Dec
10
2024

Value-Weighted Index: Explanation and How to Calculate

By | Growing Wealth, invest, Investing | Comments Off on Value-Weighted Index: Explanation and How to Calculate

Value weighted indexes, also called cap-weighted indexes, may be used by investors to gauge the performance of various sectors of the stock market. Indexes effectively measure a specific portion or subset of the market, which can help investors get a sense of the market’s performance.

Some of the most commonly known and used value weighted indexes include the S&P 500, Nasdaq Composite, or Wilshire 5000. While these indexes can help investors get an idea of the market’s performance, they do have flaws, which investors would do well to keep in mind.

Key Points

•   Value weighted indexes aggregate stock performance using market capitalization.

•   These indexes serve as benchmarks for evaluating performance in financial markets.

•   Calculation involves multiplying stock price by shares outstanding, normalized by a divisor.

•   Other index types include price weighted and fundamentally weighted indexes, each distinct.

•   Value weighted indexes reflect market trends but can be skewed by large companies.

Value Weighted Index Explained

Value weighted indexes are often used in the investment world as a stock market evaluation tool. A value weighted index is a tool used to aggregate the performance of multiple stocks into a cohesive whole represented by a single number. In other words, it’s a way to simplify a subset of the market’s performance, and make it relatively easy to get an idea of what’s happening in the market.

Value weighted indexes multiply current share prices by the number of shares outstanding to get the market cap for each component, or asset, of the index. These individual market caps are then totaled to get the overall value of the index.

When value weighted cap indexes began, the typical method of combining these values was by using a weighted average. For instance, if a stock’s market cap represented 10% of the overall market it would be weighted at 10%.

However, that method quickly becomes complicated as stocks are removed and added from the index, and some companies may be acquired or merged. Because of this, almost all indexes calculate a divisor to normalize the business decisions made at each company so that the index represents performance as accurately as possible without being affected by individual company decisions.

Let’s examine how different constituencies use the indexes for their particular needs, including traders, investors, and fund managers.

How Traders Use Indexes

Traders may differ from “investors” in that they’re characterized by short-term decision making. Traders use indexes as a benchmark to judge performance. They try to use indexes that match with their market moves.

For example, a technology focused investor might use the Nasdaq Composite to measure how well they are meeting their investment goals. They might also use the market index to determine when to enter or exit trades by gleaning any information they can about how the overall market is moving.

How Investors Use Indexes

Investors may differ from “traders” in that they have long-term horizons or investment goals, and thus, may be a bit more conservative in their investing approach. But similar to traders, investors also use indexes as a benchmark to compare how they’re doing in comparison. But investors may also be looking for less-risky investments with broad diversification.

Exchange-traded funds, or ETFs, may align with their goals, and ETFs often seek to replicate the various indexes by holding shares in proportions to match the index. Index investing can be a relatively simple way to start investing for beginners, as it allows for a degree of built-in diversification, tends to align with market performance, and typically comes with the benefit of low transaction fees.

But further research is always required to ensure that a specific ETF aligns with an investor’s strategy. With that in mind, it may be worthwhile to review available resources to help you learn more about investing in ETFs.

How Mutual Fund Managers Use Indexes

Mutual funds pool investment resources from a number of investors to try and provide diversification across sectors, and often pursue more conservative investments. Mutual fund managers may, again, use value weighted indexes as a north star, and try to match a market index’s performance, or beat it with the goal of generating returns for investors. However, keep in mind that investors can always lose money, too.

Mutual funds are also generally aligned with an index that parallels the investment philosophy of the fund, be that stocks, bonds, commodities, etc. So, there may be mutual funds that specialize or focus on investing in certain market segments, and use those as indexes to try and match.

How Hedge Funds Use Indexes

Hedge funds pool investment resources in a similar way to mutual funds, but typically follow a far more aggressive investment strategy and managers stick to an active investing style. Though they may be a bit more aggressive and less risk-averse, like other types of funds, hedge fund managers may use indexes as a benchmark to meet or beat in an attempt to generate returns for investors. Remember: There’s a potential for losses, too.

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Pros and Cons of Value Weighted Indexes

Value weighted indexes have their pros and cons, of course. Here’s a quick rundown of what the advantages and disadvantages of using value weighted indexes may be for investors.

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Pros:

•   Tend to offer a comprehensive market perspective

•   Are often comprised of less volatile, more mature companies

•   Often include a broad-based, well-diversified list of companies and have low transaction costs

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Cons:

•   The largest companies in the index may overwhelm performance

•   May help generate market bubbles, with overpriced assets

•   May encourage buying-high, selling-low investor behavior

How Market Value Weighted Index Is Calculated

Theoretically, the calculation of a value weighted index and the weights assigned to each component are easy to calculate. But as with most things, reality is a little more complicated.

