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Credit Card Debt Relief: Everything You Need to Know



When you’re buried in credit card debt, it can be stressful to make payments every month and may still feel like you’re falling behind. In 2019, credit card debt in the United States totaled over $1 trillion, so you’re definitely not alone. Unexpected bills, high-interest rates or a layoff can make spiraling into debt unavoidable. 

Debt relief can help alleviate your financial burdens and make strides toward becoming financially stable. Credit card debt relief programs vary and are personalized to your situation. Some of them carry risks, so review your options and the fine print closely before proceeding. 

To determine if debt relief is right for you, take a close look at your financial situation. If debt relief can ease your financial stress and raise your credit in the long run, it can put you on the path to improved finances and overall well-being.

Table of Contents

  • What is Credit Card Debt Relief?
    • Credit Card Debt Relief vs. Credit Card Debt Forgiveness
  • How Do I Know If I Need Debt Relief?
  • Options for Relief
    • Credit Card Balance Transfer
    • Personal Loan
    • Debt Consolidation
    • Debt Reduction Plan
    • Bankruptcy
  • Tips to Successfully Manage Credit Card Debt Relief
  • What to Look Out For
  • How Does Credit Card Debt Relief Program Affect My Credit?

What Is Credit Card Debt Relief?

Credit card debt relief eases the burden of debt through a specific plan, and there are several options to choose from. While debt relief doesn’t erase debt, nor the potential consequences to credit, it can help with repaying your debt or adjusting the repayment terms.

Credit Card debt relief helps with repaying your debt Image

When budgeting and scaling back on expenses isn’t enough, a debt relief program can be beneficial. Ideally, you’ll work with a credit counselor to form a plan that works best for your situation. 

Some relief options include: working with your creditor to grant lower interest rates; a payment schedule that lowers your monthly payments; or debt consolidation.

Credit Card Debt Relief vs. Credit Card Debt Forgiveness

The terms ”credit card debt relief” and ”credit card debt forgiveness” mean two different things. 

Credit card debt relief involves taking steps to make debt and repayment manageable. 

Credit card debt forgiveness is when your creditor agrees to accept an amount that’s less than what you owe. Credit card debt forgiveness is not a silver bullet that eradicates all your debt, nor does it come free of potential risks. The two strategies can work together, though.

Example of Pursuing Both Relief and Forgiveness

Danielle owes $20,000 on her credit card, and she hasn’t made a payment in over five months. She reaches an agreement with her credit card company to pay $12,000 in installments if she pays a lump sum of $3,000 now. That means $5,000 of her debt has been forgiven.

By paying back the rest in installments, she’ll relieve her debt, and her credit score will improve over time. Not all creditors forgive or settle debts, and it could negatively affect your credit score (at least for a time). You may also have to pay taxes on the forgiven debt. Still, there are several options for credit card debt relief, and forgiveness is only one of them.

How Do I Know If I Need Credit Debt Relief?

To determine if you need credit card debt relief, you should evaluate your specific financial situation. Keep in mind that if your debt can be repaid by making small changes in the way you spend, that’s always the best route. But if you’re budgeting meticulously and barely staying afloat (or you’re sinking), you may need to seek help. 

Here’s how to know if you’re a candidate for debt relief assistance:

  • Your total unsecured debt is half or more of your gross annual income: If you add up your debt across your credit cards, personal loans and medical bills, and the total is more than half of your annual gross income, debt relief might help you get back on track. 
  • It’s a struggle to repay your unsecured debts, even when you budget like a champ: If you’ve cut your spending to the bone and still cannot make your debt repayments, continuing to struggle is often a slower, insufficient way to improve your finances and get back on your feet. 

Multiple creditors have sold your debt to collections agencies: Debt collectors can be ruthless and difficult to work with. Sometimes setbacks and unexpected bills happen and some of your debt may have reached a collections agency. If you’re at the point, getting help to negotiate with debt collectors can be a huge relief.

