Some people may have emergency savings to dip into or family or friends who can help them out if the unexpected happens. But for those who can’t access such resources, help may come in the form of a hardship loan, a type of loan offered to help people get through financial challenges, such as unemployment or medical debt.
Taking out a hardship loan can offer the cushion needed until a person’s financial prospects brighten. There are a variety of hardship loans to consider, from personal loans to home equity borrowing, and each has its own application requirements.
What Is a Hardship Loan?
A hardship loan doesn’t have an official definition, but many personal finance institutions may offer their own version of hardship loans. At its core, a hardship loan is a loan that can help you get through unexpected financial challenges like unemployment, medical bills, or caregiving responsibilities.
What Can You Use a Hardship Loan For?
As one of the types of personal loans, a hardship loan typically works much like any standard personal loan. The borrower receives a lump sum of money to use as they need, with few limitations. Potential uses could include:
• Rent or mortgage payments
• Past-due bills
• Everyday expenses like groceries and transportation
• Medical needs
A hardship loan could overwhelm already strained finances, however. Debt in any form will have to be repaid eventually, with interest, even in the case of hardship loans.
Hardship Borrowing Options
When you’re experiencing financial difficulties, you may feel the need to make a quick decision. But assessing your options can help you find the best solution for your needs and financial circumstances. Here are some options you may consider when looking for financing during times of hardship.
Personal Loans
A personal loan allows you to borrow a lump sum of money, typically at a fixed interest rate, that you’ll then repay in installments over a set amount of time. Unlike a credit card, which is revolving debt, a personal loan has a set end date. This allows you to know exactly how much interest you’ll pay over the life of the loan (a personal loan calculator can always help with that determination, too).
The common uses for personal loans are wide-ranging. In addition to using a personal loan to help cover current expenses, you could also use personal loans to consolidate high-interest debt that you may have incurred, whether due to hardship or other reasons.
Typically, personal loan interest rates are lower than credit card interest rates, making them an attractive alternative to credit cards. When it comes to getting your personal loan approved, expect lenders to look at your credit history, credit score, and other factors.
Credit Cards
Some people also may use credit cards to cover hardship expenses. While this strategy can help in the moment, it can lead to larger bills over time.
For instance, a credit card that offers a 0% annual percentage rate (APR) could allow you to minimize interest charges throughout the promotional period. However, you’ll need to ensure the balance is paid in full before the introductory period ends. Otherwise, you could start racking up interest charges quickly, adding to your financial challenges.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending is becoming more common as people seek out nontraditional financing. P2P loans are generally managed through a lending platform that matches applicants with investors.
While it may offer more flexibility than a traditional loan, a P2P lending platform still looks at an applicant’s overall financial picture — including their credit score — during the approval process. Like a traditional loan, a P2P’s loan terms and interest rates will vary depending on an applicant’s creditworthiness.
Generally, lenders in the P2P space will report accounts to credit bureaus just as traditional lenders do. So making regular, on-time payments can have a positive effect on your credit score. And, conversely, making late payments or failing to make payments at all can have a negative effect on your credit score.
If you own your home, you may consider borrowing against your home’s value. You could do this in the form of a home equity loan, a home equity line of credit (HELOC), or by refinancing your mortgage through a cash-out refinancing option.
With a home equity loan, you’ll pay back the amount borrowed (with interest) over an agreed-upon period of time. While a home equity loan is offered in a lump sum, a HELOC is a revolving line of credit that can allow you to withdraw what you need. However, HELOCs often have variable interest rates, which can make it challenging to plan for repayment.
With a cash-out refinance, on the other hand, you’d refinance your current mortgage for more than what you currently owe, allowing you to get a bit of extra cash to use as you need. This process replaces your old mortgage with a new one.
In all of the options outlined above, if you can’t pay back the loan or follow the agreed-upon terms, there’s the potential that you may lose your house.
401(k) Hardship Withdrawal
It also may be possible to withdraw funds from your retirement plan. Under normal circumstances, a penalty typically is incurred for early withdrawal. There’s a chance the penalty will get waived due to certain types of financial hardship, but exceptions are limited.
Additionally, making a hardship withdrawal from your retirement account means a missed opportunity for these funds to grow. This could potentially put your retirement goals at a disadvantage or later require you to come up with an alternative catch-up savings strategy. In other words, really pause to think it through before using your 401(k) to pay down debt or put toward current expenses.