To calculate a value weighted index, the first step is to multiply the price and shares outstanding (both of which are in near constant flux) of each component to get the market capitalization for each stock. For example, if you were trying to calculate a value weighted index comprising only three companies (which would not be indicative of a true index, but for simplicity’s sake, will work for an example), you’d first figure out the market capitalization of each company.

Market Capitalization = Price per share x Shares Outstanding

In this hypothetical example, here’s how that might look:

•   Company 1: 50 shares outstanding at a current price of $10 = $500

•   Company 2: 100 shares outstanding at a current price of $5 = $500

•   Company 3: 75 shares outstanding at a current price of $15 = $1,125

Adding those up, the entire market value of this index is $2,125. To calculate the weights of each company in the index, you divide the value of the given company by the overall value of the index:

•   Company 1: $500 ÷ $2,125 = weight of 23.5%

•   Company 2: $500 ÷ $2,125 = weight of 23.5%

•   Company 3: $1,125 ÷ $2,125 = weight of 53%

So, our total weight between the three companies is 100%, and Company 3 carries the highest weighting.

But remember: Due to complications with adding and removing companies from the index, dividends paid, buybacks, mergers, etc., there must be some normalizing done to the formula to remove large fluctuations caused by anything other than core performance.

This function is accomplished by the divisor, which oftentimes performs double duty by scaling the index values much smaller, say in the thousands rather than in the trillions, resulting in the following formula.

Index Value = ∑𝑖𝑝𝑖𝑞𝑖 / Divisor

Other Forms of Weighted Market Indexes

Value weighted indexes aren’t the only index-based securities measuring tool. Investors can utilize the following market index assessment options as well.

The Price Weighted Index

Price weighted indexes are another form of weighted market index, and a good example is the Dow Jones Industrial Average.

A price weighted index weights each component based on its stock price. Therefore a company trading at $200 will have a higher weighting than a stock trading at $5. This is despite the revenue, employment, or market capitalization of the respective companies.

The Fundamentally Weighted Index

A fundamentally weighted market index weighs companies based on some other financial criteria such as revenues, earnings, dividend rates, or other factors. Fundamentally weighted indexes allow tremendous flexibility in creating an index to match an investing criteria and strategy.

Unweighted Index

The term “unweighted” simply means that no weight is applied when measuring a stock against an index. Instead, the measurement gives equal weight to each index component. It is common to see unweighted versions of major indexes compared to the weighted indexes to get deeper market insights on, for example, how broad-based a market rally truly is.

The Takeaway

Value weighted indexes can be useful as performance benchmarks and to provide a quick overview of market conditions. By observing the index performance, investors may be better informed on entry and exit opportunities, as well as to measure their own investing performance.

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Dec
07
2024

Why Are Student Loan Interest Rates So High?

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

Student loan interest rates are rising. In July 2024, interest rates rose to their highest level in 16 years. Rates for undergraduate loans have increased almost 19% over last year and 44% over the past five years. Some loan rates for graduate students have never been as high as they are now.

Why are student loan interest rates so high? Some of it comes down to perception: Interest rates are up after a decade of historical lows. But other factors also come into play.

Read on to learn how student loan interest rates are set, why interest rates are going up, and the different options available for managing high-interest student loans.

Key Points

•   Federal student loan interest rates have risen to their highest levels in years, and rates for some loans for graduate students are at record highs.

•   Interest rates on federal student loans are set annually by Congress, influenced by the 10-year Treasury note rate plus a fixed increase. Rates are capped at specific limits.

•   Private lenders determine interest rates on private student loans, using benchmarks such as the prime rate. Borrowers’ credit scores and credit history also impact private loan rates.

•   Students who don’t have a strong credit history may need a cosigner on a private student loan to qualify for more favorable rates.

•   Methods to help pay off student loans include paying any accruing interest while in school, using an income-driven repayment plan after graduation, and refinancing student loans.

Understanding Student Loans

There are two main types of student loans — federal and private student loans. Federal loans are offered by the Department of Education (DOE) and they include Direct Subsized and Unsubsidized student loans for undergraduate students, and Direct Unsubsidized loans and Direct PLUS loans for graduate or professional students.

•   Direct Subsidized loans are for undergraduates who have financial need. You fill out the Free Application for Student Aid (FAFSA), and your school determines how much you can borrow. The interest on the loan is paid by the DOE while you’re in school and for a six-month grace period after graduation.

•   Direct Unsubsidized loans are available for undergrads and graduate students. A borrower does not have to prove financial need for these loans. Again, your school determines the amount you can borrow. However, unlike Direct Subsidized loans, the interest on Direct Unsubsidized loans begins to accrue as soon as the loan is disbursed.

•   Direct PLUS loans are for eligible parents (typically called a parent PLUS loan) and grad students. To be approved for one of these loans, a borrower must undergo a credit check and cannot have an adverse credit history. Interest accrues on Direct PLUS loans while the student is in school.

