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Generally, scholarships used to pay for qualified educational costs at an eligible educational institution aren’t considered taxable income. The same goes for any grants used to pay for college tuition and fees.

However, there are some cases in which scholarship or grant money may be taxable. For example, if you have money left over after covering your qualified education expenses and use it for other costs (such as room and board or school supplies not required by your program), these funds typically count as taxable income.

If you or your student received scholarship funding, it can be helpful to know ahead if it will contribute to your tax liability. Here’s what you need to know about identifying taxable scholarships and handling filing requirements.

Scholarships That Are Tax-Free

Students can be exempt from paying taxes on their college scholarships if they satisfy certain criteria. For one, they must be enrolled at an accredited college, university, or educational institution that maintains regular attendance.

Additionally, scholarship funds must be used to pay for qualified education expenses — a determination made by the IRS. Under this definition, qualified education expenses include the following:

• Tuition

• Mandatory fees (e.g., athletic and tech fees)

• Textbooks

• Equipment and supplies (e.g., lab equipment)

When it comes to textbooks, equipment, and supplies, anything that is required by your school to complete coursework would be free from taxes. If you use the funding towards an extra-curricular activity, such as a club or intramural sport, however, the amount you spend would be considered taxable.

If the scholarship is used for a certificate or non-degree program, the entire amount is taxable whether or not funds are used for qualified education expenses.

It’s important to note that any scholarship funds leftover after paying for qualified education expenses would become taxable income.

Scholarships Considered Taxable Income

How are scholarships taxable? According to the IRS, scholarships used for expenses outside the scope of qualified education expenses must be reported in gross income — making them taxable.

Scholarship funds used for the following costs are considered taxable by the IRS:

• Room and board

• Travel

• Medical expenses

• Optional equipment (e.g., new computer)

But are scholarships taxable income in any other situations?

Scholarships that are awarded in exchange for services like teaching or research, often known as fellowships, are classified as taxable compensation in most cases. Students would have to pay taxes even if their fellowship money is used to pay for tuition and other qualified education expenses.

However, there are a few exceptions when education-related payments could be tax-exempt. Specifically, students do not have to pay taxes on funds received for required services through the following scholarship programs:

• National Health Service Corps Scholarship Program

• Armed Forces Health Professions Scholarship and Financial Assistance Program

• Student work-learning-service programs operated by a work college

Other forms of financial aid could be considered taxable income as well.

Earnings through the Federal Work-Study program are subject to federal and state payroll taxes. If you stay below 20 hours a week while enrolled full-time, you won’t have to pay FICA (taxes for Medicare and Social Security) taxes.

Even Pell Grants — a federal aid program for students with significant financial need — are taxable if they’re not used for qualified education expenses.

Making it Legal: Reporting Taxable Awards

If a college scholarship is considered taxable, the student would need to report the scholarship (or portion of the scholarship) on their tax return.

Some students may receive a W-2 form from the scholarship provider outlining the taxable amount. Otherwise, they may need to calculate and enter the amount on their own tax return.

The student would report any taxable amount of a scholarship, grant, or fellowship as follows:

• If filing Form 1040 or Form 1040-SR, you would include the taxable portion in the total amount reported on Line 1a of your tax return. If the taxable amount wasn’t reported on Form W-2, enter it on Line 8 of Schedule 1 (and attach the form).

• If filing Form 1040-NR, you would report the taxable amount on Line 8 and fill out and attach a Schedule 1.

If you have questions about whether or not any portion of your scholarship money is taxable and how to report those funds on your tax return, it’s a good idea to consult a tax professional for personalized guidance.

How Education Tax Credits Fit in

Students and their family members may be eligible to claim the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) if they paid for college and related costs in the past year. Take note that you can’t use both tax credits for the same student in the same year.

To claim either tax credit, you’ll need Form 1098-T from your college. This form shows any reportable transaction for an enrolled student.