Alternative Options
While you can use personal loans for a variety of financial needs, there may be other options to consider depending on your situation. For example, if you’re a single parent, you might consider seeking out loans for single moms or dads who have sole financial responsibility for their household. Here are some other options you might explore:
• Employer-sponsored hardship programs: If you’re facing financial hardship, ask your employer if they have an employee assistance program (EAP). Financial assistance might be offered to help employees who have emergency medical bills, who have experienced extensive home damage due to fire or flood, or who have experienced a death in the family. Employees will likely have to meet specific qualifications to receive EAP funds.
• Borrowing from friends and relatives: Asking for an informal loan from a friend or family member is certainly an option for getting through financial hardship, although not one that should be considered lightly. Having clear communication about each party’s expectations and responsibilities can go a long way to keeping a relationship intact. Consider having a written loan agreement that outlines details about the loan, such as the amount, interest rate (even if it’s nominal), and when repayment is expected.
• Community-based resources: There may be specific grants within your community available for people with emergency financial needs. Organizations like 211.org help individuals find the assistance they need. Community-based social services organizations also may be able to make referrals to other organizations as needed.
• Government programs: Federal and state governments list resources on their websites for individuals seeking financial hardship assistance. Depending on your circumstances, you may be eligible for certain government programs that could help reduce expenses for food, childcare, utilities, housing, prescription medication, and others.
The Takeaway
Researching all of your options for financial relief is a wise move. You might find help from government or community resources, your employer, or a friend or family member. Or, you might consider options such as a financial hardship loan, a home equity loan, or a P2P loan.
If you’re looking for financial help in the form of a hardship loan, a SoFi personal loan could be a good option for your unique financial situation. SoFi personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score*, and it takes just one minute.
See if a personal loan from SoFi is right for you
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*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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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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.
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It’s a good idea to regularly review your credit report. Doing so can help ensure that the information used to calculate your credit scores is accurate and up to date. It can also alert you to fraud or identity theft.
Unfortunately, understanding your credit report can sometimes feel like a challenge — especially if it’s the first time you’re doing it. Below, we’ll explain how to read a credit report, as well as highlight some common credit report errors to look out for.
What Is a Credit Report?
Your credit report contains a large amount of information about your financial life and payment history. If you have credit cards or loans, for instance, those accounts and how you pay them are included in your credit report. Often, you’ll have more than one credit report, as creditors are not required to report to every credit reporting company.
Credit card issuers and lenders can pull these reports and review them in order to determine your creditworthiness. They will rely on this information to make a decision on whether to loan you money, as well as the terms they’ll offer if they do.
Who Compiles Credit Reports?
Credit reports are created by three national credit reporting agencies: Equifax, TransUnion, and Experian. The information the credit bureaus compile in credit reports comes from creditors — like lenders, credit card companies, and other financial companies — that submit information on your accounts and payment history to the bureaus.
Who Can See Your Credit Report?
Your credit report is accessed whenever a lender (or an employer or landlord) conducts what’s known as a hard credit inquiry. This is when a business accesses your credit report to make decisions about your creditworthiness, likely in order to make a decision about extending a loan (or a job or housing).
Hard credit inquiries will appear on your credit report, so you should recognize any credit inquiries that appear. They may also subtly affect your credit score. Multiple inquiries in a short period of time may signify to lenders that you’re seeking multiple loans, which may bring up concerns about your financial stability.
Your credit report can also be accessed by consumers (like you). The Fair Credit Reporting Act requires each of the credit reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months. Your credit score will not be impacted when you request a copy of your own credit report.
How to Get a Credit Report
Each year, you have the right to ask for one free copy of your credit report from each of the credit bureaus. There are a few ways you can request it:
• By visiting AnnualCreditReport.com
• By calling (877) 322-8228
• By downloading and filling out the Annual Credit Report Request form, and mailing it to the following address:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
You also can request credit reports from consumer reporting companies, though these may charge a fee. Additionally, you’re eligible to request free reports beyond your one per year under certain circumstances, such as being denied credit or due to potential inaccuracies because of fraud.
Also know that you can only check your own credit report — checking someone else’s credit report is generally illegal.
When you get your credit reports, it’s a good idea to read each section closely. Here’s a rundown of the sections you’ll typically find included, so you’ll know what to expect and thus how to read a credit report.
This section of the report is used to identify you. It contains basic information like your name, address, and place of employment. You may also find previous addresses and employer history listed here. Your employment history doesn’t affect your credit score. Rather, it’s included on your credit report only to verify your identity.
When scanning this area you’ll want to make sure that your name, address, and employer match up. Any incorrect or unfamiliar personally identifiable information (like company names you don’t recognize or employers you never worked for) may be a sign of identity fraud.