Here’s a look at how the interest rates on these federal loans have increased over the last four years:

School Year 2021 – 2022

 School Year 2022 – 2023

 School Year 2023 – 2024

 School Year 2024 – 2025
Direct Subsidized and Unsubsidized Loans for Undergrads 3.73% 4.99% 5.50% 6.53%
Direct Unsubsidized Loans for Graduate or Professional Students 5.28% 6.54% 7.05% 8.08%
Direct PLUS Loans for Graduate or Professional Students or Parents of Undergrads 6.28% 7.54% 8.05% 9.08%

There are several different repayment plans for federal student loans, including the standard 10-year plan; graduated repayment in which your monthly payments gradually increase over 10 years; extended payment, which gives you up to 25 years to repay your loans; and income-driven repayment plans that base your monthly payments on your income and family size. Federal loans come with benefits such as federal loan forgiveness.

Private student loans are issued by private lenders, such as banks, credit unions, and online lenders. Their interest rates and loan terms differ from lender to lender. The interest rates on private student loans may be fixed or variable, and the rate you get depends on your credit history. You can use student loan refinancing later on for potentially better interest rates and terms on your private loans, if you’re eligible. (Federal loans can be refinanced as well, but they then become private loans and lose the federal benefits mentioned above.)

By using our student loan refinance calculator, you can check the interest rate and repayment terms you could qualify for — and find out if refinancing makes sense for your situation.

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Factors Contributing to High Interest Rates

Congress sets federal student loan interest rates, while private loan rates depend on the credit rating of the borrower (or their student loan cosigner, if they have one). But that’s not the whole story.

The federal government adjusts federal student loan rates every year based on 10-year Treasury notes, plus a fixed increase. Rates are also capped, so they can’t rise above a certain limit. Here are the formulas:

•   Direct Unsubsidized Loans for Undergraduates: 10-year Treasury + 2.05%, capped at 8.25%

•   Direct Unsubsidized Loans for Graduates: 10-year Treasury + 3.60%, capped at 9.50%

•   PLUS Loans to Graduate Students and Parents: 10-year Treasury + 4.60% Capped 10.50%

The rates for Treasury notes are set based partly on global market conditions and the state of the economy. When market conditions are in flux, the rates for Treasury notes tend to rise.

Federal student loan interest rates are fixed over the life of the loan. That means, if you get a federal student loan for your freshman year, the rate it was issued with won’t change despite Congress setting a new rate every year. If you need to take out another federal student loan for your sophomore year, however, you’ll then get the new rate, not the previous one.

Private student loan rates vary by lender and fluctuate with market trends. A borrower’s credit history also determines the rate they get for a private student loan.

Another factor is that student loans are unsecured. Unsecured loans are not tied to an asset that can serve as collateral. Secured loans, by comparison, are backed by something of value, such as a car or house, which can be seized if you default. But lenders can’t seize a degree. So student loan interest rates may be higher than secured loan rates because the lender’s risk is higher.

Comparison of Federal and Private Student Loan Interest Rates

Why are student loan interest rates so high? As noted above, private student loan rates will fluctuate with market trends and from lender to lender. They also depend on a borrower’s credit score. As of November 2024, some private student loan rates start at about 4% and go up to around 17%.

Private student loan rates for 10-year loans may be higher than the federal interest rate when you are comparing rates concurrently on offer. The rates may be lower for a loan that has a shorter term length than the standard 10 years of federal loans.

What’s more, private student loan rates and student loan refinance rates that are currently on offer can very well be lower than the federal interest rate you received at the time of getting your loan. And you can shop around with private lenders for the best interest rates.

Recommended: Student Loan Refinancing Guide

Pros and Cons of Federal and Private Student Loans

Both federal and private student loans have advantages and drawbacks.

Pros of federal student loans include:

•   Interest rates for federal loans are fixed over the life of the loan

•   The rates for federal loans may be lower than the rates you might get for private student loans

•   Depending on the type of federal loan you have, the government may pay your interest while you are in school and during the six-month grace period after graduation

•   Federal loans have federal programs and protections such as income-driven repayment plans and federal deferment options

Cons of federal student loans include:

•   You can’t shop around for interest rates

•   If you take out a new loan in subsequent years, you may get a higher rate than you got with your initial loans

•   Borrowing limits may be lower compared to private student loans

Pros of private student loans include:

•   You can shop around with different private lenders for lower rates

•   Borrowers (or cosigners) with very good or excellent credit can get lower interest rates

•   May offer higher borrowing limits than federal loans, spending on what a borrower is eligible for

Cons of private student loans include:

•   Borrowers with poor credit will get higher interest rates or may not be able to qualify for a loan

•   If the loan has a variable interest rate, it may rise over time

•   Private loan student holders don’t have access to the same programs and protections that federal student loan borrowers do

•   Deferment and forbearance options (if any) depend on the lender

💡 Recommended: Average Interest Rate for Student Loans

Interest Rates for Graduate and Professional Degrees

For graduate students and those pursuing advanced professional degrees, interest rates on federal Direct PLUS loans and Direct Unsubsidized Loans for graduate and professional students are substantially higher than the interest rate for Direct Subsidized and Unsubsidized loans for undergrads.

