Student Loans Will Get (Slightly) Cheaper Next Year Thanks to Lower Interest Rates

Interest rates on federal student loans are set to tick down for the upcoming academic year, though they remain high compared to what borrowers have paid over the past decade.

Undergraduate student loans will carry an interest rate of 6.39%, down from 6.53% this year. Graduate direct loans will drop to 7.94% from 8.08%. And PLUS loans for graduate students and parents of undergrads will be 8.94%, compared with 9.08% this year.

The rates, which were set based on the results of a Treasury auction this week, take affect July 1.

This is the first time since the summer of 2020 that interest rates on federal student loans have decreased — a ripple effect from the macroeconomic environment. Since student loan interest rates were set last year, the Federal Reserve has cut its own benchmark lending rate three times in hopes of curbing inflation. While borrowing costs on all kinds of products have decreased from their post-pandemic peaks, any further Fed rate cuts are on hold for now.

Still, when looking at recent history, the financing charges students will pay next year are quite expensive. From 2011 to 2022, for example, undergraduate borrowers never paid more than 5.05%, and in five of those years, they paid less than 4%.

How interest rates on federal student loans are set

Interest rates on federal student loans are based on the high yield of the 10-year Treasury note at auction in May, plus a fixed percentage add-on that's dictated by law. The rates are fixed, meaning all borrowers who take out a loan between July 1, 2025, and June 30, 2026, will pay the rates set this week for the entire loan repayment term (unless they refinance their debt into a private loan).

Federal loans also carry a one-time origination fee, which increases their overall cost. The fees are currently 1.057% for undergraduate and graduate direct loans and 4.228% for PLUS loans.

While rates are decreasing this year, because the change is so modest, the resulting savings will be minimal. For example, an undergraduate who borrows $7,000 in subsidized loans for the upcoming school year would pay about $2,490 in interest charges over a 10-year repayment period. That's roughly $60 less than a borrower would pay for the same loan and repayment term taken out during the 2024-2025 school year.

Student loan interest rates on the private market currently range from 3.39% to 17.99%, though only the most credit-worthy borrowers will qualify for the lowest rates, and almost all undergraduate borrowers will need a cosigner to get approved for a private student loan.

That's not the case for federal student loans; most have no credit requirement. The exception is PLUS loans, which do require a basic credit check to confirm the borrower doesn't have any recent delinquencies, defaults or bankruptcies.

Even if you can qualify for lower rates on the private market, experts still recommend students use federal loans first, as they have better borrower protections and more flexible repayment options.

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