehicle, depending on a family’s situation. If the student is definitely going to attend college and if the state of residence offers tax benefits for these savings, or a prepaid tuition plan, it can be a good option.

Why shouldn’t you invest in a 529 plan?

For some people, a 529 may not be the best option. If a family is unsure whether a child will attend college, lives where there aren’t state-level tax breaks for these programs, or thinks they can earn higher returns elsewhere, they might not want to open a 529 college savings plan.

Is a 529 plan better than a savings account?

A savings account offers more flexibility than a 529 college savings plan, but it won’t offer the tax advantages that a 529 does. With a 529 account, contributions will grow tax-free, and withdrawals for qualified education expenses are also not subject to taxes.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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

As a student, it can be easy to focus solely on the college application process and completely forget about financial aid. You spend so much time studying for the SATs (or ACTs) and tweaking your college essay so it perfectly represents you, that after you’ve been accepted and the reality of tuition payments set in, you might feel momentary panic.

It’s no secret that college tuition is expensive. Students and parents save for years to pay for higher education, but sometimes that’s just not enough. According to a Sallie Mae® study, parent income and savings covered 37% of college costs in the 2023-24 school year, while student income and savings covered 11% of the costs.

Many of us rely on financial aid to bridge the payment gap. Financial aid may come from multiple sources, including scholarships, grants, work-study, federal student loans, and private student loans. Keep reading for a look at financial aid secrets you should know.

Types of Financial Aid

Scholarships and grants are extremely useful forms of financial aid, since students are not typically required to pay back the money they receive. An online survey of students and parents found 27% of college families in 2023-24 relied on scholarships and grants to cover a portion of college expenses, according to Sallie Mae’s study.

Scholarships, grants, and savings often aren’t enough to cover the cost of attending college. Sallie Mae says 23% of college families borrowed money to help pay for college in 2023-24. Some families used home equity loans and credit cards, but federal student loans represented the most frequently used source of borrowed money followed by private student loans.

To top it all off, the financial aid application process can be confusing. Between federal aid and other scholarships, it can be difficult to keep everything straight.

Most often, the first step in applying for financial aid is filling out the Free Application for Federal Student Aid (FAFSA®). You can begin filling out the FAFSA on October 1 for the following academic year. The federal FAFSA deadline for the 2024–25 academic year is June 30, 2025, but you’ll likely want to file well before the school year starts – colleges and states may have their own FAFSA deadlines.

Taking the effort to apply for financial aid early can have a positive impact on your tuition bill. Below we highlight seven financial aid secrets you should know.

Financial Aid Secrets You Should Know

1. Decision Day vs Summer Melt

May 1 is usually decision day, the deadline when prospective college students must decide which college they plan to attend in the fall. But even after this deadline, students can change their minds. This phenomenon is known to industry professionals as “summer melt,” and sometimes it’s triggered by FAFSA verification setbacks.

Students who receive insufficient need-based financial aid, for example, might be compelled to reconsider their college enrollment decisions. Summer melt can give you an opportunity to select a more affordable school for you if you’ve encountered a FAFSA verification roadblock.

Summer melt is a common problem that causes schools to lose students during the summer. Because of this, schools may have a bit of secret wiggle room in their acceptance policy to admit new students over the summer for the fall semester.

Recommended: Should You Choose a College Based on Price?

2. Writing a Letter

You might be able to take advantage of summer melt with this secret: write a letter. After you get your financial aid offer, you could write a letter to your school’s financial aid office to open the lines of communication.

Let them know how excited you are to attend school in the fall. That’s where you could include a thoughtfully worded inquiry for any additional aid that you might qualify for as a result of summer melt.

When students decide to switch schools or not attend at the last minute, it means that they also won’t be using their financial aid award — which could now be available to other students.

3. Calling the Financial Aid Office

Another way to potentially take advantage of summer melt is to call your school’s financial aid office. Instead of calling immediately after you receive your financial aid award, think about calling in June or July. This allows financial aid offices time to account for students who have declined their financial aid packages.

An appropriately timed call to the financial aid office at your school could mean additional financial aid is allocated to your package — no guarantees, of course, but it never hurts to ask.