For the 2024-2025 school year, the interest rates are:

Direct PLUS loan: 9.08%
Direct Unsubsidized loans for graduate and professional students: 8.08%
Direct Subsidized and Unsubsidized loans for undergraduate students: 6.53%

The higher rates on loans for graduate and professional students add significantly to the cost of borrowing. Not only that, the interest on these loans begins accruing immediately and while the borrower is in school, which also adds to the overall amount they’ll need to repay.

It’s worth noting that loans for graduate students have much higher borrowing limits than federal loans for undergrads. Graduate students can usually borrow up to $20,500 each year, with a lifetime cap of $138,500. Undergrad borrowers can typically borrow $5,500 for the first year, $6,500 for the second year, and $7,500 for the next two years, up to a total of $31,000.

Credit Score Impact on Private Student Loan Interest Rates

Private lenders will look at your creditworthiness when determining your interest rate. This involves considering such factors as:

•   Credit score: Lenders have different requirements when it comes to credit scores for private student loans, but many look for a score of at least 650. As a student, you may not have that high a score, and in that case, you may need a cosigner on the loan in order to be approved.

•   Credit history: When entering college, most students have little to no credit history. That means the lender could be unsure of their ability to repay the loan since students don’t typically have a history of paying any loans. This can lead to a higher interest rate.

•   Your cosigner’s finances: Since many private student loan applicants are relatively new to debt and have no credit history, they might be required to provide a cosigner, as previously mentioned. A cosigner shares the burden of debt with you, meaning they’re also on the hook to pay it back if you can’t. A cosigner with a strong credit history can potentially help secure a lower interest rate on private student loans.

To help build your credit as a student, having student loans can help. Managing your student loans responsibly is a good way to help establish credit.

In addition, you might consider getting a credit card with a lower line of credit and use it to cover a few small expenses such as groceries and transportation. Be sure to pay your bill on time each month and in full if you can. Strategies like these can help you build credit over time.

Recommended: Student Loan Without Cosigner

Strategies to Pay Off Student Loans Faster

Whether you’re still in school or you’ve just graduated, you have options that may save you money. But it’s important to be proactive. Here are some potential actions you could take:

If You’re Still in College or Grad School

Borrowers with Direct Unsubsidized loans are responsible for the interest that accrues while they’re in school and immediately after. They don’t have to make payments while enrolled, but not making payments means that, in certain situations, interest may “capitalize” — that is, it will be added to the principal. In other words, a borrower would be paying interest on the interest.

To save yourself money on interest, consider making interest-only payments during school until your full repayment period begins after graduation. It will take a small bite out of your budget now, but it can save you money in the long run.

If you have Direct Subsidized loans, no interest will accrue until your grace period ends.

If You Graduated

Borrowers are automatically placed on the standard repayment plan, unless they select another option. The standard repayment plan spreads repayment over 10 years. Other options, such as the extended plan, extend the repayment term, which can make payments more manageable in the present, but that means you may pay more in interest over the life of the loan.

With an income-driven repayment (IDR) plan, your monthly student loan payments are based on your income and family size. Your monthly payments are typically a percentage of your discretionary income, which usually means you’ll have lower payments. At the end of the repayment period, which is 20 or 25 years, depending on the IDR plan, your remaining loan balance is forgiven.

💡 Quick Tip: You might qualify for the student loan interest deduction, which could reduce your taxable income.

Federal Student Loan Forgiveness

You could also explore student loan forgiveness through a state or federal program. Borrowers with federal student loans who work in public service may be eligible for the Public Service Loan Forgiveness (PSLF) program. If you work for a qualifying employer such as a not-for-profit organization or the government, PSLF may forgive the remaining balance on your eligible Direct loans after 120 qualifying payments are made under an IDR plan or the standard 10 year repayment plan.

In addition, check with your state to find out what loan forgiveness programs they may offer.

Refinancing Student Loans

Refinancing is one way to deal with high-interest student loan debt if you don’t qualify for federal protections. You can potentially lower your interest rate or your monthly payments.

If you’re considering refinancing to save money, you could be a strong candidate if you’ve strengthened your credit since you first took out your loans. Unlike when you were first headed to college, you may now have a credit history for lenders to take into account. If you’ve never missed a payment and have continually built your credit, you might qualify for a lower interest rate.

Having a stable income can also help. Being able to show a consistent salary to a private lender may help make you a less risky investment, which in turn could also help you secure a more competitive interest rate.

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


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

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).

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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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

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

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Oct
09
2024
Breaking Down the Parent PLUS Loan Application Process

Breaking Down the Parent PLUS Loan Application Process

By | Going to College, Student Loans, student_loan | Comments Off on Breaking Down the Parent PLUS Loan Application Process

Federal PLUS Loans are an accessible option for graduate students and parents of college students.

