SoFi

A high-yield checking account is a secure place to deposit, store, and withdraw money, but with an enhanced interest rate vs. other similar accounts. Typically, money in a checking account doesn’t earn any interest — or maybe a nominal fraction of a percent.

With a high-yield checking account, there’s the potential to turn your regular deposit account into a passive income machine. While it’s unlikely to make you rich, a high-yield checking account can help pad your pockets with a few extra interest dollars, which can add up over time.

However, these accounts can come with certain conditions that may or may not make them the right choice for you. Here’s what you need to know.

How High-Yield Checking Accounts Work

High-yield checking accounts, as their name implies, are checking accounts that offer a high “yield,” or interest rate, on the balance held in the account.

Whereas the national average for an interest-bearing checking account is about 0.07% APY (annual percentage yield) per the FDIC, a high-yield account might offer 3% to 5% APY or even higher — which still might not make you a fortune, but is a significant upgrade and on a par with some savings accounts.

High-yield checking accounts make it possible to create a passive income stream, albeit a small one, just by holding money in your checking account (which you likely already do). A high-yield checking account can augment interest earnings from other financial products you may hold, such as a high-interest savings account or investments like high-yield bonds.

However, there can be account minimums to contend with or potential fees.

Does a High-Yield Checking Account Come With Fees?

Although some high-yield checking accounts come with monthly maintenance fees that could easily eclipse whatever interest you stand to earn, these fees can commonly be waived so long as you maintain a certain minimum monthly balance or meet other requirements. These may include making a certain number of debit card transactions or receiving a certain threshold in direct-deposit income each month.

These days, there are even some free high-yield checking accounts — usually offered through online banks — but the level of interest you’ll earn may depend on your ability to meet the same kind of transaction minimums we just mentioned. (If you don’t meet the requirements, you might not earn any interest at all.)

So, in short, while you might not have to pay for your high-yield checking account, you’ll likely need to perform the basic minimum monthly transaction requirements in order to glean the full benefits of the account.

Top 3 Pros of a High-Yield Checking Account

High-yield checking accounts can be very beneficial — here’s how.

1. More Earnings

These accounts offer an opportunity for interest earnings simply by holding a checking account. In some cases, the interest rate may rival that of certain kinds of savings accounts.

2. Motivation to Keep More in Your Account

These high-yield checking accounts can incentivize account holders to keep a higher minimum balance due to interest-earning requirements — which can help you generate a cash cushion.

3. Availability

These accounts are becoming increasingly available, especially thanks to the proliferation of online-only banks. You likely don’t need to invest much time and energy in research when looking for one.

Cons of a High-Yield Checking Account

On the other side of the coin (pun totally intended), high-yield checking accounts can have their drawbacks.

Transaction Requirements

These high-yield accounts may come with transaction requirements to secure interest earnings. If the account holder doesn’t meet them, little or no interest will be earned. These obligations might suit your money style, or they might prove to be a major hassle.

Modest Interest (If We’re Honest)

Many interest-bearing accounts generate just a fraction of a percentage in interest. Even the highest-yield checking accounts currently only offer about 5.00% APY. Yes, every little bit helps but this certainly isn’t enough money to retire on.

Additional Fees

In some cases, high-yield checking accounts may come with fees. Waiving them may require holding a significant minimum monthly balance — which can be challenging for individuals and families living paycheck to paycheck.

Here, you can review the pros and cons again in table format:

Recommended: What Is a Certificate of Deposit (CD)?

Is a High-Interest Checking Account Worth It?

Whether or not a high-interest checking account is worth it will probably depend on a couple of key factors.

•   First of all, how high is the interest rate? If it’s just a fraction of a percentage above the norm, it may not be worth it. But if it’s a multiple of the standard rate, it might be a good way for your money to make money.

•   Next, what fees or minimum requirements are involved? If your money would make $10 more in interest per year in a high-yield account but you need to tie up funds that could be working harder elsewhere, then it’s probably not a money-wise move.

Factors to Look For in a High-Yield Checking Account

If you’re shopping for a high-yield checking account, consider these factors:

Interest Rate

Of course, you will likely want to shop around and see what are the highest rates available for a checking account. Currently, the highest rates are 5.00% or slightly higher.

Minimum Balance

With this kind of checking account, you may be required to make a specific size of deposit to open the account. You may also need to keep a certain balance in order to earn the high interest rate or to avoid fees. If that’s the case, make sure you can meet that number.

Fees

In addition, when opening a checking account, be sure you understand what fees might be charged. These can include maintenance, overdraft, ATM, and foreign transaction fees, among others. You’ll probably want to avoid being charged fees so that they don’t eat away at the interest you are earning. Online banks may be more likely to waive such fees.

How to Qualify for High-Yield Checking Accounts

In order to qualify for a high-yield checking account — and actually get the benefits — you’ll need to be able to fulfill whatever that account specifies as far as transaction requirements or minimum opening deposits.

In addition, if your banking history is marked by overdrafts and other negative factors, this may be reported by ChexSystems, which is kind of like a credit score bureau but for banking. If you have many negative factors (unpaid fees, say, or many overdrafts), you may not be able to qualify for a high-yield checking account — or other types of deposit accounts, either. (If your ChexSystems report contains errors, you can always dispute false information with ChexSystems online.)