Three Steps to Finding the Best Debt Relief Plan Image

If you’re buried in debt, but don’t know where to go, take the following steps. You might be able to get relief sooner than you expect.

Steps to Find the Best Debt Relief Strategy

Here are the following steps you should consider after evaluating your situation:

  • Speak to a credit counselor: Allow someone who is familiar with debt relief options to help guide you to an individualized plan. 

A reputable credit counseling organization will discuss your financial outlook with you. They’ll make recommendations on managing your debt and budgeting, plus share available resources. 

  • Research all your options based on the consultation: Ask the counselor for trustworthy educational resources, and take time to look into the options given by the credit counselor. Make yourself familiar with them and weigh the pros and cons. 

Be sure to know the concrete steps of each option and how they’ll impact your unique situation.

  • Select a route that works best for your situation: Once you’ve reviewed debt relief options—and perhaps had a follow-up credit counseling session—make a decision and move forward. 

Select the route you want to take, then formulate a concrete plan. This will help you make consistent progress in overcoming your debt. 

5 Options for Credit Card Debt Relief (and the Pros and Cons of Each)

There are several options when it comes to credit card relief. Remember that no matter which option you choose, credit card relief takes time. In general, it takes three to five years to see huge increases in your credit score through debt relief programs, but putting in the time and effort now can help with long-term gains. 

Here are common credit card relief options along with their pros and cons.

1. Credit Card Balance Transfer

If you have high-interest debt on a credit card, you can transfer the balance to a different card with a lower interest rate. By paying less in interest, more of your payments will go toward the principal balance, allowing you to pay off your debt faster.

When making a balance transfer, check to see if the new card offers a low introductory interest rate. An introductory interest rate, which could be as low as zero percent, usually lasts for a certain period of time, such as six to 18 months.

Ideal Balance Transfer Traits Image

Any late or insufficient payments can invalidate these lower interest rates. If you think you can pay off a good part of your debt within that time, a transfer might be a wise choice. A fee for transferring a balance is common—usually about three percent of the balance amount. If you have a good credit score, this fee might be waived.


  • Can provide a much lower interest rate, making your payments more manageable
  • Usually a convenient process
  • Simplifies many payments into one if you transfer multiple balances


  • Might require a good or excellent credit score
  • If you don’t have a good credit score, the fee to transfer might be expensive
  • Once introductory interest rates are over, the interest rates could be higher 
  • New purchases won’t be interest-free like the balance transfer
  • Can be complicated to put your payments toward your balance transfer vs. new purchases

2. Personal Loan

Personal loans give you access to funds that can be put toward your credit card debt. There are two types: Secured and unsecured personal loans. Secured loans require collateral, such as a vehicle. In case you don’t make repayments, they can seize your property. Unsecured loans only need a signature, but usually require a higher credit score than secured loans.

Personal loans can have high-interest rates but are often fixed for the life of the loan, meaning they won’t increase. A lender might give you months or years to pay off a personal loan depending on the contract you sign.


  • Quick access to funds (up to thousands of dollars)
  • Can be used to pay off credit card debt immediately
  • Can be easy to get even with a low credit score (especially secured personal loans)
  • Flexible repayment terms 


  • Often high-interest rates
  • Can get hit with fees
  • Could put your assets at risk (with a secured loan)
  • Could damage your credit if you don’t pay back the loan on time

3. Debt Consolidation

Combining debt from several credit cards into a consolidation loan can give you a fixed rate and a single monthly payment. Consolidation loans usually offer lower interest rates than credit cards, so you can pay off debt faster and pay less overall.

While the lower rates are helpful, certain loans can be viewed as a risk factor by lenders and credit scoring models like FICO®. But removing your debt from your credit cards results in a lower credit utilization, which can help increase your credit score. 


  • Can give you a lower interest rate
  • Many options and lenders available
  • Combines payments into one easy payment
  • Can give you mental relief from many payments
  • Doesn’t usually have a huge negative impact on your credit


  • May not help your credit significantly long-term
  • You may not be eligible if you have a low credit score
  • Secured consolidation loans put your assets at risk, like your home or car
Debt Consolidation Image

4. Debt Reduction Plan

A debt reduction plan helps you manage your debts, often through lower monthly payments. A debt relief counselor works to determine the exact method like a repayment plan or debt consolidation.