Parent PLUS Loans are federal loans for parents of undergraduate students. They offer flexible repayment options, fixed interest rates, and higher borrowing limits.

Direct PLUS Loans, also known as grad PLUS Loans, are available to graduate and professional degree students. Both parent and grad loans fall under the Direct Loan Program operated by the federal government.

Key Points

•   Parent PLUS Loans are federal loans for parents of undergraduate students, requiring a credit check and offering fixed interest rates, flexible repayment, and borrowing up to the cost of attendance minus other aid.

•   The application process requires completing the FAFSA first, then applying online with a verified FSA ID, student/school information, and employer details; approval requires signing a Master Promissory Note (MPN).

•   Loan details: For 2024–25, interest is 9.08% with a 4.228% origination fee; repayment starts after final disbursement unless deferment is requested (interest accrues during deferment).

•   Parents denied a PLUS Loan may add an endorser (cosigner) or complete PLUS Credit Counseling to proceed.

•   Borrowers can access income-driven repayment only by consolidating into a Direct Consolidation Loan; repayment is tied to income over 20–25 years, with possible forgiveness (forgiven amounts may be taxable).

What Is a Parent PLUS Loan?

Parent PLUS Loans can be borrowed by parents of undergraduate students in order to help their child pay for college. These loans are funded by the U.S. Department of Education and are part of the Direct Loan Program.

Unlike other types of federal student loans, Parent PLUS Loans do require a credit check. If an applicant has an adverse credit history, they may not be approved to borrow a Parent PLUS Loan.

💡 Quick Tip: New to private student loans? Visit the Private Student Loans Glossary to get familiar with key terms you will see during the process.

How Do Parent PLUS Loans Work?

As noted previously, Parent PLUS Loans are available to all qualifying parents of undergraduate students. Borrowers with poor credit history can ask an “endorser” to cosign the loan, or borrowers can send a report clarifying their credit history to be considered.

The loan amount is limited to your child’s cost of attendance (COA), less any other aid awarded to the student. The interest rate is fixed for both loan types, and interest accrues the moment it’s released, even during deferment. For the 2024-25 academic year, PLUS Loans have an interest rate of 9.08% and an origination fee of 4.228%.

Like other loans in the Direct Loan program, a third party company called a “loan servicer” manages customer service around general billing requests such as repayment and deferment.

Parent PLUS Loan Application Process

The first step in borrowing a Parent PLUS Loan is to have your child fill out the FAFSA or Free Application for Federal Student Aid. This is required before a parent can request a PLUS Loan. After the FAFSA® is taken care of, parents can submit an online application for a PLUS Loan.

Before applying for a PLUS Loan, remove any security freezes on your credit bureau files. Any active credit freezes will prevent an application from being processed.

It may take upwards of 20 minutes to complete the application, and you’ll generally need the following information:

•   Verified FSA ID (your StudentAid.gov login)

•   School Name

•   Student Information

•   Personal Information

•   Employer’s Information (such as the employer’s name, address, and phone)

A verified FSA ID is a unique ID that acts as a legal electronic signature. It should only be used by that applicant.

After being approved for the PLUS Loan, borrowers will be required to fill out the Master Promissory Note (MPN). This indicates that you agree to the terms of the loan.

Recommended: Do You Have to Apply for a Parent Plus Loan Every Year?

Filling Out the FAFSA

The FAFSA is required for all forms of federal student aid, including grants, work-study, and federal loans. Some state and school-specific aid may also be awarded based on information included on a student’s FAFSA form.

Applicants who submit a FAFSA get a Student Aid Report (SAR) that summarizes the form’s information. It will include your Student Aid Index (SAI) and your eligibility for federal grants and loans, among other details. Schools listed on your FAFSA get a copy of this report to determine aid.

Recommended: FAFSA Guide

Determining Your Eligibility

Borrowers must fulfill the following basic requirements:

•   Be the legal guardian of an undergraduate enrolled in a higher ed program part-time or full-time

•   Fulfill general federal student aid requirements, such as citizenship

•   Not have an adverse credit history

How Much Can You Borrow?

Parent PLUS Loan borrowers can take out the total cost of attendance of the program their child is enrolled in, less the amount in scholarships or other forms of aid.

How Much Do You Want to Borrow?

It can be tempting to borrow to make paying for college easier, but be cautious of overborrowing. Parent PLUS Loans have costlier fees and rates, with the latest interest rate at 9.05%, combined with a 4.228% origination fee.

For income-earning parents, it may be easier to measure the amount of student debt you should take on. As a general rule of thumb, all debt, including student loans, should not exceed more than 20% of your annual or projected annual take-home pay.

Filling Out Your Parent PLUS Loan Application

Prospective students and parents of prospective undergraduates fill out a Parent PLUS Loan application online. Grad PLUS Loan applications are separate online forms.

Enrollees will have the option to sign up for in-school deferment and get a credit check on the spot. Borrowers can also view a demo to see what the application entails before applying.