To qualify for the AOTC or LLC, you could have paid educational expenses out of pocket or with student loans. Expenses that were paid for by tax-free scholarships are not eligible for a tax credit.

The AOTC and LLC differ in scope and eligibility, so it’s helpful to compare both to see which may apply and provide a greater tax return.

American Opportunity Tax Credit (AOTC)

The AOTC can be used for qualified education expenses — tuition, fees, textbooks, and necessary supplies — for a student’s first four years of college.

The maximum credit currently stands at $2,500 a year for eligible students. This is calculated as 100% of the first $2,000 in qualified education expenses paid for an eligible student plus 25% of the next $2,000 in qualified education expenses.

If the AOTC reduces your taxes to zero, it’s possible to have 40% of the remaining credit (up to $1,000) refunded.

Eligibility for the AOTC is based on the tax filer’s modified adjusted gross income (MAGI). If you’re filing separately, your MAGI must be $80,000 or less to qualify for the full AOTC credit. The threshold is $160,000 for married filing jointly.

It’s possible to receive a reduced AOTC amount if filing separately with MAGI between $80,000 and $90,000 or $160,000 and $180,000 for married filing jointly.

Recommended: 23 Tax Deductions for College Students and Other Young Adults

The Lifetime Learning Credit (LLC)

The LLC can apply to a broader range of expenses than the AOTC. It can be used to claim up to $2,000 for tuition and related educational expenses for undergraduate, graduate, or professional degree courses. Costs of non-degree programs that improve job skills are also eligible for the LLC.

This credit does not have a limit on the number of years it can be claimed on your tax return. However, the LLC has stricter income requirements.

For Tax Year 2022, the amount of your LLC is gradually reduced (phased out) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

You can’t claim the credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).

Recommended: Can You Deduct Your Child’s Tuition from Taxes?

Don’t Forget Deductions

If you’re paying interest on a student loan, you may be eligible to deduct up to $2,500 of that interest with the student loan interest deduction. To be eligible, interest payments must be legally obligated and your filing status can’t be married filing separately.

There are also income requirements, which can vary annually, to factor in for the deduction calculation. For the tax year 2022, the filer’s MAGI must be less than $85,000 (or $170,000 if filing jointly) to be eligible for the full $2,500 deduction.

If your MAGI is between $70,000 and $85,000 (or $140,000 and $170,000 if filing jointly), you could qualify for a reduced deduction.

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

The Takeaway

Scholarships, grants, and fellowships can help make college more affordable. Not only that, the funds you receive typically aren’t taxable.

A general rule is that your college scholarship is tax-free when it is used to pay for “qualified education expenses.” Exceptions include any part of the scholarship or grant you used to pay for supplemental things (not required for a course) or as payment for work or services you performed.

If scholarships, grants, other aid, and federal student loans are enough to cover the cost of your college education, you may want to consider applying for a private student loan. Loan limits vary by lender, but you can often get up to the total cost of attendance. Interest rates may be fixed or variable and are set by the lender. Generally, borrowers (or cosigners) who have strong credit qualify for the lowest rates.

Keep in mind, though, that private loans may not offer the borrower protections — like income-based repayment plans and deferment or forbearance — that automatically come with federal student loans.

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

Photo credit: iStock/pixelfit

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

SOIS0823051

College is expensive, with the yearly cost of attendance at some private schools now topping $75,000. Looking at these numbers, you may wonder how you will ever possibly afford to send your kids to college.

But before you get too disheartened, it’s important to understand that a college’s published “sticker price” is often very different from what you actually have to pay (known as the net price). What’s more, just putting a small amount of money aside each month in a college fund can add up to a significant sum over time, especially if you take advantage of a tax-advantaged college savings account.

Read on to learn key things about how to save for college — from estimating how much you need to set aside to picking the right college saving fund.

Determining the Cost of College for Your Children

Tuition costs vary widely, depending on the type of school your child wants to attend, the type of degree they’ll earn (bachelor’s or associate), and even geographic location.