How to Open a High-Yield Checking Account

Now that you know what it is, you may wonder how to open a high-yield checking account. The process is similar to opening any other type of account. You’ll be asked to provide:

•   Basic personal information, such as your name and address

•   Proof of address (such as a utility bill)

•   Government-issued photo ID

•   Your Social Security number or other taxpayer identification number

In addition, your chosen bank may also require a certain minimum opening deposit, which you’ll need to provide to activate the account. The bank will offer specific details as far as what documentation is required and how to deliver it.

High-Yield Checking Accounts vs High-Yield Savings Accounts

If you are comparing high-interest checking and high-yield savings accounts, you will likely want to consider the following points:

•   A high-interest checking account does generate money on your deposit, but it may come with minimum transaction or balance requirements. These could be difficult for some people to meet.

•   A high-interest savings account can offer good earning power, but the number of transactions you are allowed could be limited. Although Regulation D, which limits savings accounts to six transactions a month, was largely suspended since the pandemic, some financial institutions may still apply this rule and charge fees if you conduct more transfers.

Depending on your needs, one of these may be a better option than the other. Also, it is likely to be easier to find a solid interest rate with a high-yield savings account than with the checking variety. In other words, many high-interest checking accounts don’t offer all that much earning power.

Opening a Checking and Savings Account With SoFi

A high-yield checking account is a great way to augment whatever passive income you might earn from savings accounts, investments, and other holdings. Some interest is better than none, after all — every little bit of interest earned counts.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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

Is a high-yield checking account worth it?

This all depends on whether or not you can meet any minimum monthly transaction requirements. If you can fairly easily do so, a high-yield checking account is an easy way to earn passive income just by keeping an active bank account. But if you can’t, you might not earn any interest at all — or even pay additional fees for the account.

What is the difference between a high-yield checking and savings account?

A high-yield checking account is designed to be the hub of your financial life and typically doesn’t have any limits on the number of transactions you may make; savings accounts may restrict this. However, this kind of checking account likely pays less interest than a high-yield savings account, which may do a better job of helping you generate passive income.

Can you withdraw money from a high-yield savings account?

Yes, you can withdraw money from a high-yield savings account. However, there may be restrictions on how many transactions you can make per month. Going over that number could result in fees or the account being converted to a checking account.

What bank has the highest checking interest rate?

Currently, some of the banks offering the highest checking interest rates are Axos Bank, Presidential Bank, Heritage Bank, and Quontic Bank.

Can you ever lose your money with a high-yield savings account?

A high-yield savings account is typically a very safe place to keep your money, especially if it’s FDIC- or NCUA-insured. The risk of losing money is extremely low.

Photo credit: iStock/MicroStockHub

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 12/23/25. 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.
We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

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.

SOBK0324009

Preparing to go to college starts long before your senior year in high school. In fact, soon after starting your freshman year in high school, you may want to begin thinking about what you can do to put your best foot forward on your college applications.

With the right college preparedness plan, choosing where to apply, filling out your applications, and getting into your top choices can be significantly easier. Here’s a smart 10-step plan that can help ensure you are ready for college when the time comes.

10 Ways to Get Prepared for College

1. Take the Required Courses

It’s a good idea to consult with your high school guidance counselor about what classes you should take for college preparation. Generally, high school students will take courses like:

•   English (American and English literature)

•   Math (Algebra I and II, Geometry, Trigonometry, and Calculus)

•   Science (Biology, Chemistry, Physics, and Earth Science)

•   Social studies (U.S. History, U.S. Government, World History, and Geography)

•   Foreign language

•   Arts

Completing these courses demonstrates to college admissions officers that you can handle a rigorous curriculum. It also prepares you for college-level coursework, allowing you to meet prerequisites for specific majors and improve your chances of excelling in advanced subjects.

2. Enroll in AP, IB, and College Courses

Your high school may offer you the opportunity to take Advanced Placement (AP) or International Baccalaureate (IB) classes, which are college-level and will allow you to earn college credit. Then, you can skip these courses when you get to college and ensure you have a head start.

Both require that you take exams, and you can send your scores to colleges. Keep in mind that IB classes would be more useful if you plan on going to college outside the U.S., since only U.S.-based schools recognize AP coursework.

3. Do Test Prep

A key step in preparing for college is studying for the SAT or ACT. Taking one of these tests is required for many college applications in the U.S. You can study by forming study groups with friends, taking the PSATs/pre-ACTs and practice tests, getting an SAT/ACT tutor, and enrolling in SAT/ACT practice classes.
You may want to look at the average SAT/ACT score of students who have been admitted to your top choice schools and aim to get those scores — or higher — to ensure your application impresses the admissions officers.

Recommended: ACT vs. SAT: Which Do Colleges Prefer?

4. Hone Your Study Skills

In college, you’re going to take a rigorous set of courses. Your academics are likely to be more challenging than they were in high school. This means you should hone your study skills now to prepare for college. Find a quiet place to study, turn off all distractions, organize your lecture notes, join study groups, and take breaks when you need them in order to effectively study.