4. Submitting Paperwork and Applications On Time

Every school’s financial aid office has to follow a budget. Some financial aid is offered on a first-come, first-served basis, so it helps to submit forms, like the FAFSA, and other applications, on time or even ahead of schedule.

You may be out of luck if you apply for assistance after your university’s financial aid office has met their budget for the year. Some states have early winter deadlines for awarding scholarships and grants. Tennessee residents, for example, must complete their FAFSA by April 15 to be considered for a state-funded Tennessee Student Assistance Award grant.

5. Being Prepared

Have the basics ready to go before you sit down to fill out the FAFSA. If you have all of the information you need before you begin filling out the FAFSA, you’ll likely have an easier time filling out the information.

Usually, each parent and the student will need to create a username and password, which is called the Federal Student Aid ID (FSA ID). You’ll also need:

•   Social Security numbers (for you and your parents)

•   Bank statements and records of untaxed income (possibly)

•   You and your parents’ tax returns (aid awards are based on income from two years ago)

•   Any W2 forms

•   Net worth calculations of your investments (for students and parents)

6. Being Wary of Services that Charge You for Help

If you need assistance filling out the FAFSA, avoid any services that charge you. The first F of FAFSA stands for “Free,” so there is no need to pay for a service to fill the form out for you.

If you need assistance filling out the FAFSA, there are plentiful online resources through the U.S. Department of Education .

7. Filing the FAFSA Every Year

For every year you are a student and want to receive federal aid, you’ll have to file the FAFSA. Get in the habit of filing it every fall, so you’re closer to the top of the financial aid pile.

Navigating financial aid can feel overwhelming, but understanding key strategies can significantly impact your college funding.

The Takeaway

Scholarships and grants can be super helpful additions to a federal financial aid package. The money can reduce your tuition bill and doesn’t usually need to be repaid. Work-study can also be beneficial in helping college students make ends meet, as can federal 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

What is the most common FAFSA mistake?

The most common FAFSA mistake is providing incorrect or incomplete information, such as inaccurate income details or failing to list all schools you’re considering. Errors can delay processing or reduce financial aid eligibility, so double-check entries and ensure all required documents, like tax returns, are accurate and up to date.

How can I maximize my financial aid eligibility?

To maximize financial aid eligibility, submit the FAFSA early, accurately report income, and reduce assets in the student’s name. Explore scholarships and grants, appeal for additional aid if circumstances change, and ensure all financial aid deadlines are met. Focus on schools with robust need-based aid programs for added support.

How do I get a bigger financial aid package?

To secure a larger financial aid package, submit the FAFSA early and accurately, apply for scholarships and grants, and appeal for more aid if your financial situation changes. Choose schools with strong aid programs, minimize student-owned assets, and maintain good academic performance to qualify for merit-based assistance.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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.

SOISL-Q424-063

If you’ve applied for federal student loans in the past, chances are you’re familiar with the Expected Family Contribution, or EFC — a number used by colleges to figure out how much financial aid students are eligible for.

Starting in the 2024-2025 school year, the EFC was replaced by the Student Aid Index, or SAI. It fulfills the same basic purpose but works a little differently, which we’ll discuss in-depth below.

This change was part of the larger FAFSA® Simplification Act, which itself was part of the larger Consolidated Appropriations Act passed in December 2020. The idea is to simplify the federal aid application process by making it more straightforward for students and their families, particularly for lower-income earners. But all changes come with a bit of a learning curve, even if simplicity is the goal. Here’s some helpful information about the Student Aid Index.

Student Aid Index vs the Expected Family Contribution (EFC)

While both of these calculations perform a similar function, there are important differences in how they work—and important ramifications on how students receive financial aid.

How the EFC Currently Works

Despite its name, the Expected Family Contribution is not actually the amount of money a student’s family is expected to contribute—a point of confusion Student Aid Index is meant to clarify.

Rather, the EFC assesses the student’s family’s available financial assets, including income, savings, investments, benefits, and more, in order to determine the student’s financial need, which in turn is used to help qualify students for certain forms of student aid, including Pell Grants, Direct Subsidized Loans, and federal work-study.

A very simplified version of the calculation looks like this:

Cost of college attendance – EFC = Financial Need

However, a college is not obligated to meet your full financial need, and they may include interest-bearing loans, which require repayment, as part of a student’s financial aid package.