Personally Identifiable Information Included in Your Credit Report
• Name(s) associated with your credit
• Social Security number variations
• Address(es) associated with your credit
• Date of birth
• Phone numbers
• Spouse or co-applicant(s)
• Current or former employers
• Personal statements, such as fraud alerts, credit locks, or power of attorney
Credit Summary
This section summarizes information about the different types of accounts you have, including credit cards and lines of credit, mortgages and other loans, and any accounts that have been sent to collections. For each account, your credit report will include the date the account was opened, its balance, its highest balance, the credit limit or loan amount, payment status, and payment history.
As you read this section, make sure that all the information looks familiar. It’s not unusual for a credit report to have slightly dated information, such as a higher balance because you just paid off a bill this month. However, all information should seem recognizable. In particular, you’re looking for:
Unfamiliar accounts
Late payments that do not align with your records
Balances that do not match your records
The information in this section is pulled from public records and may include debt collections or bankruptcy information.
If you have any debt collections and bankruptcy on your record, it’s important to remember that they won’t stay there permanently. The following statutes of limitations apply to different types of debt, restricting how long the information will remain on your credit report:
• Chapter 13 bankruptcy: Removed seven years after the filing date
• Chapter 7 bankruptcy: Removed 10 years after the filing date
• Late payments: Removed seven years after they occur
• Payment defaults: Removed seven years after they occur
If you see information that’s not familiar, you’ll want to flag it, since this could be a sign of identity theft. You may also want to flag any information that is still on your credit report after the statute of limitations has expired.
Credit inquiries list all parties who have accessed your credit report within the past two years.
These could be from lines of credit you opened, such as applying for a credit card, or from applying for a loan.
Both hard inquiries and soft inquiries will appear, though they have different impacts on your credit — hard inquiries will affect your credit, whereas soft inquiries will not. You can distinguish the two types of inquiries based on how they appear on the report:
How a Hard Inquiry Will Appear
How a Soft Inquiry Will Appear
Business name
Company name
Business type
Inquiry date
Inquiry date
Contact information
Date inquiry will be removed
Contact information provided by the creditor for the account
It’s a good idea to make sure you recognize any recent credit inquiries, as they can be a red flag for identity theft.
Why Credit Reports Are Important
Your credit report can play a critical role in determining your financial future. That’s because creditors will refer to your credit report to decide whether to approve you for a loan or a credit card and, if so, what terms they’ll offer you, including the interest rate. In other words, your credit report will help determine whether you’ll get the auto loan you need to purchase a new car, or the mortgage necessary to purchase a home.
It’s not just creditors looking at your credit report either — landlords, insurers, potential employers, and even phone and cable companies may look at your credit report as part of their vetting process. This is why it’s so important to understand what information your credit report contains, so you can know what information these potential parties can learn from viewing it.
What Information Is Not Found on Your Credit Reports?
One surprising piece of data that you may be surprised to find out credit reports do not include is your credit score. Beyond that, your credit report will not contain the following information:
• Salary
• Employment status
• Marital status
• Spouse’s credit history, if applicable
• Assets, such as bank account balances, investments, or retirement accounts
• Any 401(k) loans
• Public records outside of bankruptcy
• Medical information
• Expired information
• Race or ethnicity
• Religious beliefs or information
• Political affiliates
• Disabilities
What To Do If You Find Errors on Your Credit Report
None of the information on your credit report should look unfamiliar. In fact, one of the main reasons you want to read your credit report is to make sure that your credit report matches your records.
But sometimes, there can be discrepancies. If you detect an error on your report, such as a payment incorrectly reported as late, you’ll want to file a formal dispute. You’ll need to dispute credit report errors with both the credit reporting company and the entity that provided the information (such as a credit card company).
When writing a dispute letter, you’ll want to include:
• A clear explanation of what is wrong in the credit report.
• Supporting documentation showing the information is inaccurate (such as a copy of a paid bill).
• A request for the information to be fixed.
By law, the credit reporting company must investigate your dispute and notify you of its findings.
If you notice an error that suggests identity theft (such as unknown accounts or unfamiliar debt), it’s a good idea to sign up with the Federal Trade Commission’s (FTC’s) IdentityTheft.gov site in addition to alerting the credit bureaus. The FTC’s tool can help users create a recovery plan and figure out next steps, which may include placing a security freeze on your accounts.