5. Go to College Fairs

Whenever there is a local college fair happening, try to attend it. That way, you can learn about different colleges you may want to apply to. Typically, a college fair will consist of college representatives who set up booths, give presentations, talk to prospective students, and hand out pamphlets about their schools. College fairs can be a great opportunity to learn about a number of colleges in a short time period.

College fairs also allow you to connect with representatives at the colleges. As an attendee, you’ll have the opportunity to ask the representatives specific questions and take the handouts so you can continue your research at home.

Recommended: Ultimate College Application Checklist

6. Take College Tours

Before applying to a school, try to go on a campus tour to see what it’s all about. A college that has a great website or looks good on paper may not end up being the right fit once you actually visit it. While on the tour, ask your student tour guide and other students around about the pros and cons of the school to get a real feel for whether or not you’d like it there.

Some colleges may do interviews as a part of the application process. If you’re heading to campus for a college interview, make time for a tour too.

7. Meet With Your High School Guidance Counselor

Your high school guidance counselor can help you with preparing for college in a number of different ways. They can advise you on what classes to take and extracurricular activities you can enroll in to ensure you have a competitive college application when the time comes.

Your counselor can also help you determine what you want to major in and the kind of career you might enjoy by steering you toward career fairs and giving you a test that will show your strengths and reveal your talents. If you’re worried about paying for college, they can let you know your options and ensure you fill out all the right forms in time.

8. Fill Out a FAFSA Form

The Free Application for Federal Student Aid (FAFSA®) is the form you need to fill out each year to apply for federal financial aid. This includes federal grants, scholarships, work-study, and federal student loans. Some schools also use the information provided on the FAFSA to determine scholarship awards.

If you anticipate needing support to cover the cost of attendance in college, this is usually the place to start. The FAFSA for the 2025-26 school year is available now.

9. Look Into Student Loans

Filling out the FAFSA isn’t the only thing on your financial to-do list when you’re prepping for college. You could also weigh your student loan options. As mentioned, the FAFSA puts you in contention for federal student loans — among other tuition subsidies like work-study or grants. Federal student loans have fixed interest rates, which means the rate will not change for the duration of the loan.

Each year, Congress determines what the fixed interest rate on federal student loans will be — and interest rates vary across federal undergraduate loans, including PLUS loans for parents and grad students. While these loans can be an important resource when it comes to funding your education, there are limits to the amount you can take out each year. For example, first-year undergraduates currently have a federal loan limit of $5,500.

If federal aid and other sources of funding aren’t enough to cover the cost of tuition, you may consider looking into private student loans to fund the rest of your education. Private student loans don’t always offer the same benefits as federal student loans — like the option to pursue Public Service Loan Forgiveness or student loan deferment — so they are generally considered only after all other options have been reviewed and exhausted.

Recommended: Private Student Loans vs Federal Student Loans

10. Apply for Scholarships

Once you start applying to colleges, you may also want to search out and apply for private scholarships. Your school may offer specific scholarships you can apply for that will help you pay for your education. Online databases are another resource to check out. One option is Fastweb, a free national scholarship database that matches you to scholarships, internships, and grants you could potentially qualify for.

You can also use SoFi’s scholarship search tool to find scholarships based on your location, field of study, religious affiliation, and more.

Recommended: The Complete Guide on Going to College

The Takeaway

There are many things you can do to prepare for college. Above all else, you’ll want to focus on your academics and make your college application as competitive as possible so that you can get into the school of your dreams.

You’ll also want to think about what your education will potentially cost and come up with a plan for how you will pay for college. Your options include savings, grants, scholarships, work-study, and federal or 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 are some effective ways to stay organized when preparing for college?

To stay organized, you can create a detailed checklist of application deadlines, scholarship opportunities, and required documents. Using digital planners or apps to manage tasks and setting reminders for important dates will keep you on track and reduce stress.

How can high school students improve their chances of getting into their desired college?

High school students can improve their chances of getting into their desired college by maintaining a strong GPA, participating in extracurricular activities, and volunteering in the community. Additionally, writing a compelling personal statement and securing strong letters of recommendation can make a positive impression on admissions officers.

What financial steps should students take before starting college?

Students should research scholarship opportunities, apply for financial aid through FAFSA, and create a budget for tuition and living expenses. Opening a savings account and exploring part-time job options can also help manage costs and reduce the need for student loans.

About the author

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.

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-Q125-020

Discretionary income is defined as the cash you have available to spend after your necessary payments are covered. Those necessities are typically made up of basic living expenses, such as housing, utilities, food, healthcare, insurance costs, as well as minimum payments on debt.

So what does discretionary income equal in daily life? It’s the post-tax money you can put toward things like eating out, entertainment, travel, clothing, electronics, and gym memberships. You might think of discretionary income as paying for the wants in life vs. the needs.

Read on for a closer look at the meaning of discretionary income, including examples, how to calculate discretionary income, plus tips on how to make the most of your discretionary income.

What Is Discretionary Income?