Still, the EFC plays an important role in determining how much financial aid you’re eligible for and which types.

How Does the Student Aid Index Work?

The Student Aid Index works in much the same way: the figure will be subtracted from the cost of attendance to determine how much need-based financial aid a student is eligible for. However, there are some important updates that come along the rebranding:

Pell Grant Eligibility

Pell Grant eligibility is determined primarily by a student’s SAI, which measures financial need based on information provided in the FAFSA. Unlike the EFC, the SAI can go as low as -$1,500, helping to identify students with the highest need. Students with lower SAIs are more likely to qualify for Pell Grants, which are awarded to low-income undergraduate students to help cover educational expenses.
Eligibility also depends on factors like enrollment status, the cost of attendance, and federal guidelines. The SAI provides a clearer, more equitable assessment of financial need for Pell Grant allocation.

New Rules

The SAI comes along with new rules that allow financial aid administrators to make case-by-case adjustments to students’ financial aid calculations under special circumstances, such as a major recent change in income. The bill also reduces the number of questions on the FAFSA down to a maximum of 36 (formerly 108), removes questions about drug-related convictions (which can now disqualify applicants from receiving federal aid), and more.

Recommended: How to Complete the FAFSA Step by Step

How Will the Student Aid Index Be Calculated?

The Student Aid Index will be calculated much the same as the Expected Family Contribution is calculated today, though the bill does include some updates to make the process easier.

For one thing, the bill works together with the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act to import income directly into a student’s FAFSA, simplifying the application process.

The new FAFSA will also automatically calculate whether or not a student’s assets need to be factored into the eligibility calculation, shortening the overall application and offering more students the opportunity to apply without having their assets considered.

The bill also removes the requirement that students register for the Selective Service in order to be eligible to receive need-based federal student aid.

Recommended: Getting Financial Aid When Your Parents Make Too Much

What Is a Good Student Aid Index Score?

The Student Aid Index isn’t like a test or a report card — there aren’t really “good” or “bad” scores, or “scores” at all. It just depends on your personal financial landscape.

But just like the EFC, the lower the SAI, the more need-based aid a student may be qualified for. Since need-based aid includes grants, which don’t need to be repaid, and subsidized loans, whose interest is covered by Uncle Sam while you’re attending school, a lower SAI may translate into a lower overall college price tag.

Recommended: Private Student Loans vs Federal Student Loans

How Will the Student Aid Index Be Used?

Like the EFC before it, the SAI is used to help colleges determine a student’s financial need based on their financial demographics. Although the school itself may have its own grant programs and other types of aid, certain forms of federal student aid — such as Pell Grants and Direct Subsidized Loans — are offered based on demonstrable financial need, and the SAI is a key part of the calculation used to determine that need.

In short: the SAI will be used to determine how much financial aid a student is eligible to receive.

When Did the SAI Go Into Effect?

The SAI was implemented in the 2024-2025 academic year.

The Takeaway

The Student Aid Index is essentially the same number as the Expected Family Contribution, but it’s been renamed as part of the FAFSA Simplification Act in order to clarify to families what exactly the number means. This act also bundles in some other important changes that will hopefully simplify the overall student loan application process and increase access to education for the lowest-income students and their families.

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 is the Student Aid Index?

The Student Aid Index (SAI) is a measure used to determine a student’s eligibility for federal financial aid. It replaced the Expected Family Contribution (EFC) starting in the 2024-2025 academic year. The SAI assesses a family’s financial situation to calculate the amount of need-based aid a student may qualify for.

How is the Student Aid Index calculated?

The SAI is calculated using financial information from the FAFSA, including family income, assets, and household size. Unlike the EFC, the SAI can be a negative number, which helps identify students with the highest financial need.

Why was the SAI introduced?

The SAI was introduced to improve clarity and fairness in the financial aid process. By allowing for a negative value, it better reflects the financial need of students from low-income families. The change aims to make financial aid distribution more equitable and easier to understand for students and families.

Photo credit: iStock/SDI Productions

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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

SOISL-Q424-061

You can sometimes reopen a closed bank account depending on the bank’s policies and the reasons for the closure. Accounts that you closed or that were closed due to inactive status tend to be easier to reopen than those that were terminated due to problems like frequent overdrafts. This guide will help you navigate having a closed bank account that you’d like to reopen.

