The Federal Reserve has announced a rate cut by 50 basis points. While this change may influence several types of debt you currently hold or may acquire in the future, it will not affect existing federal student loan interest rates. Let’s take a closer look at how federal student loan interest rates are determined.
Calculating Federal Student Loan Interest Rates
Federal student loan interest rates are determined annually by the federal government, based on the auction of 10-year Treasury notes held each May. Following this auction, the Higher Education Act of 1965, as amended, outlines the legal framework for calculating the fixed interest rates applicable to the distinct types of federal student loans. The rates established in May will apply as fixed interest rates for federal student loans for the upcoming award year, which commences on July 1.
Loans issued between July 1 and June 30 of any award year will carry these fixed interest rates until they are paid in full. If a federal student loan borrower wanted to consolidate their loans with a federal Direct Consolidation Loan, the interest rate on the loan will be based on a weighted average of the underlying loans rounded up to the nearest one-eighth of a percent. It is important to note that the method for calculating federal student loan interest rates is established in law, meaning any changes to the rates or their calculation would require an act of Congress.
Impact on Federal Student Loans
Your interest rate depends on the date your loan is first disbursed. For federal student loans, interest rates are established each award year, which runs from July 1 to June 30. Each federal loan type has a fixed rate for any loans disbursed within a given award year.
The recent Fed cut will not have an immediate effect on federal student loans. However, if the trend of declining rates continues through the next 10-year Treasury notes auction in May 2025, we may see federal student loan interest rates decrease for loans first disbursed on or after July 1, 2025.
For borrowers receiving federal student loans between July 1, 2024, and June 30, 2025, your interest rates will remain fixed until the loan is paid in full. It's important to note that there is no option within the federal student loan program to “refinance” your loan to achieve a market rate interest rate.
For academic year 2024-2025 (July 1, 2024 – July 1, 2025), the interest rates are:
| Loan Type | 2024-2025 Award Year |
|---|---|
| Undergraduate Federal Direct Stafford Loans (Subsidized and Unsubsidized) | 6.53% |
| Graduate Federal Direct Stafford Loans (Unsubsidized) | 8.08% |
| Direct PLUS Loans (for parents, and graduate and professional students) | 9.08% |
Impact on Private Student Loans
We may see a decrease in private student loan rates due to recent changes, as lenders adjust their competitive interest rates to align with current market conditions. Borrowers with existing private student loans at variable interest rates might also benefit from lower monthly payments because of this news.
However, those who secured fixed-rate private student loans for the 2024 Fall term will not experience any changes to their interest rates. Still, fixed-rate borrowers can consider refinancing options to explore their opportunities to optimize their repayment strategy.
For college students seeking additional funding for the 2025 Spring term, it's wise to shop around and monitor interest rate offers from various lenders.
Should You Refinance Your Student Loans?
When considering federal student loans, borrowers should be cautious about the benefits they may lose by refinancing with a private lender. Federal loans come with various repayment options, including income-driven repayment plans that offer interest subsidies during repayment and potential forgiveness after a specified number of years. Additionally, borrowers aiming for Public Service Loan Forgiveness (PSLF) should note that refinancing will forfeit this opportunity.
For those with private student loans, it’s wise to explore available options. Borrowers who took out private student loans at high interest rates may find refinancing could lead to lower rates, potentially reducing their monthly payments. However, a lower interest rate doesn’t always guarantee a significant decrease in monthly costs, as repayment terms can vary and may either increase or decrease payments.
Every borrower’s situation is unique. While refinancing may serve as an effective repayment strategy for some, it may not be the best choice for others.