The Takeaway
It’s easy and free once a year to gain access to your credit reports from the three major bureaus. Taking advantage of this service can help you maintain good credit and good overall financial health.
Reviewing your credit report can give you a chance to correct any errors, and make sure your credit report is an accurate representation of your financial situation. It can also alert you to any fraudulent activity. In addition, reading your credit report can help you understand how creditors see you as a borrower and cue you into any potentially problematic information that may lead to a lower credit score than you would like.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
When should you check your credit report?
The Consumer Financial Protection Bureau (CFPB) recommends checking your credit report at least once a year to ensure there are no errors and that all information is up-to-date. You might consider checking them even more frequently than that though to have the most accurate picture of your current financial situation.
What do the numbers mean on a credit report?
Your credit report may contain a variety of different numbers. This can include your name identification number, your Social Security number, the IDs for addresses associated with your credit, phone numbers, account numbers, and more. It can help to go through section by section if you’re unclear as to what a particular number means.
What should I look for on a credit report?
When reading your credit report, you’ll want to look out for any changes to your personal information, such as changes to account details, inquiries, or data available in public records. Keep your eye out for any errors or anything that otherwise seems amiss, as this could be a sign of fraud.
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.
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 .
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.
Who doesn’t love receiving a paycheck and knowing you can use it to pay bills or maybe even indulge in a little splurge or two? But when you see just how much you are taking home as net pay vs. gross pay, it can be a little deflating.
Looking more closely at your paystub or direct deposit receipt, you’ll see several line items that are called “deductions.”
Deductions are all of the things that were taken out of your gross pay, leaving you with your net pay, or take-home pay.
While there are some deductions that are required by law and are out of your control, others are part of your employee benefits package, which means that you may be able to adjust them according to what works for you and your budget.
Read on for a paycheck breakdown that can help you understand exactly what is coming out of your paycheck and why, including:
• What are common payroll deductions?
• How do payroll deductions work?
• What are tips to manage payroll deductions?
What is Net Pay?
Whether you’re paid hourly or by salary, your rate of pay is the compensation that you and your employer agreed upon when you accepted the job.
This number appears in official contracts and is referred to as your gross pay. However, it does not represent the actual amount that you will be paid.
Net pay, also referred to as take-home pay, is the compensation that is paid out via check or direct deposit to an employee. It is your gross pay with all the deductions taken out, which can make you think, “Wait, where’d my money go?” when it hits your checking account.
What Are Payroll Deductions?
So, to answer that question: Here’s where your money goes:
• Mandatory deductions: By law, an employer must subtract various mandatory federal and state tax withholdings.
• Elective deductions: Employers will also subtract costs for employer-sponsored offerings that the employee takes part in, such as healthcare, life insurance, and retirement.
Whether required or optional, these are pulled out of your gross pay and applied where needed. While you may feel disappointed to see these funds siphoned off, they have an upside. They are saving you from owing major taxes come April 15, and they are potentially helping provide important elements of financial fitness, like saving for your future. This knowledge can be reassuring, especially if you are filing taxes for the first time, and are feeling a bit shocked about the difference between your gross and net pay on an annual basis.
How Do Payroll Deductions Work?
As mentioned above, payroll deductions may be required, such as federal or any state taxes, or they may be optional (say, a 401(k) plan or health insurance). The mandatory and elective deductions are subtracted from your paycheck’s gross pay amount.
What remains after these payroll deductions is your net pay. This is the amount that is paid to you. You can typically see a breakdown of exactly what has been subtracted from your compensation by looking at your paystub. If you are paid via direct deposit, you will likely find this information online at your employer’s portal. If you receive a paper paycheck, the paystub is often attached.
Types of Payroll Deductions
As you look at your paystub and see all the deductions that are being taken out of your gross pay, you may want a bit of help understanding what’s what. Below are explanations of some of the most common paycheck deductions:
Federal Taxes
Federal taxes include all the taxes you are required by law to pay to the federal government. These taxes (which are often referred to as being withheld vs. paid) help fund the federal government, allowing them to invest in things such as infrastructure, education, and national defense, and provide services to the American people.
What is tax withholding and how much must you allocate towards it? When you were first hired, you likely filled out an Employee’s Withholding Certificate or W-4 form form and claimed the number of tax exemptions you have. This amount tells the federal government how much money to take out of each paycheck to cover your taxes. The more allowances you take, the less federal income tax the government will take out of your paycheck.
One way to ensure that you have the right amount of tax withheld for each pay period is to use the IRS Tax Withholding Estimator or speak with someone in your company’s HR department. You can tell them if you’re single or married, how many dependents you have, and if you have any other sources of income, and they should be able to help you fill out your form accurately.