Recommended: Grad PLUS Loans, Explained

Signing a Promissory Note

Once you complete the PLUS Loan application, you’ll be directed to complete a Master Promissory Note (MPN). An MPN spells out a borrower’s rights and responsibilities in the loan agreement.

Loans will not be awarded until an MPN is completed.

You’ll be asked to fill out personal information and provide two references as future contacts in case you’re unreachable.

What to Expect After Applying

Approved loans will be disbursed to the school you’re enrolled in and they’ll apply the loan to outstanding fees, tuition, and/or room and board. If there are funds left over, you can cancel the remainder or choose to keep it for discretionary expenses related to higher ed day-to-day living.

What If You Are Denied?

If you are denied a loan, you may be able to add an endorser, or cosigner, to your application. An endorser is someone who agrees to pay your loan if you are unable. If you were denied for having an adverse credit history, you will likely need to complete an online PLUS Credit Counseling course.

Recommended: Guide to Grad PLUS Loan Credit Score Requirements

How Long Until the Loan Is Disbursed?

Each school pays out loans on a different schedule. Once the federal government has processed your paperwork and released funds, schools handle the process afterwards. If you have questions about when your loan will be disbursed, contact the financial aid office at your child’s school.

When Do You Need to Begin Repayment?

Repayment for Parent PLUS Loans begins immediately upon the last disbursement of the loan or after deferment, depending on the repayment plan you select.

If you request a deferment, you are able to pause payments until six months after your child graduates from college. If you are interested in this option, you can make this selection on the PLUS Loan application or request it directly with the loan servicer. Interest will accrue even while the loan is in deferment.

Income-Driven Repayment Options for Parent PLUS Loans

Parent PLUS Loan borrowers are able to enroll in an income-driven repayment plan if they first consolidate the loan through the Direct Consolidation Loan Program. Income-driven repayment plans tie the monthly payments to your income and repayment takes place over a period of 20 to 25 years.

On these plans, your loan payment may fluctuate each year depending on your income and family size. At the end of your repayment period, any outstanding balance is forgiven, but under certain circumstances, this forgiven amount may be considered taxable income by the IRS.

The Takeaway

PLUS Loans are federally funded loans available to graduate students and parents of undergraduate students. Applying for a PLUS Loan is a straightforward process when you understand the key steps and requirements. By ensuring you meet the eligibility criteria, gathering the necessary documentation, and completing the application accurately, you can secure funding for education expenses efficiently.

Other ways to pay for college include cash savings, scholarships, grants, and private student loans. Federal loans, including PLUS Loans, come with certain benefits and protections, and should be used prior to looking into 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.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

How long does it take for approval for a Parent PLUS Loan for college?

Loan applications are preliminarily approved or denied on submission and schools are notified within 24 hours. Applicants must pass eligibility requirements after completing the application. A Master Promissory Note and the FAFSA also must be completed prior to loan awards. Disbursement processing times differ with each school.

Can you be denied a Parent PLUS student loan?

Yes, if you have an adverse credit history you may be denied a PLUS Loan. You can get a PLUS Loan with an endorser or documentation proving extenuating circumstances around your history. Examples include foreclosure or bankruptcy.

What is the maximum borrowable amount for a Parent PLUS Loan?

The maximum borrowable amount allowed is the cost of attendance (COA), which is determined by schools.

Photo credit: iStock/solidcolours

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

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

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


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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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13
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Refinancing Student Loans During Medical School: What to Know

Refinancing Student Loans During Medical School: What to Know

By | Going to College, Student Loans, student_loan | Comments Off on Refinancing Student Loans During Medical School: What to Know

A career in medicine can be rewarding, but the high cost of medical school means many students take on additional student debt on top of their existing undergraduate student loans.

Some students defer student loan payments while they’re in medical school and others choose to refinance their student debt. The right choice for you depends on a number of factors, such as whether you have federal or private student loans. Here’s what to know about refinancing student loans during medical school.

What You Can Expect to Pay

Going to medical school is expensive: The average cost of medical school is $264,704 for four years at a private institution and $161,972 at a public medical school, according to the Education Data Initiative.

Many students need loans to cover the high cost of medical school tuition and other educational expenses. In fact, 70% of medical school students use loans specifically to help pay for medical school (as opposed to undergraduate debt). The average medical school graduate owes $250,995 in total student loan debt, which includes undergraduate debt.

If you don’t have the option for in-school deferment for your undergraduate loans while you’re enrolled in med school, refinancing your undergraduate student loans might be worthwhile and may help lower your loan payments while you’re in medical school. Here’s what you need to know to decide if refinancing loans as a medical student is right for you.

Can You Refinance Student Loans During Medical School?

Whether you have federal or private student debt, you can technically refinance your student loans at any time along your journey toward becoming a physician.

During a student loan refinance, you can combine multiple student loans of any type — federal and private — into one new refinance loan. This new loan is from a private lender, and comes with a new interest rate and different loan term.