According to the College Board, the average annual college tuition costs for the 2022-23 school year were:

•   $10,940: public four-year in-state (a 1.8% increase from 2021-21)

•   $28,240: public four-year out-of-state (a 2.2% increase from 2021-22)

•   $39,400 : private nonprofit four-year (a 3.5% increase from 2021-22)

•   $3,860: public two-year in-district (a 1.6% increase from 2021-22)

The College Board also studied the annual, inflation-adjusted change in college tuition and fees over the last decade:

•   -1%: four-year public schools

•   -4%: two-year public schools

•   +6%: four-year private (nonprofit) schools

If your kids are young, you may wonder how much college will cost when it’s time for them to head off. Fortunately, there are many online calculators that can help you figure this out, taking factors like your child’s age, the type of school you expect your child to attend, and the expected rise in the cost of college into account.

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

Net Price vs. Sticker Price

Every college and university, private or public, lists a sticker price, which is also known as the cost of attendance (COA). This price includes tuition, fees, room and board, books, supplies, and miscellaneous expenses.

The net price, on the other hand, is what a student would actually pay, after factoring in any financial aid provided by the college and the federal government.

Financial aid is based on your family’s income, as well as the student’s academic achievement. Aid is offered in the form of grants, scholarships, work-study, and sometimes federal student loans. Schools offer aid based on financial need, a student’s “merit,” or a combination.

When you fill out the Free Application for Federal Student Aid (FAFSA), you will receive a Student Aid Index, or SAI. (Previously, this was called the Estimated Family Contribution, or EFC.) Colleges use this number to determine the amount of financial aid they award to accepted students. Typically, colleges come up with a financial aid package to help bridge the gap between the school’s sticker price and what your family can afford to pay.

Indeed, sometimes colleges with the highest sticker price end up costing less than a college with a much lower sticker price.

Recommended: How to Start Saving for Your Child’s College Tuition

Using a Net Price Calculator

Fortunately, you can get an idea of what the net price will be for a particular college before you apply by using the government’s net price calculator. This tool can help students and their families get a better idea of the cost of college, after subtracting scholarships, grants, and other financial aid.

Keep in mind, though, that the net price calculator is going to require specific details about your income and assets, so the more transparent you are regarding your personal finances, the more precise your calculation is likely to be.

When is a Good Time to Start Saving for Your Child’s Education?

Generally, the sooner the better. In fact, it can be wise to set up and start making small monthly contributions to a college savings fund soon after your child is born.

For some familes, however, it may not be possible to start saving that early. It’s equally important to pay attention to your other expenses and family’s needs. For example, you may want to prioritize building an emergency and paying off expensive credit card debt over saving for college. It’s also a good idea to make sure you’re on track with retirement savings. At the end of the day, students are able to get loans for an education but it’s not possible to take out loans to fund retirement.

Some Options for Saving

529 Plan

A 529 education savings plan is an investment account that can be used to save for the beneficiary’s qualified education expenses. The funds can be used to pay for higher education or private elementary or high schools. A 529 plan allows your savings to grow tax-free, and some states even offer a tax deduction on your contributions.

All 529 plans are set up at the state level. However, you don’t have to be a resident of a particular state to enroll in its plan.

If your child decides not to go to school, it’s possible to roll the account over into the name of another family member. If the funds aren’t used for education-related expenses, there may be taxes and penalties.

Family members and friends can also contribute to a child’s college savings plan. They may choose to make deposits to an existing 529 account or set up one themselves, naming a beneficiary of their choice.

Some 529 savings plans offer an age-based investment option to automatically adjust the risk of the investment strategy as the beneficiary gets older. This type of investment approach might be similar to how a target date fund works in your retirement plan.

Regular Savings Accounts

You can also save for your child’s college tuition using a savings account at a traditional bank, credit union, or online bank. Just keep in mind that interest rates, even for high-yield savings accounts, tend to be relatively low. Plus, savings accounts don’t offer the tax advantages you can get with some other college savings vehicles.