You may also create a personal budget for paying off debt. A counselor can help you figure out where you can scale back and how you might be able to make extra cash for payments. A debt relief counselor can also negotiate lower interest rates and give you guidance on how to repair your credit.


  • Can help you get out of debt with the least amount of stress
  • Can help you negotiate low-interest rates
  • Is personalized to you and your financial situation
  • Allows you to take control of your finances
  • Initial consultations are usually free


  • Difficult to do without a credit counselor
  • Can take time to reduce your debt
  • Might have an initial negative hit on your credit score

5. Bankruptcy

If you find yourself deep in debt, sometimes declaring bankruptcy may sometimes be the best option for you. While it can be detrimental to your credit in the short-term, filing a Chapter 7 or Chapter 13 bankruptcy might put you ahead in the long run.

However, you should consult with an attorney in detail to fully explore this option and understand how bankruptcy will affect you.

Chapter 7 Bankruptcy & Chapter 13 Bankruptcy Image

Bankruptcy is not something to take lightly, as declaring bankruptcy affects your credit report for up to 10 years. Here’s what to expect with both types mentioned.

Chapter 7 bankruptcies: Your debt is mostly wiped out by selling your assets, and it stays on your report for up to 10 years.

Chapter 13 bankruptcy: Recovering is typically easier since you pay back some or all of your debts, and it falls off your credit report after 7 years.


  • Gives you a fresh start 
  • Bankruptcy lawyers will guide you through the process 
  • Your lawyer handles the calls and letters from collections agencies
  • Your personal assets like your home and retirement savings are exempt from creditors
  • You can rebuild your credit after bankruptcy is off your record


  • Ruins your credit score for up to 10 years
  • Recovery is slow
  • A bankruptcy lawyer can be expensive
  • Not all debts may be eliminated (i.e., your student loan or alimony payments won’t go away)

Tips to Navigate Credit Card Debt Relief

Depending on how you’re handling your credit card debt relief, you’ll be making one or several monthly payments to creditors. If you miss a payment, paying off your debt will take longer and be more expensive. 

Here’s how to better manage your credit card debt while paying it back:

  1. Scrutinize your spending: Take a hard look at your lifestyle and how you’re spending your money. Once you’ve got a handle on where your money goes, decide where you can cut expenses and allocate your savings to your cards.
  2. Create a budget: Design a budget on a spreadsheet or in an app. Budgeting apps can send you payment reminders and alert you if you’re spending too much. Some apps even track your credit score.
  3. Reduce your debt as much as possible: Credit card debt can take a long time to pay off. To see a difference, repay some of the balance every month, not just a minimum payment (if possible).
  4. Lower your interest payments: If your credit score is solid, consider transferring your current credit card balances onto a new card with zero interest on balance transfers—and no transfer fee.
    It’ll be easier to start reducing your debt without the large interest payments.
  5. Consolidate your debt: An effective way of getting your debt under control is to combine it into one monthly amount. Shop around for a good deal, pay off your existing agreements, and you’ll be left with a single, more manageable sum. 
  6. Don’t borrow against your mortgage: It may be tempting to borrow against your house to settle your credit card debt, but this should be a last resort. Using your mortgage to pay credit card debt makes the debt last longer.
    For instance, you’ll be paying it back over 20 years instead of only a few years on something like an unsecured loan. In general, you’ll end up paying a lot more interest in the long run.
  7. Don’t skip secured loan payments: While paying back your credit card debt is important, you should prioritize any secured loans first so that you don’t risk losing your house, car or other assets. 
  8. Don’t use retirement money: It can be costly to pay off your credit cards with your retirement fund. Leaving the money where it is, allows it to accrue much more interest in the long-term than you’ll save by using it to pay off your credit cards. 
    You’ll also be liable for fees for withdrawing the money early, and, as the withdrawal will be considered income, you’ll be taxed as well.  
  9. Don’t feel pressured by creditors: Creditors and collection agencies can be persistent. Make sure you’re not pressured into paying more than you can afford. Remember that harassment is an offense and you can report it.
    If possible, negotiate with your creditors by letter or email rather than on the telephone.
  10. Bankruptcy should be a last resort: Declaring yourself bankrupt seriously impacts your creditworthiness in several ways. It will reduce your credit score by as much as 200 points, and a record of it will remain on your credit report for up to 10 years. You run the risk of losing assets, and you’ll find it hard to get credit in the future. 
  11. Keep your credit cards open: Once you’ve paid off your credit card debt, you should think carefully before closing your cards. If you have several kinds of credit, closing your cards increases your overall credit utilization. Plus, it shortens the length of your credit history. Both result in your credit score taking a hit.
Credit Card Debt Relief Don'ts Image