Why Might You Need to Close a Bank Account?

Account holders may decide to close a bank account for a variety of reasons, including the following:

•   No longer needing the account

•   Moving to a new location

•   Lack of convenience

•   Dissatisfaction with the account

•   Issues meeting minimum requirements

Here’s more about each.

No Longer Needing the Account

Sometimes, you simply might not need a bank account anymore. For example, if you’d set up a separate savings account to save enough money for a down payment on a house or for a vacation, after you’ve accomplished those goals, you might decide that you don’t need multiple bank accounts anymore.

Moving to a New Location

If you’re moving to a new community that doesn’t have a branch of your financial institution nearby, you may decide to close your bank account and open a new one that’s more readily accessible in your new town. Moving doesn’t create a problem when someone banks solely online, but it can lead someone to switch banks if they prefer in-person options.

Lack of Convenience

Another potential reason someone might switch banks is due to a lack of convenience, such as a bank’s hours being incompatible with their schedule or the bank not having a widespread enough network of ATMs so they wind up paying many ATM fees. When banking becomes inconvenient through a certain financial institution, that could spur someone to seek a more practical solution.

Dissatisfaction With the Account

Whether it’s poor customer service, a lack of desired services, or fees that are too high, customers sometimes close their accounts and go elsewhere because they aren’t satisfied with their current financial institution. If, for instance, you see an offer for a savings account that earns more interest and charges lower fees, you might decide to make a switch.

Issues Meeting Minimum Requirements

If a bank requires you to maintain a certain balance to keep the account open or to avoid hefty fees, an account holder may opt to close the account if they’re struggling to meet those requirements. By closing a savings account with a minimum balance that’s just out of reach, for instance, someone could avoid incurring fees each month when they don’t make the minimum balance requirement.

Is It Bad When a Bank Closes Your Account?

Whether it’s bad when a bank closes your account depends on why the bank closed it — and situations can vary. According to the governmental agency, the Office of the Comptroller of the Currency , banks typically can close accounts for nearly any reason without providing notice.

That being said, common reasons why a bank may close an account can include:

•   Low or no activity: Banks may place an account in a dormant status after a certain period elapses with no transactions. With a dormant account, it’s not technically closed, but the account owner is no longer able to make transactions. How long it might take for an account to go dormant depends on both state laws and a particular bank’s policies.

   After an account has been dormant for a period of time, a traditional or online bank may close the account and, if you can’t be reached, forward the funds to the proper state government, labeling them as “unclaimed property.” At this point, you’d need to submit a claim to your state’s treasury office to obtain that money.

   Recommended: How to Find a Lost Bank Account

•   Suspicious activity: A bank will close an account if it has proven the account to be involved in fraudulent activity. When the bank initially suspects fraudulent behavior (whether the account holder was the perpetrator or the victim), the bank will likely freeze the account to investigate. Red flags can include large transactions, frequent account activity (especially if that activity is new or different), and transfers to overseas accounts.

•   Excessive overdrafts: If an account holder regularly spends more from an account than what’s available, this leads to negative balances and bounced checks. A bank can charge overdraft fees and require that the account holder bring in sufficient funds to return the account back to the minimum balance required. If that happens frequently or if funds are not restored, however, the bank may close the account.

Worth noting: If your bank account is closed due to a negative balance or suspicion of fraudulent activity, this may make it difficult for you to open a new bank account. Those issues will be on your record with ChexSystems, an industry reporting agency. You might need to explore what are known as second chance checking accounts in order to open a bank account again.

Do You Get Your Money If a Bank Closes Your Account?

By law, a bank must refund to you any money in a closed account after subtracting fees that are due. Typically, a check will be sent to the account holder. There is a possibility that the bank might move the money into a different type of account.

If the bank cannot reach you about this matter, your funds could be sent to the state as unclaimed money.

How Long Do Banks Keep Closed Accounts?

For deposit accounts of $100 or more, a bank must retain records for at least five years. However, this doesn’t necessarily mean that you can reopen the account within that time frame.

You’ll learn more about how you might reopen a closed account below.

