Where Will Student Loan Interest Rates Land for 2024-2025?

Preparing to head to a university this fall, or have a high schooler who’s about to become a college freshman? Like many families, you’ve probably completed your FAFSA application and are awaiting a financial aid package.

Whatever the verdict, chances are you or your student may have to take out loans to afford the high cost of tuition, room and board, books, and other costs. That begs an important question: What will the interest rates be on student loans in the 2024-2025 academic year?

It’s a good idea to understand how student loan interest rates are determined, how they affect what you’ll pay, and why these rates have climbed in recent years. Read on for rate predictions and helpful advice from financial experts.

How Student Loan Rates Are Set

Mark Kantrowitz, a renowned student loan expert and college planning author, explains that interest rates on student loans are calculated based on different factors.

“Federal student loan rates are set by Congress, based on the high yield of the last 10-year Treasury Note auction every May, plus a formula that adds a fixed margin,” he says. “The margins are currently 2.05% for the Federal Direct Stafford Loan for undergraduate students, 3.60% for the Federal Direct Stafford Loan for graduate students, and 4.60% for Federal Direct PLUS Loans. These rates are currently capped at 8.25%, 9.50%, and 10.50%, respectively.”

Note that interest rates on federal student loans are set by federal law, not the U.S. Department of Education. The rates updated every year are effective for new student loans distributed between July 1 and June 30 of the subsequent year.

Federal loan rates are fixed, which means you will pay the same amount in principal and interest every month when your loan repayment period begins. 

For federal subsidized loans, the government covers your interest expenses while you’re attending school at least half-time, during your grace period, and when you’re in deferment. When repayment begins, what you owe includes your initial principal amount and loan fees.

Federal unsubsidized loans, on the other hand, begin accruing interest right after disbursement. If you opt to delay payments until after graduation or your six-month grace period, the accumulated interest is added to your principal balance once repayment commences. (Note that there are no prepayment penalties on student loans, so you can pay the outstanding student loan balance at any time to prevent future interest from accruing).

Lenders of private student loans determine their interest rates based on benchmarks like the Secured Overnight Financing Rate (SOFR) index or Prime Lending Rate. In addition to these benchmarks, private lenders frequently evaluate your creditworthiness (or your cosigner’s), earnings, and financial history to determine your rate.

You will likely pay lower interest rates if you or your cosigner have a higher credit score and a more preferred financial rating. Interest rates on private loans can either be fixed or variable.

“The interest rates on private student loans are pegged to a one-month or three-month average of the SOFR index or Prime Lending Rate, plus a margin. Interest rates typically change monthly. Most lenders have five or six tiers, which are ranges of credit scores. Each tier is mapped to a different margin,” says Kantrowitz.

Why Student Loan Interest Rates Have Risen

There are several reasons why interest rates on student loans have climbed a bit recently.

“The federal funds rate, which influences borrowing costs across the economy, has been on an upward trend, contributing to higher student loan rates,” Andy Kolodgie, a certified financial planner, notes. “Also, as the yield on Treasury Notes increases, so do federal student loan rates. Remember, too, that Congress sets the interest rates for federal student loans annually.”

Demand for credit is another factor.

“More demand from borrowers means private lenders can charge higher rates,” says certified financial planner Chase Hughes. 

Interest rates on federal student loans hit a record low during the 2020-2021 academic year, during the pandemic, and then started increasing.

“The Federal Reserve Board has increased interest rates since March 2022, eventually stopping in September 2023,” Kantrowitz continues.

How Rising Interest Rates Affect Your Student Loans

The good news is that student loans with fixed interest rates will not cost more between the time of disbursement and the time they are paid off. So if you are already past year one of undergraduate or graduate school and you’ve already been disbursed federal student loans, you won’t be paying anything extra, even if rates go up for everyone else.

But if you’re readying to become a freshman or first-year graduate student, or if you already have an adjustable-rate student loan, you can likely expect rates to climb.

“Higher rates impact student loans by making borrowing more pricey. This means you pay back more than if rates were lower. This can make debt harder to manage and cause your monthly expenses to rise,” Hughes says. 

Case in point: let’s say you have a $10,000 student loan with a 5.5% fixed interest rate; if so, your monthly payment would be $108.53 and your total payments would be $13,023. But if your interest rate was 7.0%, your monthly payment jumps to $116.11 and your total payments increase to $13,922.

“That equates to a $910 increase in your total payments,” says Kantrowitz.

Where Student Loan Rates Are Headed in The Upcoming Academic Year

Currently, the interest rates for student loans first disbursed through June 30, 2024, are 5.498%, 7.048%, and 8.048%, respectively, for Federal Direct Stafford loans for undergrads, Federal Direct Stafford Loans for graduate students, and Federal Direct PLUS Loans.

“The most recent 10-year Treasury Note auction was on March 12, 2024. It had a high yield of 4.166%. If we were to use this as a proxy for an expected high yield this May 2024, the interest rates would likely be 6.216%, 7.766%, at 8.166% for these three loans, respectively,” Kantrowitz adds.

However, currently, the 10-year Treasury Note is trending upward, even though the Federal Reserve Board has indicated it plans on cutting interest rates later this year. If the trends observed from the start of 2024 until now continue, student loan interest rates this May could actually be 10 to 20 basis points higher.

Here’s what the pros forecast regarding federal student loan rates for the 2024-2025 academic year:

Loan	Current rate	Kantrowitz’s prediction	Kolodgie’s prediction	Hughes’ prediction
Federal Direct Stafford loan for undergraduates	5.498%	5.7-6.3%	6.0%	7.0%
Federal Direct Stafford loan for graduate students	7.048%	7.2-7.9%	7.55%	8.5%
Federal Direct Parent PLUS loan	8.048%	8.2-8.9%	8.63%	10.5%
Federal Direct Grad PLUS loan	8.048%	8.2-8.9%	8.55%	9.5%

The bottom line? All three of our experts anticipate rates rising for federal student loans disbursed in 2024-2025.

“The interest rates on private student loans are also likely to increase by similar amounts,” Kantrowitz says. “Based on current trends, I expect the interest rates on private student loans to be as much as 0.1% percentage points higher by the May Treasury Note auction and as much as 0.2% percentage points higher by July 1. Then, in the fall, the interest rates should drop when the Federal Reserve starts cutting interest rates.”

It’s important to note that these predictions are based on current economic conditions. Things may change later this year depending on what happens in the country economically, politically, and otherwise.

Advice From Experts

Given the expected student loan rate increases and current conditions, including efforts by the Biden administration to lower student loan payments, it’s important to weigh your borrowing choices carefully.

“The benefits of federal student loans are that they typically offer fixed interest rates, income-driven repayment plans, and potential loan forgiveness programs. They are a good choice for borrowers who may need these benefits,” recommends Kolodgie. 

Private student loans, on the other hand, should be considered after maximizing federal loan options. 

“Students should borrow federal loans first, as they are the least expensive and most flexible borrowing option. The main benefits of private student loans are that they have higher loan limits than federal student loans, and borrowers with excellent credit – or a cosigner with excellent credit – may qualify for a private student loan that is competitive with the interest rates on federal loans, especially the PLUS loans,” Kantrowitz suggests.

Be sure to shop around for rates and terms for multiple private lenders to find the best private loan deal for your situation, advises Hughes. And be careful not to borrow more money than you can afford to repay after graduation.

“Aim to have your total student loan debt at graduation be less than your annual starting salary,” adds Kantrowitz. “Always budget carefully before you borrow.”