The Risks Involved with Debt Relief

Debt relief takes several forms, but any method can be tricky. Whichever approach you choose, there are several ways you can be misled or scammed. Here’s what to watch for: 

  • Fake companies and scams: Fake companies ask for hefty fees upfront, then fail to contact your creditors or provide you with the loan you applied for. If you’re suspicious about a company, contact the Federal Trade Commission.
  • The deal doesn’t save you money: If the length of the loan is so extended that it costs more to pay it off than to keep original agreements in place, that’s a red flag. 
  • Hidden fees and costs:  Make sure you’re aware of all the fees and hidden costs before committing to any agreement.
  • Impacts on your credit score: Debt relief can seriously affect your credit history. 
  • Owing taxes: Debt relief is a double-edged sword. While there are a few exceptions to the rule, in general, forgiven or canceled debt is taxable. 
  • Ending up with more debt: Debt relief methods don’t address the behavior that led to the debt in the first place. If you take out a debt consolidation loan or credit card, you’re still accruing more debt, and it can be tempting to start using credit again.
Credit Card Debt Relief Risks Image

How Does Credit Card Debt Relief Program Affect My Credit?

Credit card debt relief programs affect your credit based on the type of debt relief you choose and how much debt you have. In general, you can expect a dip in your credit score at first, followed by a steady rise over time.

Expect an initial drop in your score Image

A turnaround on your credit score won’t happen overnight. It could take anywhere from a year to a few years, depending on the amount and type of debt you have. Some debt relief options might lower your score drastically to begin with, but a hit to your credit at first could be worth it in the long run. With each passing month, you’ll get more and more back on your feet.

Evaluate the type of debt relief you’re considering to understand how it might affect your credit. Declaring bankruptcy, for example, causes a major hit to your credit and requires significant time to improve it.

A Debt Relief Plan Can Get You Back On Track, But Proceed with Caution

If your financial situation could benefit from a debt relief program, you can make huge strides. Your score won’t skyrocket overnight, but with diligence, you can be freer and more stable over time. Be sure to review the terms and conditions beforehand, and understand how the plan might impact your credit score.

A credit repair consultation can help determine if other methods can improve your creditworthiness without having to sign up for debt relief. By taking the time to figure out a plan now, you’ll have relief sooner—giving you peace of mind and better financial stability.

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Credit Cards

Understanding Credit Card Security Codes



The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Credit card security codes are an important security measure to prevent fraud and identity theft. They add an additional layer of safety when making purchases and help ensure the buyer is, in fact, the cardholder.

These security codes—often called CVV codes, short for “card verification value”—are three- or four-digit codes located directly on your credit card. They’re typically, but not always, asked for when making card-not-present transactions, such as those made online and over the phone. Here, we detail where to find them, how they work and why they’re important for consumer protection.

Where to Find Your CVV Code

The location of your CVV code depends on the credit card issuer:

  • Visa, Mastercard and Discover: The code will be three numbers on the back of the card to the right of the “authorized signature.”
  • American Express: The code will be four numbers on the front of the card above and to the right of the card number.
Where to locate your card's security code.