Can You Reopen a Closed Bank Account?

There isn’t a simple yes/no answer to “Can a closed bank account be reopened?” You may be able to reopen a closed bank account in some situations. It will depend, however, on why the account was closed and your financial institution’s policies.

Usually, it’s a wise move to contact the bank, find out why your account has been closed, and see if it’s possible to use it again. You might be able to reactivate a dormant account simply by making a withdrawal or depositing funds (see below for more details). But if a bank account has been closed due to, say, suspicions of fraud, you may not be able to reinstate it.

Next, you’ll learn the steps involved if you do try to reopen a closed bank account.

How Do You Reopen a Closed Bank Account?

If you’ve closed your account (rather than a bank doing so), you can typically submit a request to reopen, say, your checking account. This can be done online, over the phone, or by visiting a branch in person, with the exact process varying depending on the specific financial institution.

Another option you have in this situation is to simply open a new bank account, whether at your previous financial institution or at another one of your choice. When choosing your account, it’s worth exploring the different types of savings accounts you might consider.

On the other hand, if your bank account gets closed by a bank, whether or not you can reopen it largely depends on the reason for the closure as well as your bank’s policies.

In general, the first step in reinstating a troubled account is to talk to your financial institution about why your account was frozen, put into dormant status, or closed. Ask what you need to do to address the issues. You can also review your account agreement. If you believe that a bank wrongfully closed your account, you can file a written complaint .

Here’s guidance on how to reopen a closed bank account in three scenarios.

Reopening a Dormant/Inactive Account

This is one of the simplest issues to address. If you receive a notification that your account is considered inactive or dormant, contact your bank to find out how to make it active again. The bank may allow you to make a deposit to the old account, or they may have you open a new bank account.

💡 Recommended: What Do You Need to Open a Bank Account?

Reopening an Account After Closure Due to Excessive Overdraft

Financial institutions need to monitor their levels of risk. If they close a bank account for excessive overdrafts, the account holder would likely need to talk to the bank to see if they are willing to reopen the old account or if they’d allow them to open a new one. Different banks will have different policies. You may be required to pay off your negative balance, sometimes within a specified timeframe, before you can reopen your account.

Reopening an Account Closed for Suspicious or Fraudulent Activities

If a bank believes that a customer is engaged in fraudulent behavior (rather than being a victim of it), then it may be difficult to reopen an account or to open a new one with the institution. Contact the financial institution, and be prepared to demonstrate how any activity in your account that appeared suspicious was, in fact, not fraudulent or not your fault.

How to Prevent Bank Account Closures

In order to avoid your bank account being closed, it’s a good idea to:

•   Use it regularly so it doesn’t go dormant.

•   Set up alerts for a low balance. That way, you can remedy a situation which could lead to closure due to your overdrafting.

•   Review communication from your bank. You might get a notice that your account has issues, but if you don’t read it, you can’t take steps to prevent closure.

Recommended: APY Calculator

The Takeaway

Whether or not you can reopen a closed bank account largely depends on why it was closed in the first place. Sometimes, an account holder in good standing decides to close a bank account and later changes their mind. In that case, the financial institution will almost certainly allow them to have an account there again. Other times, the bank closed the account, perhaps because of excessive overdrafts, suspicious activity, or lack of use. In those instances, talk to the financial institution to see what steps you need to take.

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

FAQ

Can a bank close your account?

Yes, it can. According to a governmental agency that oversees financial transactions, banks can close accounts for virtually any reason without notice.

Is it bad when a bank closes your account?

Whether it’s bad depends upon the reason why the bank closes your account. Sometimes, a bank account is closed because of inactivity. Other times, it can be a more concerning situation, one that can make it harder to open an account in the future. For instance, the bank may have flagged the account for suspicious or fraudulent activity. Another reason why a bank may close an account is excessive overdrafts.

Can you reopen a closed account?

Whether you can reopen a closed account depends on who closed the account (you or the bank), the reasons why the account was closed, and the bank’s policies. Talk to your financial institution to find out what steps you would need to take in order to reopen your account.

How do I prevent my bank account from being closed?