Discretionary income is defined as the amount of post-tax income that is left over after you have paid for all your essential expenses. Essential expenses include your mortgage or rent, utilities, car payments, as well as food, healthcare, and occasionally clothing (if it is needed, not just wanted). To phrase it another way, no, a Netflix subscription or your AM latte isn’t a “necessity.”

Also worth noting (warning, buzzkill ahead): Discretionary income isn’t just to be spent on cool stuff and fun experiences. It’s also important to put at least some of this money towards savings and making extra payments on any debt. This can help you build wealth and financial security over time.

7 Examples of Discretionary Income and Expenses

Discretionary expenses are the things people buy with their discretionary income. Here are some examples:

Entertainment and Eating Out

This category includes such expenses as dining out, getting drinks, splurge-y takeout food (pizza delivery, we’re looking at you!), and fancy coffees. In terms of entertainment, the following is typically considered discretionary: Concert, play, and movie tickets, as well as museum admission, books, magazines, streaming services, and similar costs.

Recommended: How to Save on Streaming Services

Vacations and Travel

Taking a vacation, whether you go to the other side of the planet or an hour’s drive away, is not a necessity, despite how you may feel about it.

Luxury Items

These expenses could be anything from a pricey sports car to designer clothes to jewelry to wine. While clothing and a car may be necessities in life, when you pay extra for top-notch prestige brands, you enter the realm of discretionary expenses.

Memberships and Hobbies

Yes, joining a gym or taking up a musical instrument are admirable pursuits. But they are not essential. For this reason, things like yoga or Pilates classes, crafting supplies, and similar expenses are considered discretionary.

Personal Care

A basic haircut or bottle of shampoo may not be discretionary, but pricey blowouts, manicures, massages, skincare items, and the like are.

Upgrading Items

If your current phone is functional but you still decide to buy the latest one, that’s a discretionary expense. The same holds true for being bored with your couch and getting a new one or remodeling your bathroom just because.

Gifts

Of course you want to show you care for your loved ones. But buying presents for others isn’t something you absolutely have to do, so this should be earmarked as a discretionary expense.

How Is Discretionary Income Used?

In addition to making the types of purchases listed above, discretionary income can also be used to save for future purchases and getting ahead on long-term financial goals.

Common Uses of Discretionary Income

Here’s a more detailed look at some of the different ways you can use discretionary income:

•   “Fun” spending: Many people use discretionary income to purchase goods or experiences that they can enjoy right away.

•   Saving for short-term goals: Another common use of discretionary income is to put it in a high-yield savings account earmarked for goals like taking a vacation or making a down payment on your dream house.

•   Paying down debt: While minimum payments on debts are generally considered necessary expenses, making extra payments is a common — and potentially smart — way to use discretionary funds.

•   Investing: Another way many people use discretionary income is to invest it in the market for long-term goals like retirement or a child’s future college education.

•   Charitable donations: Doing good with your discretionary dollars is another common and positive way to spend discretionary income.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

How to Calculate Discretionary Income

The formula for calculating discretionary income is:

Discretionary Income = Gross Income − Taxes − Essential Expenses

Start by assessing your average monthly take-home income (gross income − taxes). You can do this by scanning the last several months of financial statements. Or if your only source of income is your paycheck, you can simply look at your paystubs.

Next, you’ll need to tally up your essential expenses. These may include:

•   Rent/mortgage payment

•   Utilities

•   Internet/phone bills

•   Groceries

•   Minimum debt payments (credit cards, student loans or car loans)

•   Insurance premiums

•   Medical expenses

•   Transportation costs

Once you know how much you’re spending on essentials, you can subtract that number from your monthly take-home income. The result is your monthly discretionary income.

Factors That Affect Discretionary Income Calculation

A number of things can influence the amount of discretionary income you have to spend, such as:

•   Income level: Higher earnings generally increase discretionary income, provided you don’t increase your living expenses as your income goes up.

•   Living costs: Living in an area with a high cost of living raises essential costs and, in turn, lowers discretionary income.

•   Debt level: Needing to make monthly payments on loans, credit cards, and other financial obligations reduces funds available for discretionary spending.

•   Tax rates: Higher income and/or property taxes lowers your take-home pay, resulting in less discretionary income.

•   Inflation: Rising prices for goods and services increases essential expenses, which shrinks discretionary income.

What Is a Good Amount of Discretionary Income?

Generally, a good amount of discretionary income means you have enough funds after covering your essential expenses to be able to save, invest, and still enjoy the pleasures of life. The 50/30/20 budgeting formula offers one way to allocate your income. It suggests using 50% of your take-home pay on needs, 30% on wants (discretionary purchases), and 20% on goals (saving and paying more than the minimum on debts).

For example, if your monthly take-home income is $5,000, $2,500 would be siphoned off for necessities, $1,500 would be allotted for wants, and $1,000 would go toward goals like saving and investing.

Managing Your Discretionary Income for Financial Success

Making the most of your discretionary income involves thoughtful planning and smart money management. Here are some strategies to consider:

•   Track your spending: “It’s the last thing that many people want to do on their precious weekends, but tracking spending is essential. There is real truth to the saying ‘What gets measured gets improved,’” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. You may find some easy places to cut back, freeing up more money for saving.