How to Find Your CVV Code Without the Card

Credit card security codes were designed to ensure that the person making a purchase actually has the card in their possession. Because of this, it’s impossible to look up your CVV code without having the physical card. This is why it’s important to have the physical card on hand if you need to make a purchase that requires a CVV code.

If an identity thief obtains your credit card number—for example, via shoulder surfing—may try to call the bank and pretend to be you in order to get the CVV code. However, banks typically don’t give out this information. Each financial institution has their own policies, but if you can’t read or access your CVV code, they will usually issue you a new card.

While most retailers require a CVV code when making card-not-present transactions, many don’t. In these instances, crooks would still be able to use your card.

How Are CVV Codes Generated?

According to IBM, CVV codes are generated using an algorithm. The algorithm requires the following information:

  • Primary account number (PAN)
  • Four-digit expiration date
  • Three-digit service code
  • A pair of cryptographically processed keys

Other Names for CVV Codes

Depending on the credit card company and when your card was issued, your security code may go by a different name. Even though there are many different abbreviations, the basic concept remains the same. Below are all the abbreviations and meanings for credit card security codes:

  • CID (Discover and American Express): Card Identification Number
  • CSC (American Express): Card Security Code
  • CVC (Mastercard): Card Verification Code
  • CVC2 (Visa): Card Validation Code 2
  • CVD (Discover): Card Verification Data
  • CVV (All): Card Verification Value
  • CVV2 (Visa): Card Verification Value 2
  • SPC (Uncommon): Signature Panel Code

Credit Card Security Code Precautions

While CVVs offer another layer of security to help protect users, there are still some things to be aware of when making card-not-present transactions.

  • Sign the back of your credit card as soon as you receive it.
  • Keep your CVV number secure. Never give it out unless absolutely necessary—and if you fully trust the person.
  • Review each billing statement to ensure there are no transactions you don’t recognize or didn’t authorize. If there are, contact your financial institution immediately and consider freezing your credit.
Credit card security precautions.

Protecting your identity requires constant vigilance—but emerging technology may have the potential to mitigate some of the risk of credit card fraud.

Shifting CVVs: The Future of Credit Card Safety?

Since chip-enabled cards replaced magnetic stripes, in-person credit card fraud has taken a big dip. Crooks are turning toward online and card-not-present methods of fraud. CVV codes are good at combating this type of fraud—but shifting CVVs, also referred to as dynamic CVVs, may be even better.

The technology works by displaying a temporary CVV code on a small battery-powered screen on the back of the card. The code regularly changes after a set interval of time. This helps thwart fraud because by the time a hacker has illegally obtained a shifting CVV code and tried to make a purchase, it will likely have changed.

Despite the security benefits, shifting CVVs haven’t been widely implemented due to high cost, and it remains to be seen if the technology and process can scale. Financial institutions have many measures in place, such as fraud alert, to notify you of potentially suspicious activity.

If you suspect you’ve been a victim of identity theft, call your credit card company, change your passwords and notify any credit bureaus and law enforcement agencies. By regularly checking your credit card statements, being careful about who you give your information to and being vigilant when making purchases, you’ll help do your part in keeping your identity secure.

Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.

Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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How Do Credit Card Miles Work?



The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Credit card miles are rewards points that help you earn credits toward travel and other purchases. How credit card miles work and whether this type of rewards card might be a good idea for you depends on a few factors, which we’ll cover below.

What Are Credit Card Miles, and How Do They Work?

Credit card miles are similar to credit card points. They’re a reward that you earn by taking certain actions, including making eligible purchases with the card.

Once you earn enough miles, you can redeem them for rewards. They’re called miles because typically these types of rewards credit cards are aligned with an airline or travel service. That usually means the most value comes from redeeming miles for airfare or rewards miles in an airline program.

However, you can often choose to redeem them for other rewards, such as merchandise, hotel and other travel credits or gift cards at a lesser value per point.