It may be difficult to reach education financing goals through a traditional savings account alone since the interest rate might not keep pace with the inflation of college expenses.

Roth IRAs

Although generally used for retirement savings, a Roth IRA can be used to pay for the cost of college. Contributions to a Roth IRA are made with after-tax dollars but earnings grow tax-free.

Generally, to withdraw the earnings from an IRA without paying a penalty (or taxes), the account holder needs to be at least 59 ½ years old. However, if you made the first contribution to your Roth IRA at least five years before, you can also withdraw the growth penalty-free for qualified education expenses, including tuition, books, and supplies.

Keep in mind that, while there may not be an early withdrawal fee, the earnings withdrawn may still be subject to income tax.

Other Options to Pay for College

Sometimes saving alone isn’t enough to cover the cost of college. In that case, there are other funding options available that could help students and their families pay for college.

Private Scholarships

Scholarships are essential free money for college because you don’t have to pay them back. Scholarships are typically merit-based and are offered through a variety of organizations and institutions, including nonprofits, corporations, and even directly from universities and colleges. In some cases, scholarships are awarded on the basis of nationality, ethnicity, or economic need. There are a number of searchable databases that compile different scholarship opportunities.

Federal Financial Aid

When you complete the FAFSA each year, you will become eligible for federal financial aid. This can include scholarships, grants, work-study, and federal student loans (which may be subsidized or unsubsidized).

Private Student Loans

If savings and financial aid aren’t enough to cover the full cost of college, you can fill in gaps using private student loans. These are available through private lenders, including banks, credit unions, and online lenders.

Loan limits vary from lender to lender, but you can often get up to the total cost of attendance, which gives you more borrowing power than with the federal government. Interest rates vary depending on the lender. Generally, borrowers (or cosigners) who have strong credit qualify for the lowest rates.

Keep in mind, though, that private loans may not offer the borrower protections — like income-based repayment plans and deferment or forbearance — that automatically come with federal student loans.

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

The Takeaway

College tuition can be a daunting expense. Setting up a dedicated account to save for college tuition can help make the process much more manageable. There are accounts, like 529 plans, that are designed specifically to pay for educational expenses.

In addition to savings, students and their families may rely on scholarships, grants, federal student loans, or even private student loans to pay for tuition and other educational expenses.

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.

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

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

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.

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

SOPS19067

Attending graduate school can help some students achieve their career goals, and may even be required in some fields. While applying to grad school is similar to applying to college, three are some key differences to keep in mind. Graduation school programs also tend to be more competitive than undergraduate degree programs.

If you’re thinking about going to grad school, read on. What follows are some simple strategies that can help you navigate the graduate school application process, including how to find the right program, create an application timeline, write an effective statement of purpose and personal statement, and make a plan for covering the cost of tuition and expenses.

4 Tips and Strategies to Prepare for the Grad School Application Process

Below are some simple steps that can make it easier to find and apply to the right graduate school program.

Choosing the Right Graduate School

It can be a good idea to apply to four to six graduate schools, and include both safety and reach schools.

If you’re still in the early stages of exploring schools and mulling over which graduate program to pursue, now’s the time to weigh your interests, skills, talents, and career goals to find a few options that may make sense to apply to.

Here are some questions to ask as you search for the right grad school:

•  Which degree path do you want to pursue?

•  Does your chosen career encourage a Ph.D. or a Master’s degree?

•  Do the schools you’re considering offer that program?

•  What is the cost of tuition?

•  Are scholarships available, either full-ride or partial?

•  Is the degree program accredited?

•  Does this school have excellent professors?

•  Will this degree facilitate your entry into the career of your choice?

💡 Quick Tip: You’ll make no payments on some private student loans for six months after graduation.

Grad School Application Timeline

There’s plenty of prep work that must happen months before you start applying to graduate school. One way to alleviate some stress and make sure all of the necessary application requirements are met is to start early. Here’s a timeline to keep in mind.