•   Slash necessary expenses: Consider ways you might be able to reduce the cost of essentials, such as switching to a more affordable insurance, cell phone, or internet provider; meal-planning to cut food spending; or moving to a less expensive location.

•   Set financial goals: Having specific goals — like purchasing a home, funding a child’s future education, or retiring early — can help you stay focused and use your discretionary income wisely.

•   Grow your income: To boost discretionary income, you might ask for a raise at work or look into side jobs, freelance work, or ways to earn passive income.

•   Avoid lifestyle creep: As your income rises, try to resist the temptation to increase spending. Consider funnelling the extra funds into savings or investments to build wealth and strengthen your financial future.

Discretionary vs Disposable Income

The terms “discretionary income” and “disposable income” are often used interchangeably but they are not the same thing.

Key Differences

While discretionary and disposable income both refer to income left over after certain financial obligations are met, they differ in scope.

•   Disposable income refers to the money you have left from your earnings after taxes are taken out but before any other deductions are removed. It’s the total amount you have available to spend, which is typically a much higher number than your discretionary income.

•   Discretionary income is a subset of disposable income — it’s the amount of money left after your taxes and all necessary expenses are paid. You use it for “extras” like entertainment, savings, and investments.

It’s important to note that the government and courts may have slightly different definitions of these terms. In bankruptcy cases, for example “disposable income” is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income.

If you have student loans, the federal government uses a discretionary spending formula to set your repayment amount under income-driven repayment plans. For many plans, they define “discretionary income” as the difference between your annual income and 150% of the poverty guideline for your family size and state.

Get Ready to Bank Better with SoFi

Once you know how much discretionary income you have, it’s a good idea to set some of it aside in a savings account that pays an above-average interest rate.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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

What is the meaning of discretionary income?

Discretionary income is defined as the amount of money you have left after covering essential expenses like taxes, rent or mortgage, utilities, and groceries. It represents the portion of your income that can be used for nonessential spending, such as entertainment, dining out, and vacations.

What is an example of discretionary income?

Discretionary income is the money left after paying for essentials like rent, groceries, and utilities. So, for example, if you earn $4,000 a month after taxes, spend $2,500 on necessities, and have $1,500 left, that’s your discretionary income. You could use that $1,500 for dining out, entertainment, and/or saving for a vacation. How you spend this money reflects your financial priorities and lifestyle choices.

What is the difference between discretionary and disposable income?

Disposable income is the money left after paying taxes and is used to cover both essential and nonessential expenses. Discretionary income, on the other hand, is the portion of disposable income left after covering necessities, like housing, food, and utilities. You can use this money for entertainment, shopping, or saving.

How does discretionary income impact financial planning?

Discretionary income is the money you have left after covering all of your essential expenses. It plays a key role in financial planning because it determines how much you can save, invest, and spend on nonessentials each month. Higher discretionary income gives you more flexibility in your budget, allowing you to save for emergencies and other goals, invest for future growth, and enjoy life’s pleasures.

Can discretionary income be invested?

Yes, discretionary income can be invested to grow your wealth over time. After covering essential expenses, you can allocate discretionary income to stocks, bonds, mutual funds, or retirement accounts. Investing part of your discretionary income can help you build financial security, generate passive income, and achieve long-term goals like sending a child to college or retiring comfortably.

Photo credit: iStock/Gearstd

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 12/23/25. 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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOBNK-Q125-081

In a world where it can seem hard to make and stretch a dollar (hello, inflation!), isn’t it nice to know that there’s a way to earn money without any effort? That would be by collecting interest on a savings account. Your financial institution pays you for the privilege of using the cash you have on deposit, pumping up your wealth without the least bit of work on your part.

Knowing how to calculate interest can help you more effectively compare savings accounts. It also helps you understand exactly how much money you can earn on your money over time by keeping it in the account. What follows is a simple guide to how interest on savings accounts works.

What Is Interest?

Interest is the amount of money that a bank pays a depositor for storing money at their institution. While the money you have on deposit remains accessible to you, the bank uses that money for other purposes, such as lending it out for a mortgage loan. One way banks can make money is via the differential between the interest they pay for money on deposit (say, 3%) and the interest they charge when someone else borrows it (say, 6% on a home loan).

Simple Interest Formula

Calculating interest on a savings account involves some not-too-complex math; in fact, it’s primarily multiplication you need to use. The formula for simple interest looks like this:

Simple Interest = P x R x T

Where:

•   P stands for the principal, or the amount on deposit.

•   R stands for the interest rate, expressed as an annual rate usually, in decimal form.

•   T stands for time, or how long the money is held by the bank.

How Do You Calculate Interest in a Savings Account?

Now, consider how this formula could be used to calculate the interest earned on savings you deposit at a financial institution.

If you deposited $5,000 in a bank for one year at a 3.00% interest rate, the simple interest after one year would be, using the PxRxT formula:

5,000 x .03 x 1 = $150

So, by calculating savings interest, you see that you’ve earned $150. To put it another way, at the end of one year, your $5,000 would have grown to $5,150.

