Interest rates on federal student loans recently jumped by one percentage point.
Undergraduate loans now carry a rate of 6.53% for the 2024-2025 school year, up from 5.50% last school year. Graduate direct loans have a rate of 8.08%, up from 7.05%. And PLUS loans for grad students and parents of undergraduates rose to 9.08%, up from 8.05% this year.
The new rates took effect on July 1, after being in a Treasury auction earlier this year.
This marks the fourth straight year that interest rates on federal loans for higher education increased, and the rates for the upcoming school year are the highest that students have paid in more than a decade.
How interest on federal student loans works
Rates on federal student loans are set each year, based on the high yield of the 10-year Treasury note at auction in May. Interest on these loans is fixed, so the current rates apply to loans taken out between July 1, 2024, and June 30, 2025. All borrowers who take out federal loans pay the same interest rate in any given year; the only difference in rates comes from the type of loan.
Federal loans also carry a one-time origination fee, which increases their overall cost. The fees are currently 1.057% for all loans, except for PLUS loans, which carry a high 4.228% origination fee.
It’s typical for students to take out a new loan each year of school, so it’s not uncommon for a student earning a bachelor’s degree, for example, to graduate with four or more loans with different interest rates. Those rates remain the same for the life of the loan, unless the borrower chooses to refinance their student debt.
This year’s spike in rates could add up to hundreds of additional dollars a borrower would have to pay in interest. For example, an undergraduate student using a $7,500 loan for the 2024-2025 school year would pay about $465 more in interest over a 10-year period than if they’d taken out the same exact loan for the 2023-2024 school year.
Why are student loan interest rates increasing?
Federal student loan interest rates tend to follow the same trend of lending rates in the broader economy.
So the rise in student loan interest rates over the past few years is due in part to the Federal Reserve’s actions to combat inflation. While the Fed is expected to cut its benchmark rate later is year, lending rates across of economy, from mortgages to auto loans, remain high. And since federal student loan rates are set once a year, student borrowers won't see any potential effect from the Fed cutting rates until next year.
Even though federal loans are getting more expensive, they’re still recommended over private student loans. Federal loans have better borrower protections and more flexible repayment options. Plus, rates on federal loans will remain cheaper than private interest rates for many borrowers.
Rates on private loans currently start around 5% — but only borrowers with excellent credit (or a cosigner with excellent credit) qualify for those rates. Other borrowers have to pay rates in the double digits to borrow in the private market.