It’s also a good practice to revisit your W-4 selections annually as significant life events may change your withholding and also because the W-4 form is periodically updated.
During tax season of each year, individuals who have overpaid in federal taxes receive a refund from the government. Those who’ve underpaid, however, are required to pay additional funds and possibly a penalty.
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State and Local Income Taxes
There are other types of taxes that will possibly be withheld from your gross pay. Many states require a state tax to help fund government projects and services. The amount can range anywhere from 3% (Pennsylvania) to 13% (California). To learn more about your state’s taxation policy, you can look at this map for details.
Just as with federal taxes, your state income tax will get deducted from your paycheck to cover taxes you may owe at the end of the year.
Social Security and Medicare
Another common paycheck deduction you’ll see: Social Security and Medicare taxes that are part of the Federal Insurance Contributions Act (FICA) tax, a group of payroll taxes collected from both the employer and the employee. As the name implies, these taxes fund our nation’s Social Security and Medicare programs, helping with income and insurance needs once you reach retirement age.
The tax rate for social security is currently 6.2%, and Medicare receives an additional 1.45% (employers match these tax rates, bringing the total of FICA tax contributions to 15.3%).
Wage Garnishments
Another possible payroll deduction to know about: wage garnishments. These are legal procedures designed to repay delinquent, outstanding debts, such as unpaid child support, overdue credit card payments, or even unpaid taxes.
Most wage garnishments are initiated by court order. However, the IRS and other tax collection agencies also levy for unpaid taxes in the form of wage garnishment.
Garnishments are made on earnings leftover after all legally required deductions are made. The actual amount of any garnishment will depend on the amount of debt owed and income earned.
Employee Benefits
Depending on where you work, you may be able to opt into a variety of benefits. Typically, these costs are automatically deducted from your paycheck.
If you sign up for your employer-provided health insurance, at least some of the cost is likely to be a type of paycheck deduction.
Under the Affordable Care Act, employers with 50 employees or more must offer affordable health insurance. As part of an employee’s compensation package, many companies will pay half, or another percentage, of the insurance premiums. The employee’s portion of those premiums is represented on a pay stub as a deduction.
Other benefits, like flexible spending plans, commuter plans, and life insurance, may also be deducted from your pay, depending on whether or not you opt into them and if your employer picks up the bill fully or partially.
Health insurance and other benefits typically come out before your taxes, and you may be able to reduce your taxable income by signing up for them.
If you opt into this benefit, your employer will deduct funds from your wage earnings and deposit them into a retirement account. (How much of your paycheck should you save? Experts often recommend 20% should go towards saving for retirement and other short- and long-term goals.)
Employees are typically able to choose the amount they would like deducted from their earnings for retirement savings. In some cases, employers may contribute an additional percentage of your salary into your retirement account.
Contributions to your 401(k) not only help you save for the future, but lower your taxable income, since they come out of your paycheck before taxes get assessed.
3. Calculate any overtime for those employees who are not exempt and worked over 40 hours a week.
4. Take any pre-tax deductions.
5. Calculate and deduct federal income tax based on pay, withholding status, what tax bracket an employee is in, and other factors.
6. Determine and deduct Social Security and Medicare payments.
7. Calculate and deduct any state and local taxes.
8. Take any other deductions, and move funds to the appropriate entity.
Tips to Manage Payroll Deductions
If you are an employee seeking to tweak your deductions, you will have a few options. You might update your W-4 to reflect more or fewer exemptions, depending on whether you want to reduce or increase the taxes withheld.
In addition, if you could use some breathing room in your budget during a financial crunch, you might decrease retirement contributions a notch to free up a little more money for bills.
If you are in a position to be managing payroll deductions, consider these tips for making the process run smoothly:
• Develop organizational systems to manage forms, deadlines, and other aspects of the process. There are many digital and online tools you can use for this.
• Keep up to date with federal, state, and local tax laws to make sure you are deducting the proper amounts; know the guidelines about, say, equal pay provisions; and more.
• Automate the entire process with payroll software. This can save time and boost accuracy versus doing things by hand. Or consider outsourcing the responsibilities to an external agency.
• Regularly update training for payroll and HR teams, if you employ them.
• Don’t touch payroll taxes that are only paid quarterly. It may be tempting to dip into those funds before they are due and use them for other business expenses, but this is a very risky path to pursue. If you wind up being short when the taxes must be paid, you could face penalties.