Two Years Before Applying: Research Schools and Programs

Narrow down the programs of interest and your career goals about two years before you plan to apply.

One Year Before Applying

•  Prepare for any standardized tests required for admission. Some programs may require students to submit GRE scores, while others may require the GMAT. Law students will generally need to take the LSAT and future med school attendees can anticipate taking the MCAT.

•  Start gathering application materials. This could include things like college transcripts, letters of recommendation, and prepping for any personal statements that may be required (more tips on that to follow).

Year of Grad School

Generally, graduate school applications open up about nine months before a student would be expected to start classes. Some programs may accept applications on a rolling basis. It’s generally wise to apply as soon as all of your application materials are ready to go.

Refining Your Graduate School Statement of Purpose and Personal Statement

The statement of purpose for graduate school (sometimes called a letter of intent or a research statement) is where you detail your future plans and how the school you’re applying to can help you achieve those goals.

Students who are applying to multiple schools may need to tweak their statement of purpose slightly to meet different application requirements, but in general, there are a few common threads that are included in a statement of purpose. These include:

•  What do you want to study at graduate school?

•  Why do you want to study it?

•  What experience do you have in that field? How would you add value to the existing program?

•  What do you plan to do with your degree once you have it?

To craft a successful graduate school statement, you’ll want to create an outline and make sure you highlight your relevant experience and motivation for applying to this specific graduate school and program. You want your statement to stand out and target the school you are applying to; avoid writing the same statement of purpose for each school.

A personal statement, meanwhile, lets the admissions committees see you as a person, including your goals and passions and what you are hoping to get out of the program. Personal statements are generally more biographical in nature than a statement of purpose. It may highlight things like your passion for a particular field or help you demonstrate characteristics that will help you excel in grad school.

Recommended: Graduate Student Loan Limits: How Much Can You Get?

Options for Paying for Graduate School

There are a variety of ways to pay for graduate school.

Federal Aid

As a first step, fill out the Free Application for Federal Student Aid (FAFSA), which is used to determine what federal financial assistance students may qualify for. Often, people applying for graduate school are considered independent students on the FAFSA. Independent students are not required to include their parents’ financial information on their FAFSA application.

Submitting the FAFSA allows students to apply for all federal aid, including:

•  Federal student loans

•  Grants

•  Scholarships

•  Work-study program

Scholarships and Grants from Your University

Take a look at the aid options available specific to the school you will be attending (or the schools you are applying to). It may be possible to apply for additional scholarships, grants, and fellowships depending on the program.

Universities sometimes use the FAFSA to make financial aid determinations, but some have their own application process. Again, check the graduate school website to find out relevant deadlines and procedures.

Recommended: How to Become a Graduate Assistant

Possibilities Beyond Federal or University Aid

Other possibilities include employer tuition reimbursement plans, private scholarships, and private graduate student loans. Private student loans usually don’t have the borrower protections offered by federal student loans (things like deferment or forbearance, income-driven repayment plans, and Public Service Loan Forgiveness), so you may want to consider them only after you’ve exhausted other forms of aid.

After graduating, some students may consider student loan refinancing. Qualifying borrowers can often secure a competitive interest rate or preferable terms. Refinancing federal student loans, however, will mean they no longer qualify for any federal borrower protections or programs.

💡 Quick Tip: Master’s degree or graduate certificate? Private or federal student loans can smooth the path to either goal.

The Takeaway

Applying to graduate school doesn’t have to be overwhelming. Start by defining your career goals and determine which programs you want to apply to. From there, review the application requirements and set an application timeline. The steps involved in applying to graduate school include taking any required standardized tests, getting letters of recommendation, and writing a statement of purpose. Also consider how you will pay for the cost of graduate school. Options include federal student loans, scholarships, grants, 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.

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

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

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.

SOIS0823043

NBBO stands for the National Best Bid and Offer, a regulation put in place by the Securities and Exchange Commission (SEC) that requires brokers who are working on behalf of clients to execute a trade at the best available ask price, and the best available bid price.

