The Department of Education announced that federal student loan interest rates are increasing to 6.53% for the 2024-25 school year on undergraduate loans, up from 5.50% from the previous year.
Here, we’ll discuss how federal student loan interest rates are determined, how they have changed over the years, and when they may be higher than private lender rates.
Overview of Federal Student Loan Interest Rates
The 2024-25 interest rate on Direct Subsidized loans for undergraduates is now 6.53% — the highest it’s been in history.
Below is an overview of how rates have increased over the last four years:
| School Year 2021 – 2022 | School Year 2022 – 2023 | School Year 2023 – 2024 | School Year 2024 – 2025 | |
|---|---|---|---|---|
| Direct Subsidized and Unsubsidized Loans for Undergrads | 3.73% | 4.99% | 5.50% | 6.53% |
| Direct Unsubsidized Loans for Graduate or Professional Students | 5.28% | 6.54% | 7.05% | 8.08% |
| Direct PLUS Loans for Graduate or Professional Students or Parents of Undergrads | 6.28% | 7.54% | 8.05% | 9.08% |
Recommended: What’s the Average Student Loan Interest Rate?
Why Federal Student Loan Interest Rates Can Vary From Year to Year
The reason that federal student loan interest rates fluctuates has to do with how and when federal student loan rates are set. By federal statute, they are determined once a year and are based on the high yield of the 10-year Treasury note last auctioned in May (for the upcoming school year).
That yield is then added to a required percentage to get the federal interest rate for loans disbursed on or after July of that year.
So in May 2020, when businesses were in lockdown due to Covid-19, the high yield of the 10-year Treasury note was less than 1%. In May 2022, as the Federal Reserve began to try to curb inflation by raising its rate, the high yield or index rate on the 10-year Treasury note was 2.94%, and in May 2023, as the economy was looking up in terms of inflation, the index rate was 3.448%.
💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.
Required Markups to the 10-Year Treasury Index Rate to Determine Federal Student Loan Interest Rates
The required percentage added to the high yield of the 10-year Treasury note last auctioned in May 2023 depends on the type of loan and borrower. The added percentages follow this schedule:
• For Direct Subsidized and Unsubsidized loans for undergraduate students, the added percentage is 2.05%.
• For Direct Unsubsidized loans for graduate and professional students, the added percentage is 3.60%.
• For Direct PLUS loans for parents of undergraduate students and for graduate or professional students, the added percentage is 4.60%.
How Federal Student Loan Interest Rates Have Been Set Over the Years
The federal student loan program began in the 1960s. Over time, the way rates are set has changed due to legislative action. Here’s a general timeline of how federal student loan interest loans have been set:
From the 1960s to 1992
Originally, Congress set the interest rates for student loans. The rates were fixed and ranged from 6% in the beginning to 10% for the years 1988 to 1992.
From 1993 to 2003
Congress amended the law so that rates were variable rather than fixed and reset annually. The formula for federal student loan interest rates was the interest rate on short-term Treasury securities at a set time plus 3.1%. The rate was capped at 9.0%. Over the next six years, Congress lowered the added percentage and the cap.
Soon after switching to variable rates, Congress passed the Student Loan Reform Act, which authorized the Direct Loan program. The law changed the formula for calculating interest rates so that they were pegged to 10-year Treasurys, which aligned with the term or length of student loans. The markup was lowered to 1.0%, and the new formula was to be used starting in five years.
But in 1998, because the Direct Loan program was taking longer than expected to replace the old loan program, where banks provided the loans instead of the government, Congress postponed when the new formula would be used until 2003. In the meantime, the old formula was used but with a 2.3% add-on (instead of 3.1%).
From 2003 to Present
Several bills have been passed trying to make student loans more affordable, including a bill that fixed the rate at 6.8% starting in 2006. For Direct Unsubsidized loans for undergraduate students and Direct Unsubsidized loans for graduate and professional students, the federal student loan interest rate stayed at 6.8% through 2013.
In 2013, a law enacted the current formula used to calculate federal student loan interest rates.
How Private Student Loan Interest Rates Differ From Federal Loan Rates
Of course, private student loan rates will fluctuate with market trends and from lender to lender. That said, private student loan rates for 10-year loans are generally higher than the federal interest rate when you are comparing rates concurrently on offer.
However, this isn’t always the case when it comes to student loans for parents or graduate/professional students. For the 2024-25 school year, the interest rate on Direct PLUS loans is 9.08%. But in June 2024, some private student loan rates are actually lower.
Also, private student loan rates (and refinance rates) can be lower for a loan that has a shorter term length than the standard 10 years of federal loans.
What’s more, private student loan rates and student loan refinance rates that are currently on offer can very well be lower than the federal interest rate you received at the time of getting your loan.
💡 Quick Tip: It’s a good idea to understand the pros and cons of private student loans and federal student loans before committing to them.
What Private Lenders Consider When Determining Your Interest Rate
As mentioned earlier, private lenders will look at your creditworthiness when determining your interest rate. This involves considering such factors as:
• Credit History – When entering college, most students have little to no credit history. That means the lender could be unsure of their ability to repay the loan since students don’t typically have a history of paying any loans. This can lead to a higher interest rate.
• Your School – Most four-year schools are eligible for private loans, but some two-year colleges aren’t. Additionally, applicants typically have to be enrolled at least half-time to qualify for private student loans.
• Your Cosigner’s Finances – Since many private student loan applicants are relatively new to debt and have no credit history, they might be required to provide a cosigner. A cosigner shares the burden of debt with you, meaning they’re also on the hook to pay it back if you can’t. A cosigner with a strong credit history can potentially help secure a lower interest rate on private student loans.
The Takeaway
Federal student loan interest rates have fluctuated over the years. Currently, they are higher for 2024-25 than they were for 2023-24.
Typically, federal interest rates are lower than private student loans rates offered in the same year. But they can also be higher, particularly for parents borrowing to pay their children’s tuition and for graduate or professional students.
Also, private student loan rates (and refinance rates) on offer at the present time can be lower than federal interest rates from previous years or they can be lower on loans for term lengths shorter than the standard 10 years.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
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