The Takeaway
While you may be surprised to see all the deductions coming out of your paycheck, once you know what number to expect to see landing in your bank account each pay period, you’ll be able to plan your spending and budget accordingly.
It’s a good idea to check your pay stubs periodically to ensure that the deductions being taken out are accurate and align with your financial goals.
If you haven’t maxed out your 401(k) contributions, for example, you may decide to increase them as your income grows and you become more financially stable.
To make sure the appropriate amount of taxes are being withheld from each paycheck, you may also want to revisit your W-4 annually and make any adjustments as your circumstances change.
Another good way to keep close tabs on your earnings and spending is to open an online bank account with SoFi. With our Checking and Savings account, you’ll enjoy an easy-to-read dashboard, the convenience of spending and saving in one place, and automatic saving features that help you organize your cash, track spending, and stash your change with Vaults and Roundups. Qualifying accounts with direct deposit can get paycheck access up to two days early, which can give you a headstart on managing your money. And with SoFi, you’ll earn a competitive APY and pay no account fees.
Want your paycheck to work harder for you? SoFi Checking and Savings can help!
FAQ
What are some common incorrect payroll deductions?
Examples of incorrect employee payroll deductions are expenses that have to do with running the business, workers’ compensation premiums, and some personal protective gear costs. In addition, payroll deductions should not bring an employee’s income below minimum wage.
How do I report payroll deductions?
If you are an employee, your payroll deductions will be reflected in the end-of-year W-2 form that you receive. If you are an employer, you are likely filing IRS Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, which shows the wages you’ve paid and various taxes withheld.
What are the pros and cons of payroll deductions?
Payroll deductions are a fact of life. On the plus side, they whisk away taxes regularly so you don’t face a huge tax bill come April 15, and the money paid in taxes can help quality of life in America. Also, deductions like health insurance and retirement savings go towards achieving financial security. The main con, of course, is that you take home less pay than your gross earnings and may need to budget wisely to balance your spending and saving.
What are the categories of payroll deductions?
The main categories of payroll deductions are federal, state, and local taxes; Social Security and Medicare; employee benefits; and retirement contributions.
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
If you’ve applied for federal student loans in the past, chances are you’re familiar with the Expected Family Contribution, or EFC—a number used by colleges to figure out how much financial aid students are eligible for.
Starting for the 2024-2025 school year the EFC will be replaced by the Student Aid Index or SAI. It fulfills the same basic purpose but works a little differently, which we’ll discuss in-depth below.
This change was part of the larger FAFSA® Simplification Act, which itself was part of the larger Consolidated Appropriations Act passed in December 2020. The idea is to simplify the federal aid application process by making it more straightforward for students and their families, particularly for lower-income earners. But all changes come with a bit of a learning curve, even if simplicity is the goal. Here’s some helpful information about the Student Aid Index.
Key Points
• The Student Aid Index (SAI) replaces the Expected Family Contribution (EFC) starting from the 2024-2025 school year, aiming to simplify the federal aid application process.
• Unlike the EFC, the SAI can have a negative value, potentially increasing the amount of aid for which students are eligible.
• The SAI calculation considers a family’s financial assets and income to determine a student’s financial need, influencing eligibility for Pell Grants and other federal aid.
• Changes include a simplified FAFSA form with fewer questions and adjustments to financial aid eligibility criteria.
• The SAI also allows financial aid administrators more flexibility to adjust aid amounts based on a student’s or family’s unique circumstances.
Student Aid Index vs the Expected Family Contribution (EFC)
While both of these calculations perform a similar function, there are important differences in how they work—and important ramifications on how students receive financial aid.
How the EFC Currently Works
Despite its name, the Expected Family Contribution is not actually the amount of money a student’s family is expected to contribute—a point of confusion Student Aid Index is meant to clarify. (Most families end up paying significantly more than the calculated EFC when funding a college education, especially when you factor in loan interest.)
Rather, the EFC assesses the student’s family’s available financial assets, including income, savings, investments, benefits, and more, in order to determine the student’s financial need, which in turn is used to help qualify students for certain forms of student aid, including Pell Grants, Direct Subsidized Loans, and Federal Work-Study.
A very simplified version of the calculation looks like this:
Cost of college attendance – EFC = financial need
However, a college is not obligated to meet your full financial need, and they may include interest-bearing loans, which require repayment, as part of a student’s financial aid package.
Still, the EFC plays an important role in determining how much financial aid you’re eligible for and which types.
How Will the Student Aid Index Work?