How Are Credit Card Miles Different From Frequent Flier Miles?

In some cases, credit card miles and frequent flier miles may be the same thing. If you have an airline-branded card, such as a Delta SkyMiles credit card, your points may be in the form of the airline’s frequent flyer miles. You can redeem those for flights or other rewards within the frequent flyer program.

If you have a non-branded card, then you may earn generic credit card miles. Those may be redeemed for flights with numerous airlines or other rewards, typically via the credit card rewards program’s online portal.

Hotel rewards cards work in a similar manner. If it’s a branded card, you may earn rewards directly via the hotel chain’s membership rewards program.

How Do You Earn Credit Card Miles?

The exact way you earn credit card miles depends on your card. But typically, you can earn by spending with your card to qualify for various rewards.

Use Your Credit Card Often

Rewards cards are designed to promote spending. You usually earn a certain number of miles or points for every dollar you spend on qualified purchases. In some cases, you can earn more by spending with certain retailers or on certain categories.

For example, it’s common for an airline-themed card to reward more for spending in travel categories. You might earn 3x miles or 5x miles for every dollar you spend with a certain airline, for example, and one mile per dollar on all other purchases.

The key to earning a lot of miles is using the card as much as possible for things you would already be buying and then paying the balance off immediately so you don’t owe interest. For example, if you earn two miles per dollar spent at grocery stores, you could use your credit card to cover your grocery shopping each week.

If you spend $200 a week, that’s roughly 1,600 miles earned per month just for doing grocery shopping you already do.

Take Advantage of Sign-Up Bonuses

Many rewards cards come with sign-up bonuses, and this is a great way to earn a lot of credit card miles right from the start. Typically, the bonus requires you to spend a certain amount of money when you first open the card.

For example, you might earn 50,000 miles if you spend $5,000 in the first three months as an account holder. That sounds like a lot, but it’s often achievable just by using the credit card to cover all normal expenses, such as fuel, groceries and even utility bills. Just make sure you’re paying off the card balance regularly so you don’t end up with a high utilization rate and expensive interest.

Refer Your Friends

Some credit card rewards programs offer extra miles if you refer friends. If your friend applies for the card using your referral code and is approved, then you may be awarded extra credit card miles.

How Much Are Credit Card Miles Worth?

The value of credit card miles varies, but typically they’re worth about one cent. That means if a flight costs $400, you need 40,000 miles to cover it. In some cases, you may be able to raise the value of your miles by redeeming them through a select online portal or via certain airlines.

Redeeming Your Miles

Follow the general steps below, as well as any unique instructions from your credit card company or rewards program, to redeem miles.

Check Your Balance

First, find out how many miles or points you have. This is typically listed on your last statement, but most credit cards support online account access where you can get up-to-date information about your points. You can also call your credit card company or rewards customer service line to find out.

Understand the Limitations

Before you plan on using miles to pay for travel, look at the fine print to understand restrictions. Some rewards programs have blackout dates, which means you might not be able to use miles to pay for airfare during peak times. Others require mile minimums, which means you need a certain amount of miles to redeem to cover part or all of your airfare.

And miles do expire, so make sure you keep track of when you earned the miles and when they will expire so you can redeem them beforehand.

Have a Flexible Schedule

Being flexible about when exactly you travel can also help you get the most out of credit card miles. For example, in some cases you can save hundreds on airfare by leaving a day earlier or later than planned. That means your miles can stretch further to cover more trips or tickets.

Choosing the Best Card for You

Earning and using credit card miles helps you boost your spending power. With the right credit card, you’re getting more than your original purchase when you buy things. But you do need to stick to recommended credit card use, such as paying off your bill every month and keeping your balance as low as possible.

Otherwise, you could end up paying high interest rates or driving down your credit score, and the miles you might earn in the process are not valuable enough to make up for those costs.

Which card you should get depends on your personal needs and preferences. Popular options include the Chase Sapphire Preferred Card, the Bank of America Travel Rewards card and the Capital One Venture Rewards card. These are unbranded cards that let you earn general miles.