To prevent your bank account from getting closed, use the account regularly and set up low balance alerts so you can avoid overdrafting. If your account is troubled, talk to your financial institution. Explore what solutions might exist to keep your account open and return it to good standing. It might also be beneficial to brush up on your financial habits and the basics, such as how savings accounts work.

Will a direct deposit reopen a closed account?

No. If an account is closed, the direct deposit funds will have nowhere to be deposited and so the transaction will not go through. To address this situation, talk to your bank about reopening the account and let the payer know that there is an issue with the account tied to your direct deposit.

About the author

Kelly Boyer Sagert

Kelly Boyer Sagert is a full-time freelance writer who specializes in SEO-optimized blog and website copy: both B2B and B2C for companies ranging from one-person shops to Fortune 500 companies. Read full bio.

You may also be interested in:

How to Close a Bank Account

Guide to Bank Account Closure Letters

Do Closed Bank Accounts Affect Credit Scores?

Photo credit: iStock/Delmaine Donson

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

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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.

SOBNK-Q424-101

After making a deposit to a bank account, in many cases, not all of the money is immediately available for use. This temporary delay in the availability of funds is called a “hold.” Typically, a deposit hold will only last one to two business days. Sometimes, however, deposited funds may be held for as long as seven business days. This might be the case if your account is new, the deposit is for a high amount, or the bank has a reason to suspect a check will not clear. Hold times are governed by federal law. In addition, each financial institution has its own policies on hold times.

While these policies are in place for the bank’s protection as well as your own, it can be frustrating when you can’t spend your own money, which may lead you to wonder how to remove a hold on a bank account.

What Is a Hold on a Bank Account?

When a financial institution puts restrictions on an account holder’s ability to withdraw or otherwise use their funds, this is what’s called a “hold.” A hold on a deposit into your checking account typically lasts a relatively short amount of time, perhaps a day or two.

Financial institutions use the information in Federal Regulation CC to create their own holds policies. These policies usually provide information on the timing of funds availability based on the type of deposit being made, when it was made during a business day, and the amount of the deposit.

Why Banks Place Holds on Money

Overall, a bank uses a hold to protect the institution from possible loss if the funds don’t clear from the institution where the money is being drawn. Basically, the bank wants to ensure that a check is legitimate and that it won’t bounce.

Financial institutions may also place holds if they suspect fraud and are investigating. This can in turn protect the account holder.

How Long Holds Last

The length of a hold depends on a number of factors, with deposits potentially clearing on the same day or in up to seven days.

When it comes to a check deposit, the Federal Reserve requires that the first $225 must be made available to the account holder on the next business day (which doesn’t include weekends or bank holidays). Typically, a bank will make the balance of the check available by the second business day. However, there are some occasions where hold times can be as long as seven business days. This can happen if the check amount exceeds $5,525 or your account has been open for less than 30 days. Other reasons your deposited funds may be on hold for an extended period of time include:

•   An older check

•   A check that’s being redeposited

•   Deposits where an involved party has a history of overdrafts

•   Instances where there’s suspicion of fraud

Meanwhile, official checks like cashier’s checks, certified checks and government checks should clear on the day of deposit.

How to Remove a Hold on a Bank Account

As for how to manage or remove a legal hold on bank account deposits, you do have a few options, including reviewing your bank’s policy or contacting your bank. You could also simply wait it out. Here’s more on each of your possible options.

Wait It Out

If you’re not in a hurry to spend or transfer the funds being held, you can simply wait until the hold is taken off, given holds usually only last a matter of days. Keep in mind, however, that those days are business days — if there’s a bank holiday or a weekend coming up, your wait is bound to be longer.

Review Your Bank Policy

A notice of funds availability must be included on pre-printed deposit slips, but Regulation CC notes that it only needs to state that deposits may not immediately be available for withdrawal. So if you’d like to learn more specific information about the length of holds, you can often find your bank’s policies online or by contacting them. This information is also typically provided to you when you first open your account.

Armed with this information, you may be better able to plead your case with the bank to lift the hold — especially if you find out the hold is outside the norms.

Contact Your Bank

If deposited funds are being held for a longer period than you expected, it’s a good idea to call, email or stop by a branch of your bank to ask about specifics of its hold policy. You can ask your bank to provide an explanation for the hold or sometimes even to release the hold. Keep in mind, however, that it can be difficult to get a bank to remove a hold. And since all banks have them, you can’t switch banks to avoid them either.