The Student Aid Index will work in much the same way: the figure will be subtracted from the cost of attendance to determine how much need-based financial aid a student is eligible for. However, there are some important updates that come along the rebranding:
Pell Grant Eligibility
Pell Grant eligibility will now be determined before the FAFSA is submitted if their adjusted gross income (AGI) is less than a certain threshold determined by the poverty line. Pell Grants may still be offered to students after an application is submitted, using the SAI, if they don’t immediately qualify based on income alone.
A Wider Range of Financial Need
The SAI offers a greater range of financial need than the EFC, whose lowest amount is $0 (meaning a student demonstrably needs the full cost of college covered by aid). The lowest possible SAI, on the other hand, is -$1,500, which creates a cushion to help the lowest-income students cover adjacent college expenses that aren’t bundled into the school’s calculated cost of attendance figure.
New Rules
The SAI comes along with new rules that allow financial aid administrators to make case-by-case adjustments to students’ financial aid calculations under special circumstances, such as a major recent change in income. The bill also reduces the number of questions on the FAFSA down to a maximum of 36 (formerly 108), removes questions about drug-related convictions (which can now disqualify applicants from receiving federal aid), and more.
The Student Aid Index will be calculated much the same as the Expected Family Contribution is calculated today, though the bill does include some updates to make the process easier.
For one thing, the bill works together with the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act to import income directly into a student’s FAFSA, simplifying the application process.
The new FAFSA will also automatically calculate whether or not a student’s assets need to be factored into the eligibility calculation, shortening the overall application and offering more students the opportunity to apply without having their assets considered.
The bill also removes the requirement that students register for the Selective Service in order to be eligible to receive need-based federal student aid.
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Company by U.S. News & World Report.
What Is a Good Student Aid Index Score?
The Student Aid Index isn’t like a test or a report card—there aren’t really “good” or “bad” scores, or “scores” at all. It just depends on your personal financial landscape.
But just like the EFC, the lower the SAI, the more need-based aid a student may be qualified for. Since need-based aid includes grants, which don’t need to be repaid, and subsidized loans, whose interest is covered by Uncle Sam while you’re attending school, a lower SAI may translate into a lower overall college price tag.
How Will the Student Aid Index Be Used?
Like the EFC before it, the SAI will be used to help colleges determine a student’s financial need based on their financial demographics. Although the school itself may have its own grant programs and other types of aid, certain forms of federal student aid such as Pell Grants and Direct Subsidized Loans are offered based on demonstrable financial need, and the SAI is a key part of the calculation used to determine that need.
In short: the SAI will be used to determine how much financial aid a student is eligible to receive.
When Will the SAI Go Into Effect?
The SAI will be implemented in the 2024-2025 academic year. In the meantime, students will still use the same, extended FAFSA to apply for federal financial aid, and will still receive an EFC.
The Takeaway
The Student Aid Index is essentially the same number as the Expected Family Contribution, but it’s been renamed as part of the FAFSA Simplification Act in order to clarify to families what exactly the number means. This act also bundles in some other important changes that will hopefully simplify the overall student loan application process and increase access to education for the lowest-income students and their families.
Submitting the FAFSA and exhausting need-based federal student loan options, which tend to be the most generous to borrowers or grantees, is an important first step when it comes to funding a college education. But there are other tools in a student’s college-funding toolbox, as well.
Students can also apply for Direct Unsubsidized Loans from the government, which often have competitive interest rates and may offer more flexibility to postpone, lower, or forgive the repayment. Additionally, federal loans for undergraduate students don’t require a credit check to qualify, while private student loans usually do.
For those pursuing private student loan funding, SoFi offers no-fee student loan options for undergraduates, graduate students, and parents with competitive interest rates—not to mention the 0.25% discount for borrowers who set up autopay.
Could a SoFi student loan help fund your bright future? Learn more about options for undergraduates, graduate students, parents, and professionals.
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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.
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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.
In housing markets teeming with buyer demand, it’s not uncommon to put an offer on a home only to be outdone by a competing offer. If two or more potential buyers want a property badly enough, they may find themselves locked in a bidding war.
The tea leaves indicate that 2023 will throw cold water on many bidding wars, but certain markets in the country could remain competitive.
Here’s how to increase your chances of winning a bidding war so you don’t have to bid adieu to a home you really want.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
1. Know How a Bidding War Works
Bidding wars usually take place in a seller’s market, when demand outpaces housing inventory. They also typically occur when there are multiple interested parties and when there is some sort of constraint, like timing.