This, of course, represents simple interest. When putting your money in the bank today, you may well earn compound interest.

Simple vs Compound Interest

When you earn interest on the principal amount alone, such as in the example above, it’s called “simple interest.”

But the reason savings accounts can be such an effective tool for growing money is that not only is interest earned on the amount deposited, but the interest also earns interest. This is called compounding.

Depending on the account, interest may be calculated and added (or compounded) daily, monthly, or quarterly. Each time this happens, the interest earned to date becomes part of the principal, and the interest earned moving forward will be based on both the principal plus the interest earned to date. You might think of it as accelerating your money’s growth as time passes.

With simple interest, you would only earn 3.00% on the original amount ($5,000) each year, or $150. With compounding, you earn interest on your principal plus any interest you’ve already earned.

Here’s a chart showing the difference simple vs. compound interest can make at a rate of 3.00% on $5,000 deposit:

It may not seem like compounding could make a huge difference, but adding to the principal regularly can grow your money faster. In addition, seeking out a higher interest rate can of course boost your cash faster as well.

APY vs Monthly Interest Rate

Calculating compound interest can get complex; the equation involves more complicated math. But some banks simplify an account holder’s potential earnings into a single rate called the annual percentage yield, or APY. The APY factors in both the interest rate and the effect of compounding into an actual rate of return over the course of one year. To calculate how much interest will be earned on a savings account using the APY, simply multiply the principal by the APY.

This simplicity makes APY a more helpful rate to use when comparing interest rates for different accounts or banks, because it includes the effect of compounding. Banks will usually post this information because the APY is higher than the stated interest rate. A savings account interest calculator can be helpful when calculating how much interest you’ll earn over multiple years. It also allows you to see how adding to your savings account each month can impact your earnings.

Understanding Interest Rates

In comparing savings accounts at different banks (or even within the same bank), consumers may notice that interest rates can vary with the type of account. What’s more, interest rates posted by the Federal Reserve (aka “the Fed”) may vary considerably from the interest rates banks offer their customers.

Tasked with maintaining economic stability, the Fed uses signals such as employment data and inflation to determine its rates. During economic slowdowns, the Fed typically lowers rates to reduce the cost of borrowing and incentivize individuals and businesses to spend more, stimulating the economy. Conversely, when the economy appears to be growing too quickly, the Fed may raise rates, increasing the cost of borrowing in order to slow spending.

How does this play into the interest rate consumers might earn on their own savings? There are a number of factors that determine the interest rate a bank posts:

•   The target federal funds rate, set by the Fed, is one such cue.

•   Banks, however, set their own interest rates and these may vary depending on factors such as promotions the bank may have in place to attract new customers or incentivize greater account balances, as well as how much work an account takes to administer.

This last factor is why checking accounts, which are often used for a higher volume of everyday transactions, often pay less interest than savings accounts, where customers are more likely to let their money sit and accrue.

•   Interest rates also change over time, so the posted rate when an account is opened may not remain the same.

•   Banks may also have tiered interest rates, where account holders earn different rates of interest depending how much they have in their account, or balance caps, in which an interest rate can only be earned up to a certain amount.

Recommended: Basics of a High-Yield Savings Account

What Is a Good Savings Account Interest Rate?

What is a good savings account interest rate will vary with the times. During the 1980s, the interest rates on savings accounts were around 8.00%, while from 2018 to 2021, the average was barely one-tenth of one percent, which could hardly keep pace with inflation.

As you shop around for the right account at the right rate, you may find that online banks offer some of the most competitive APYs. Since they don’t have brick-and-mortar locations, they can pass their savings on to their customers. Savings account rates are averaging 0.42% APY as of December 16, 2024, according to the FDIC. A high-yield account at an online bank, however, may pay 3.00% APY or higher.

Questions to Ask When Considering a Savings Account

It’s hard to dispute the appeal of earning money on savings. But in addition to knowing how to calculate interest on a savings account, there are other considerations that could affect the flexibility and ease with which that account will help you achieve your goals. Some account holders may find they need multiple bank accounts to meet both their everyday and long-term financial needs and goals.

Here are some things to consider.

Will You Be Penalized for Everyday Transactions?

Savings accounts typically provide higher interest rates than checking accounts because they require less work for the bank to administer since they’re not meant to be used for everyday transactions.

But savings accounts may limit the number of transactions you can make in a month, and charge a fee if you exceed the limit. The Federal Reserve’s Regulation D, which imposed a six-transaction-per-month limit, was loosened during the COVID-19 pandemic. Even so, some banks have opted to continue to impose limits on savings account transactions to six or, sometimes, nine per month. Inquire at a potential new home for your funds before opening a savings account.

Is There a Minimum Balance?

Some banks incentivize or penalize customers to encourage them to keep more money in their accounts. For example, an account may be subject to fees unless the balance is maintained above a certain amount. Tiered savings accounts provide a higher rate of interest on bank balances above certain levels.

Can the Money Be Accessed Easily?

Some types of savings accounts provide higher interest rates but limit access to your money for a predetermined earnings period. For example, a certificate of deposit (CD) is a savings vehicle that holds an investor’s money for a certain period of time. At the end of that term, the account holder is paid the original principal plus the interest earned. There may be penalties imposed on early withdrawals from a CD.