How to Prevent Holds

Rather than worry about how to remove a hold on a bank account, it might be helpful to take proactive steps to prevent a hold in the first place. Read on for some suggestions for reducing or eliminating hold lengths in a variety of situations.

For Paychecks

If your employer offers it, sign up for direct deposit. This means that your paycheck will be electronically transferred through the Automated Clearing House (ACH), and these deposits usually clear more quickly — often becoming available the next business day. Plus, many financial institutions make paychecks that are electronically deposited immediately available.

For Large Deposits

If you know that you’re owed a large sum of money, ask for it to be paid by certified check, cashier’s check, or a form of government check (such as a money order purchased at the United States Post Office). These types of official checks typically clear quickly, usually by the next day. As another option, you could ask for the funds to be wire transferred.

For Deposits in Person

Making your deposits in person is a good way to prevent delays in funds availability. Doing so through an ATM or through an app, on the other hand, can result in longer holds.

Recommended: Can You Deposit Cash at an ATM?

For Deposits Into a Separate Account

This strategy doesn’t help to remove a hold on bank account funds, but it can help to prevent an overdraft due to a hold: Deposit funds that may come with a longer hold into an account that you don’t use regularly to pay expenses, such as your savings account. (Note that when funds are being held, you can’t transfer money to another bank from that deposit until it’s cleared.)

When Using Your Debit Card

When you use your debit card to make a purchase or a reservation, the merchant may place a temporary hold on some of the funds in your checking account. This is done as a safeguard to make sure you’ll have sufficient funds to cover the full payment. This can come up when you’re filling up at a gas station or reserving a hotel room or rental car. If you foresee the hold being an issue, consider paying with a method other than your debit card (such as a credit card) or transfer additional funds into your checking account to act as a buffer. It can also be helpful in this scenario if you’ve linked bank accounts.

The Takeaway

Financial institutions create hold policies for funds deposited into bank accounts under the guidance of the Federal Reserve. Holds generally are placed for two reasons: to ensure that funds are cleared and to protect the account holder when fraud is suspected. How long a hold lasts depends on a variety of factors, including the type of deposit, when the deposit was made, the age of the account, and a bank’s specific policies.

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

FAQ

Why is the bank holding my deposit?

In general, financial institutions place holds for two main reasons: First, they want to make sure that a deposit will clear as a way to protect themselves and, second, sometimes they’ll place a hold on funds because they suspect fraud and are taking actions to protect the account holder.

What can I do if my deposit is placed on hold?

You can check your bank’s hold policies (usually given to you when the account was opened and/or available on the bank’s website) to see if you can wait it out. Or, you can contact the financial institution for more information about your situation and to request for the hold to be lifted.

How long do I have to wait before my deposit is released?

In general, the first $225 of a non-cash deposit must be made available on the next business day. The next $226 to $5,524 must be available in two business days, and amounts over $5,525 must typically be made available on the seventh business day. There are exceptions in either direction though, and keep in mind that these estimated time frames only apply to weekdays, not weekends or bank holidays.

How long can a bank put your account on hold?

A bank deposit hold can last anywhere from one to seven business days. In general, however, holds last for less than five days. The exact length of a hold will depend on a number of factors, including the type of deposit, the age of your account, and the bank’s policies.

Why is my bank account on hold?

A specific deposit may be on hold due to the bank enforcing its holds policy to ensure that the deposit clears, or there is concern about fraud. If the entire account is frozen, contact your financial institution for specifics. Note that if you have concerns about identity theft or other forms of fraudulent activity on your bank accounts, you can consider a credit freeze or credit lock to protect yourself while the situation is being resolved.

About the author

Kelly Boyer Sagert

Kelly Boyer Sagert is a full-time freelance writer who specializes in SEO-optimized blog and website copy: both B2B and B2C for companies ranging from one-person shops to Fortune 500 companies. Read full bio.

You may also be interested in:

What Is a Check Hold?

What Does ACH Hold Mean?

What Does a Pending Transaction Mean on a Bank Account?

Photo credit: iStock/RyanJLane

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

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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.

SOBNK-Q324-057