Students and families borrowing money for college will get a slight reprieve for the upcoming school year.
The interest rate for undergraduate federal student loans disbursed between July 1, 2025 and June 30, 2026 will be 6.39%, down from 6.53% for the 2024-25 school year, the Department of Education announced on May 30. Graduate loans will come with a 7.94% rate and Parent Plus loans will have an 8.94% interest rate, both lower than the prior year.
The last time interest rates dropped for federal student loans was for the 2020-21 school year, when the undergraduate rate fell from 4.53% the previous year to 2.75%. Rates have ticked back up each year since then.
Federal student loan interest rates are fixed for the life of the loan and are set by the federal government each year using a formula based on the yield of the 10-year Treasury bond. The Treasury Department sells these bonds at auction and the price can rise and fall based on numerous factors in the broader economy.
“The bond yields are complicated,” student loan expert Mark Kantrowitz said in an email. “A decrease in buyers might cause the price to decrease, which causes the yield to increase. Even a slight change in investor demand can keep yields high. Tariffs could be a factor, as could changes in the trade imbalance.”
For example, in 2024, the bond yield rose, bringing student loan interest rates with it — to their highest level in over a decade — in part because of inflation and the Federal Reserve’s interest rate hikes, CNBC reported at the time.
Borrowers taking out loans for the upcoming school year will have a slightly more affordable repayment, but uncertainty remains in the broader student loan landscape.
Where federal student loans stand
Historically, financial planners and experts have favored federal student loans over private loans for families who need to borrow money to pay for college.
That’s because, for some borrowers, federal loans offer a lower interest rate, which means they’ll pay back less over the life of the loan versus what they’d pay a private lender. But beyond interest rates, federal student loans come with a number of benefits that often make them a superior option.
Subsidized interest, flexible repayment options and leeway during times of financial hardship make federal loans a smart option for many eligible borrowers. While some borrowers with good credit may be able to get a lower interest rate through a private lender, they generally won’t receive any of those other benefits.
However, several of those benefits could be eliminated in the near future. Republicans in Congress included provisions within their budget reconciliation package that may bring significant changes for current and future federal borrowers if enacted, including fewer repayment options and borrowing limits.
For now, the current benefits remain in place. The Senate is currently weighing the bill and could make changes and vote on it in the coming weeks.
“Despite the uncertainty around proposals from lawmakers and the White House, students should still explore all federal loan options before considering private loans,” Sarah Austin, a policy analyst with the National Association of Student Financial Aid Administrators, said in an email. “Even with proposed or potential changes to the Direct Loan program, it is still highly likely that the benefits of federal loans outweigh any advantages of private loans.”
Not everyone is eligible for federal student loans, though, so private student loans may be some students’ only option if they need to borrow money to pay for school.
“As always, when comparing loan options, students should consider interest rates, fees, and repayment terms,” Austin said.
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