If you fly regularly with a certain airline, you might be able to maximize value from a branded airline rewards card. Most rewards credit cards do require good or excellent credit. Check your credit before you apply so you know what cards you might qualify for.

And if you find anything inaccurate on your credit report that could be dragging down your score, reach out to Lexington Law for information on how we can help you dispute errors on your credit.

Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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Subsidized vs. Unsubsidized Loans – Lexington Law



The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

The federal direct loan program offers subsidized and unsubsidized loans to college students. A federal direct subsidized loan is a loan where the government pays the interest while the student is in school. A federal direct unsubsidized loan is one in which the student is responsible for paying all interest, receiving no additional federal aid.

What Is the Difference Between Subsidized and Unsubsidized Student Loans?

The main differences between federal direct subsidized and unsubsidized loans are the qualification criteria, the maximum limits and how the loan interest works.

A chart displaying the differences between subsidized and unsubsidized student loans.

Loan Qualifications

Subsidized: To qualify for a subsidized loan, you must be an undergraduate student who can demonstrate financial need based on the information you submit through the Free Application for Federal Student Aid (“FAFSA”).

Unsubsidized: Unsubsidized loans are available to both undergraduate and graduate students, and there is no requirement to demonstrate financial need.

Maximum Loan Limits

Subsidized: Your school will determine exactly how much you can borrow each year, but there are federal limits. These limits are based on what year of school you are in and whether you file as a dependent or an independent. Subsidized loan limits tend to be lower than unsubsidized limits. The aggregate limit for an independent student with subsidized loans is $23,000.

Unsubsidized: Unsubsidized loan limits tend to be higher than subsidized loan limits. The aggregate limit for an independent student with unsubsidized loans is $34,500.

How Interest Accrues

Subsidized: The U.S. Department of Education pays the interest for subsidized loans as long as the student is enrolled in school at least half-time. They will also pay the interest during your grace period—defined as the first six months after leaving school—and any period of deferment. This means that the amount of the loan will not grow once the student graduates, since the government has been paying the interest.

Unsubsidized: Whether you’re an undergraduate or a graduate student, you’re responsible for paying all of the interest during the entire life of your unsubsidized loan.

What Are the Similarities Between Subsidized and Unsubsidized Student Loans?

When it comes to interest rates, fees and the “maximum eligibility period”—the amount of time you’re able to take out loans—subsidized and unsubsidized loans are virtually the same.


On top of interest, you can expect to pay a small fee for both types of loans. This is approximately 1.06 percent of your total loan amount, and it is deducted from each loan disbursement. 

Both subsidized and unsubsidized student loans have a fee of 1.06% of the total loan amount.

Undergraduate Interest Rates

The interest rates for both subsidized and unsubsidized loans for undergraduate students are the same. Currently, the rate is at 2.75 percent for loans first disbursed from July 1st, 2020, to June 31st, 2021. The one exception is for direct unsubsidized loans for graduate students, which have an interest rate of 4.30 percent. 

Maximum Eligibility Period

For both loan types, the time in which you’re eligible for your loans is equal to 150 percent of the time of your program. For undergraduates pursuing a four-year bachelor’s degree, this means they will be eligible for their loans for six years. Those pursuing a two-year associate’s degree will be eligible for three years. This ensures that students can still receive loans even if they’re unable or choose not to graduate within the program’s time frame. 

How to Apply for Subsidized and Unsubsidized Loans

Once you’re ready to apply for a federal direct loan, fill out the FAFSA. Your school will send you a detailed report of what student aid you’re eligible for. Any grants or scholarships are free money, so make sure to accept them. They’ll also decide which loans you’re eligible for, the amount you can borrow each year and what loan type you can get—subsidized or unsubsidized. 

No matter what type of student loan you go for, it’s important to understand how they affect your credit so that you can set yourself up for financial success after graduation. With responsible, on-time payments, you’ll be well on your way to healthy credit for life.

Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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