Can the Account Help Achieve Money Goals?

Earning interest is a key way a savings account can help you achieve your financial goals. If you’re saving for multiple goals at the same time — say building your emergency fund and saving for an upcoming vacation — it can be helpful to be able to know at a glance how much progress you’re making towards each goal. At some banks, you might need to open separate accounts to track each savings goal, while others may provide tools to organize your savings goals within a single account.

The Takeaway

The easiest way to calculate how much interest you’ll earn on a savings account is to multiply the account’s APY by your balance. This tells you what you’ll earn on your money over one year if you don’t make any withdrawals or deposits during that time. An online APY calculator makes it easy to calculate how much interest you’ll earn in a savings account over multiple years, taking your bank’s compounding frequency into account.

When shopping for a savings account, it’s important to not only compare APYs but also read the find print to find out if there are any balance requirements to earn the advertised APY and/or any fees that could eat into your earnings.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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.

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 12/23/25. 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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.

SOBNK-Q125-054

If you’re a borrower who paid interest on a qualified student loan, it’s possible to deduct some or all of that interest on your federal income tax return with a special tax form for student loans.

To do so, you’ll need a student loan tax form known as IRS Form 1098-E. You can use this form to report how much you paid in student loan interest on your tax return. One copy of the form will go to the IRS when you file your taxes, and you’ll keep the other.

To learn how to get your student loan interest tax form, when to deduct student loan interest, and how to file a student loan tax form, keep reading.

Common Student Loan Tax Forms and Their Purpose

The IRS Form 1098-E is a tax form for student loans that’s sent out by your loan servicer or your lender.

The loan servicer is required to send borrowers a 1098-E to complete their taxes if the borrower paid at least $600 in student loan interest during the tax year. Typically, loan servicers get the forms out by the end of January, since the interest forms for student loans and tax season coincide.

If you have more than one loan servicer, you’ll receive a 1098-E form from each one.

Why Student Loan Tax Forms Matter

The student loan interest tax form is designed to give people with student loan debt the opportunity to deduct from their federal income taxes some of the interest that they paid for the year on their loan. It is one of the student tax deductions borrowers may be able to claim.

If you paid at least $600 in interest on a qualified student loan (meaning a loan taken out to cover higher education expenses such as tuition, fees, books, and supplies), the lender you paid that interest to should send you a 1098-E. This includes federal loans, private loans, and refinanced student loans.

Recommended: Do Student Loans Count as Income>

Uses of a Student Loan Tax Form

The student loan tax form is used to calculate your student loan interest deduction on your tax return.

As long as you meet certain conditions, you may be eligible to deduct up to $2,500 in student loan interest from your taxable income:

•   You paid interest on a qualified student loan for yourself, your spouse, or your dependents in the previous tax year.

•   Your filing status is anything except married filing separately.

•   Your income is below the annual limit.

•   You are legally obligated to pay the interest, not someone else.

•   If you’re filing a joint return, neither you nor your spouse is being claimed as a dependent on another person’s tax return.

Eligibility for the student loan interest deduction is determined based on a borrower’s modified adjusted gross income (MAGI). At a certain higher income bracket, the deduction is reduced or eliminated.

•   For taxpayers filing as single: The deduction for 2024 is reduced when a borrower’s MAGI is more than $80,000 of MAGI, and the deduction is eliminated at $95,000.

•   For taxpayers filing jointly: The 2024 deduction is reduced when MAGI is more than $165,000, and the deduction is eliminated at $195,000.

How to Obtain Your Student Loan Tax Forms

To obtain your student loan interest tax form and ensure you aren’t missing any tax documents this season, there are a few steps you can take:

1.   Go directly to your loan servicer’s website, where a downloadable 1098-E form will likely be available.

2.   Call your loan servicer if you’re unable to visit their website.

3.    If you don’t know who your loan servicer is, visit StudentAid.gov, then complete steps 1 and 2.

If you have private student loans, or you’ve refinanced your student loans, contact your lender directly.

Recommended: What Is IRS Form 1098?

How to Fill Out a Student Loan Tax Form (Form 1098-E)

When it comes to filling out a student loan tax form, the IRS provides detailed instructions for the current tax season to help financial, educational, and governmental institutions and borrowers cover all their bases.

According to the IRS, if a loan servicer receives student loan interest of $600 or more from an individual during the year in the course of their trade or business, they must:

•   File a 1098-E form and;

•   Provide a statement or acceptable substitute, on paper or electronically, to the borrower

There are two boxes on the 1098-E form:

•   Box 1 is the amount of student loan interest received by the lender. It’s important to note, this figure represents interest paid, not loan payments made.

•   Box 2, if checked, denotes the fact that the amount in Box 1 does not include loan origination fees and/or capitalized interest for loans made before September 1, 2004.

Once you, as the student loan borrower, receive the 1098-E form, it’s up to you to include it when you file your taxes.