When a seller’s agent receives offers for a property that has attracted a lot of buzz, the agent may set a date by which would-be buyers should make their “highest and best” offer. Sellers can accept the best offer, counter one offer while putting the others to the side while awaiting a decision, or counter one offer and reject the others.
This brings up a salient point: It’s true that you can buy a house without a Realtor® or real estate agent, but an experienced agent can guide you through offers and counteroffers, contingency snags, and more.
2. Line Up Your Financing
One of the best things you can do to be prepared for a potential bidding war — or really any time — is to get your finances, and financing, in order.
Determine if you qualify for a mortgage and familiarize yourself with the types of home loans that are available: government-backed loan or conventional loan, fixed rate or adjustable rate.
Getting preapproved for a mortgage will give you a specific amount that a lender is tentatively willing to let you borrow.
And a preapproval letter shows sellers that you are a serious candidate to buy a home. Many experts recommend getting at least three preapproval letters from three lenders.
3. Lessen or Drop Contingencies
Contingencies are certain conditions that must be met before a real estate deal becomes binding. Potential buyers can back out of a deal without penalty if the contingencies aren’t met.
A clean offer, one with as few contingencies as possible, is attractive to sellers in a competitive market.
In a typical real estate market, a common contingency is the mortgage contingency, or financing contingency, which allows homebuyers to exit the deal and have their earnest money returned if they cannot secure financing by the agreed-upon deadline.
Another is the inspection contingency. Based on the findings of a professional inspection, the buyer may be able to negotiate repairs or the price, which are known as seller concessions if the sellers are agreeable, or cancel the contract.
Waiving contingencies shows your eagerness to triumph, but it comes with risk. The biggest is losing your earnest money deposit if you hit a snag.
4. Be Quick About These Contingencies
Sellers want to avoid spending a lot of time with a potential buyer only to have the deal fall through. If you’re including appraisal and inspection contingencies, do what you can to expedite them.
The real estate purchase contract includes any contingencies, the sales price, the closing date, and the date of the title transfer and possession. The contract is considered a working document until both parties agree on the terms.
5. Use an Escalation Clause
Unsurprisingly, one of the best ways to win a bidding war is by offering more money.
You may want to include an escalation clause in the contract if you assume there will be multiple offers.
The clause asserts that if another buyer makes a competing offer, your bid will automatically increase by a certain amount, up to a limit, to exceed the offer.
Say you put a $400,000 offer on a home, with an escalation amount of $10,000 and a ceiling of $430,000. If someone else bids $410,000, you will automatically bid $420,000, up to your ceiling.
6. Stay Flexible
A willingness to be flexible can give you a leg up in the eyes of a seller.
For example, a seller might be moving across the country for work and need to close by a specific date. So if you can get the appraisal and inspection done swiftly, that could be a huge plus.
Alternatively, sellers may need to stay in the house for a while. Working with them on their specific needs could give you an edge.
7. Pay With Cash
If you are able to do it, buying a house with cash can be very attractive to sellers. The process is typically much faster than going through a lender, and sellers don’t want to worry about financing issues that might hold up the deal or cause it to fall through.
It’s even possible that a seller would choose a cash offer over a slightly higher offer backed by a mortgage.
8. Increase Your Deposit
There are timeless standards for how to make an offer on a house. One is determining the size of your earnest money deposit.
The deposit, held in escrow by the title company, secures the real estate contract. It tells the seller that you are serious about buying the house.
Earnest money is typically 1% to 3% of the purchase price but can be more in a competitive market. If you close on the home, the deposit will be applied to your closing costs.
9. Write a Personal Letter
When sellers are choosing a buyer during a bidding war, they’re often just looking at numbers on a page. Consider writing a real estate offer letter, aka love letter, to humanize the transaction.
You might want to make a case for why you’re the ideal candidate to buy the home, and note commonalities: You’re a ceramicist and noticed an artist’s studio in the backyard. You have dogs; they have a dog. That big elm reminds you of the one at your childhood home.
Be complimentary about the things you like about the house and how it has been maintained. And be concise.
The Takeaway
Whether you’re buying in a time of burgeoning bidding wars or not, it’s good to know how they work. The tactics help homebuyers understand the lay of the real estate land: contingencies, earnest money, escalation clauses, love letters.
If you’re gearing up for a bidding war or a peaceful purchase, see what SoFi Mortgages are all about. The rates are competitive. A number of repayment terms are offered. And qualifying first-time homebuyers can put as little as 3% down.
Getting prequalified is the first step.
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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
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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.