The lender will repay your original loans that were included in the refinance process. You’ll then repay the lender, based on the details of your refinance loan agreement, in incremental monthly payments.

Another Option for Federal Student Loans During Medical School

It’s important to know that if you have federal student loans, refinancing them will remove you from the federal student loan program.

Keeping your federal student loans within the Department of Education’s loan system gives you access to benefits and protections that can be useful while in medical school, like extended deferment or forbearance.

Generally, automatic student loan deferment is applied to federal Direct Loans of borrowers who are enrolled at least half-time at an eligible school. If your federal student loans from your undergrad program weren’t placed on in-school deferment status, reach out to your school and ask them to report your enrollment status.

This student loan refinancing alternative can postpone your monthly payment requirement until after you leave school. However, if you borrowed Direct Unsubsidized Loans or Direct PLUS Loans, you’re responsible for repaying interest that accrues during this time.

Pros of Refinancing During Medical School

A student loan refinance during medical school can offer benefits.

Extend Your Loan Term

Generally, once you’ve signed your student loan agreement you’ve committed to a specific repayment term. For example, if your private student loan has a 5-year term, you’ll need to repay the loan’s balance, plus interest, in that time period.

However, repaying your loan balance while attending medical school might be difficult. With a student loan refinance, you can choose to prolong your repayment timeline over a longer term, like 10 or 15 years.

Lower Monthly Payments

By extending your student loan refinance term, your monthly installment payments become smaller since they’re stretched over a longer period. Prolonging your loan term can result in paying more interest over the life of the loan. However, it affords you a lower monthly payment so you have more funds in your budget toward the day-to-day cost of medical school.

Some Refinancing Lenders Offer Deferment

Some refinancing lenders offer borrowers the option to defer their student loan refinance payments while in medical school. Generally, you’ll need to meet the lender’s minimum enrollment status and possibly meet other requirements.

This benefit, however, isn’t offered by all lenders so always confirm with the lender before finalizing any student loan refinance offer.

Recommended: A Guide to Refinancing Student Loans

Cons of Refinancing During Medical School

Although there are benefits to refinancing your student loans, there are downsides to this repayment strategy as well.

You Could Pay More Interest Over Time

Extending your loan term causes you to pay more interest throughout the life of the loan, assuming you don’t make extra monthly payments. This means that you’ll ultimately pay more overall for your undergraduate degree.

You’ll Lose Access to Loan Forgiveness

If you refinance federal student loans, you’ll lose access to federal benefits and protections. Physicians who expect to work in the government or nonprofit sector might be eligible for loan forgiveness under the Public Service Loan Forgiveness (PSLF) program.

To be eligible for forgiveness, you must have eligible Direct Loans, and have made 120 qualifying payments toward your federal loan debt while working for a qualifying employer. After PSLF requirements are met, the program forgives the remainder of your eligible federal loan balance.

You’ll lose access to this significant benefit if you refinance federal loans into a private refinance student loan.

Should You Refinance Your Student Loans?

Student loan refinancing is a strategy that can be advantageous for certain borrowers in specific circumstances. For instance, it might be a good option for borrowers who already have a private undergraduate loan and simply want to lower their interest rate to save money.

It can also be a strategy to extend your term if your main goal is to lower your monthly undergraduate loan payments. Borrowers who have adequate savings, reliable income while in medical school, and who are confident that they won’t participate in programs, like PSLF, might benefit most.

Assess your current financial situation, and talk to your loan servicer or undergraduate loan lender to get a full understanding of your repayment options during medical school.

Refinancing Student Loans With SoFi

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.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Can you refinance student loans in residency?

Yes, you can refinance student loans while in residency. However, if you refinance federal loans, it will make that portion of your student debt ineligible for federal loan forgiveness in the future.

Do doctors ever pay off their student loans?

Yes, doctors pay off their student loans, though how they do so can vary. Some start making small payments during residency or apply for an income-driven repayment plan, while others refinance or pursue loan forgiveness programs.

When should I refinance my medical student loans?

Exploring a private student loan refinance can be done at any time, especially if your income is stable and your credit has improved since you first took out the loan. If you have federal student loan debt, consider whether you’ll pursue loan forgiveness at any point along your career journey. If you might, your student loans must be kept within the federal loan program to be eligible for forgiveness.

Photo credit: iStock/Edwin Tan

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.


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

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

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.

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Jun
07
2024

What Is the APR for Student Loans and How Is It Calculated?

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

Student loans are complicated, especially when it comes to figuring out how much the loan will actually cost you over time. APR, or annual percentage rate, reflects the total cost of the loan, including the interest rate and any fees.

Knowing how APR formulas affect your student loans is an important part of maintaining financial health, and can even help you decide whether or not you should look into alternative loan repayment strategies, like consolidation or refinancing.

What Is APR For Student Loans?

As briefly mentioned, your annual percentage rate, known as “APR,” is the interest and fees you are responsible for paying on your student loan balance over the course of a year. The APR formula shows you your actual cost of borrowing, including your interest rate and any extra fees or costs, like origination fees or forbearance interest capitalization.