The NBBO is a quote available marketwide that represents the tightest spread, e.g. the highest bid price and the lowest ask price for a certain security trading on various exchanges.

Brokers must guarantee at least the NBBO to their clients at the time of a trade, per SEC rules.

How Does “Bid vs Ask” Work in the Stock Market

In order to understand NBBO, investors need to understand the bid-ask price of a security, e.g. a stock. This is also known as the spread (two of many terms investors and traders should know). If an investor is “bidding,” they’re looking to buy. If they’re “asking,” they’re looking to sell. It may be helpful to think of it in terms of an “asking price,” as seen in real estate.

The average investor or trader will typically see the bid or ask price when looking at prices for investment securities. Most of the bid-ask action takes place behind the scenes, and it’s happening fast, landing on an average price. These are the prices represented by stock quotes.

That price is the value at which brokers or traders are required to guarantee to their customers when executing orders. NBBO requires brokers to act in the best interest of their clients.

Recommended: How to Invest in Stocks: A Beginner’s Guide

What Is NBBO?

The National Best Bid and Offer (NBBO) is effectively a consolidated quote of the highest bid and the lowest ask price of a security from all exchanges. NBBO was created by the SEC to help ensure that brokerages offer customers the best publicly available bid and ask prices when trading securities.

NBBO Example

Let’s run through a quick example of how the NBBO might work in the real world.

Let’s suppose that a broker has a few clients that want to buy a stock:

•   Buyer 1 puts in an order to the broker to buy shares of Company X at $10

•   Buyer 2 puts in an order to the broker to buy shares of Company X at $10.50

•   Buyer 3 puts in an order to the broker to buy shares of Company X at $11

Remember, these are “bids” — the price at which each client is willing to purchase a share of Company X.

On the other side of the equation, we have another broker with two clients that want to sell their shares of Company X, but only if the price reaches a certain level:

•   Client 1 wants to sell their shares of Company X if the price hits $12

•   Client 2 wants to sell their shares of Company X if the price hits $14

In this example, the NBBO for Company X is $11/$12. Why? Because these are the best bid vs. ask prices that were available to the brokers at the time. This is, on a very basic level, how calculating the NBBO for a given security works.


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

How NBBO and “Bid vs Ask” Prices Are Calculated

To make those calculations on the fly requires a whole lot of infrastructure. Because the NBBO is updated constantly through the day with offers for stocks from a number of exchanges and market players, things need to move fast.

Most of the heavy lifting in NBBO calculations is done by Securities Information Processors (SIPs). SIPs connect the markets, processing bid and ask prices and trades into a single data feed. They were created by the SEC as a part of the Regulation National Market System (NMS).

There are two SIPS in the U.S.: The Consolidated Tape Association (CTA) , which works with the New York Stock Exchange, and the Unlisted Trading Privileges (UTP) , which works with stocks listed on the Nasdaq exchange.

The SIPS crunch all of the numbers and data to keep prices (NBBO) updated throughout the day. They’re incredibly important for traders, investors, brokers, and anyone else working in or adjacent to the markets.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Is NBBO Pricing Up to Date?

The NBBO system may not reflect the most up-to-date pricing data. Bid, ask, and transaction data is flying around every millisecond, and it takes time to ingest and process it all. For high-frequency traders that are making fast and furious moves on the market, these small price fluctuations can cost them.

To make up for this lag time, the SEC allows trading via intermarket sweep orders (ISO), letting an investor send orders to multiple exchanges in order to execute a trade, regardless of whether a price is the best nationwide.

The Takeaway

NBBO represents the crunching of the numbers between the bid-ask spread of a security, and it’s the price you’ll see listed on a financial news network or stock quote.

The NBBO adds some legal teeth for investors, effectively forcing brokers to execute trades at the best possible price for their clients.

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

Photo credit: iStock/g-stockstudio

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