How and When to Deduct Student Loan Interest

Student loan interest deduction is a type of federal income tax deduction for student loan borrowers that lets them deduct up to $2,500 of the interest paid on qualified student loans from their taxable income. It’s one of the tax breaks available to students and their parents to help them pay for college.

To know when to deduct student loan interest, it’s important to understand if you meet the necessary qualifications:

Your student loan was taken out for the taxpayer (you), your spouse, or your dependent(s).

•   Your student loan was taken out when you were enrolled at least half-time in an academic program that led to a degree, certificate, or recognized credential.

•   Your student loan was used for qualifying education expenses such as tuition, textbooks, supplies, fees, or equipment (not including room and board, insurance, or transportation).

•   Your student loan was used within a “reasonable period of time,” and its proceeds were disbursed 90 days before the beginning of the academic period in which they were used or 90 days after it ended.

•   The college or school where you were enrolled is considered an eligible institution that participates in student aid programs.

Do International Students Have a Different Tax Form?

For international students, it’s possible to deduct student loan interest from a foreign country, as long as their student loan is qualified (meeting the requirements listed above) and they’re legally obligated to make student loan payments on that loan.

There’s no need for international students to acquire a special international student tax form, however. The year-end financial statement from their loan servicer is typically sufficient enough proof for them to claim the student loan interest.

How to Claim the Student Loan Interest Deduction

To claim the student loan interest deduction you’ll need Form 1098-E that shows you paid at least $600 in interest on a qualified student loan for the tax year in question. If you have more than one loan servicer, you should get multiple 1098-E forms.

If your MAGI is in the range where student interest deduction is reduced, as noted above (more than $80,000 for single filers and $165,000 for joint filers), you can generally follow the instructions on the student loan interest deduction worksheet in Schedule 1 of Form 1040 to figure out the amount of your deduction when filing your federal income taxes. Then, you can enter the calculated interest amount on Schedule 1 of the 1040 under “Adjustments to Income.”

Keep in mind that the student loan interest deduction reduces your taxable income for the year — it’s not a credit that reduces dollar-for-dollar the amount of taxes you owe. This is a major difference between a tax credit vs tax deduction.

Common Mistakes to Avoid When Filing Student Loan Tax Forms

It’s important to be accurate when filing student loan tax documents. Some common mistakes to watch out for include:

•   Failing to claim the deduction. Don’t overlook Form 1098-E. This can happen during the busy tax season when there is a lot of paperwork to keep track of. Keep an eye out for the form in the mail, or log onto your loan servicer’s website to download before the tax filing deadline.

•   Incorrect interest amount on Form 1098-E. Review your 1098-E form carefully to make sure all the information on it is correct. Double-check the interest amount listed on the form with your records of the loan payments, including interest, you’ve made.

•   Claiming an incorrect amount for the deduction. The amount of student loan interest tax deduction you can claim depends on your MAGI and tax filing status. As noted, you’re eligible for a reduced deduction if your MAGI is more than $80,000 as a single filer and $165,000 as a joint filer. Follow the instructions on Schedule 1 of Form 1040 to figure how much of a deduction you can claim, or consult a tax professional.

•   Filing when ineligible for the deduction. As discussed, not all borrowers are eligible for the student loan interest deduction. Your student loans must be qualified and your MAGI must be below the cut-off levels to qualify for a full or reduced deduction. Those whose MAGI is $95,000 or more as single filers or $195,000 or more as joint filers are ineligible for the deduction.

The Takeaway

If you paid interest on a qualified student loan for yourself or a dependent, you can likely deduct at least some of that interest on this year’s tax return. This applies to federal, private, and refinanced student loans. Once you’ve determined when and whether you’re able to deduct student loan interest and how to file a student loan interest tax form, watch for your loan servicer to send you a copy of your 1098-E or visit your loan servicer’s or lender’s website to download the form.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

What is Form 1098-E and how do I use it?

Form 1098-E is a tax form for student loans sent out by your loan servicer or lender. The form is sent to borrowers who paid at least $600 in interest on their student loans for the year. If you have more than one loan servicer or lender, you’ll receive a 1098-E from each one. You can then use the form to help calculate your student loan interest tax deduction on your federal tax return.

Can I deduct student loan interest if I’m still in school?

If you’re making student loan payments while you’re in school — even if you’re making interest-only payments — you may be able to claim the student loan interest deduction as long as you paid $600 or more in interest for the year.

How do I know if I qualify for a student loan tax deduction?

You should qualify for a student loan tax deduction if you: have a qualified student loan, paid at least $600 in interest during the tax year, are legally obligated to pay interest on a qualified student loan, cannot be claimed as a dependent on someone else’s return, have a tax filing status that is anything except married filing separately, and your MAGI is under the annual cut-off amount.

Do private student loans qualify for tax deductions?

Qualified student loans, including private student loans, are eligible for the student loan interest deduction as long as you paid at least $600 in interest on your loans for the year in question.

What should I do if I didn’t receive my student loan tax form?

If you didn’t receive your student loan tax form, go to your loan servicer’s or lender’s website where you should be able to download a copy of the form. If you can’t find it there or you have questions, call your loan servicer for assistance.

Photo credit: iStock/FG Trade

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

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.