APR vs Interest Rate on Student Loans

The interest rate on your student loan is the amount your lender is charging you for the loan, expressed as a percentage of the amount you borrowed. For example, the interest rate for Federal Direct Subsidized Loans and Unsubsidized Direct Loans is currently 6.53% for 2024-25, which means that you would be responsible for paying your lender 6.53% of the amount of money you borrowed in yearly interest.

That 6.53%, however, does not include other costs that are considered in the APR formula, including disbursement costs. For loans with no fees, it is possible that the APR and interest rate will match. But in general, when comparing APR vs interest rate, the APR is considered a more reliable and accurate explanation of your total costs as you pay off your student loans. If you’re shopping around for student loans or planning to refinance your loans, the APR offered can help you decide which lender you would like to work with.

Recommended: Student Loan Info for High Schoolers

An Example of How APR Is Calculated for Student Loans

Let’s say you take out a student loan for $20,000 with an origination fee of $1,000 and an interest rate of 5%. An origination fee is the cost the lender may charge you for actually disbursing your loan, and it is usually taken directly out of the loan balance before you receive your disbursement.

So, in this example, even though you took out $20,000, you would only receive $19,000 after the disbursement fee is charged. Even though you only receive $19,000, the lender still charges interest on the full $20,000 you borrowed.

The APR accounts for both your 5% interest rate and your $1,000 origination fee to give you a new number, expressed as a percentage of the loan amount you borrowed. That percentage accurately reflects the true costs to the consumer. (In this example, if the loan had a 10-year term, the APR would be 6.124% )

What Is a Typical Student Loan APR?

For federal student loans, interest rates are determined annually by Congress. Federal loans also have a disbursement fee, which is a fee charged when the loan is disbursed.

APRs for federal student loans may vary depending on the loan repayment term that the borrower selects. Federal student loans are eligible for a variety of repayment plans, some of which can extend up to 25 years. Generally speaking, the longer the repayment term, the larger amount of interest the borrower will owe over the life of the loan.

Typical APR for Private Student Loans

The interest rate on private student loans will vary by lender and so will any fees associated with the loan. As of June 2024, APRs on private student loans may vary from around 4% to upwards of 16% for fixed interest rates.

The interest rate you qualify for is generally determined by a variety of personal factors including your credit score, credit history, and income, among other factors. In addition to varying APRs, private student loans don’t offer the same benefits or borrower protections available for federal student loans — things like income-driven repayment plans or deferment options. For this reason, they are generally considered only after all other sources of funding have been reviewed.

How to Find Your Student Loan APR

By law, lenders are required to disclose the APR on their loans — including student loans. These disclosures help you make smart financial choices about your loans and ensure that you’re not blindsided by mystery costs when you take out a loan.

For federal student loans, the government lists the interest rates and fees online, but make sure to carefully examine any loan initiation paperwork for your exact APR, which will depend on other factors including the amount you plan to borrow, the interest rate, and origination fees.

If you’re currently paying off federal student loans, your student loan servicer can tell you your APR. If you use online payments, you can probably see your APR on your student loan servicer’s website or on your monthly bill.

If you’re shopping around for private student loans, your potential lenders must disclose the APR in their lending offer to you. Your APR will vary from lender to lender depending on many factors, which can include your credit score, any fees the lender charges, and how they calculate deferred interest, which is any unpaid interest that your minimum payment doesn’t cover.

One student loan tip — compare quotes and offers from various lenders closely. Once you’ve decided on a lender and taken out a loan, your APR should be reflected on your loan paperwork and usually on your lender’s online payment system.

Recommended: Understanding a Student Loan Statement: What It Is & How to Read It

The Takeaway

APR is a reflection of the total amount you’ll pay in both interest rate and fees for borrowing a student loan. Interest rate is just the amount of interest you will be charged. On loans with no fees, it’s possible for the interest rate and APR to be the same. Interest rates and fees for different types of federal student loans are published, but individual APRs may vary based on the amount you borrow and the repayment term you select.

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.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What is the APR on student loans?

APR or annual percentage rate is a reflection of the interest rate plus any fees associated with the loan. It provides a picture of the total cost of borrowing a loan and is helpful in comparing loans from different lenders.

Is the APR the same on subsidized and unsubsidized student loans?

The interest rate for unsubsidized and subsidized federal student loans is sent annually by Congress. These loans also have an origination fee. For the 2024-2025 school year the interest rate on Direct Subsidized and Unsubsidized loans is 6.53% and the origination fee is 1.057%. The APR for your loan will be determined by factors including the repayment term you select.

What is the typical interest rate on private student loans?

Interest rates on private student loans vary based on a variety of factors such as the lender’s policies, and individual borrower characteristics such as their credit score and income, among other factors. As of June 2024, interest rates on fixed private student loans hovered around 4% to upwards of 16%.

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

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

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


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.

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.

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

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