Inflation reaches record highs in 2022, surpassing 9%. In response, the Federal Reserve — the central bank of the U.S. that is tasked with managing inflation — increased the Fed rate to curb inflation. It was successful; since then, the inflation rate has dropped, reaching 2.4% in September 2024.
The Fed reduced rates yet again in November 2024, signaling more changes for consumers nationwide. Learn why the Fed’s rate changes are so important, and how these adjustments will affect you as a student loan borrower.
How Federal Rate Cuts Work
The Federal Reserve, often referred to simply as “the Fed” is tasked with maintaining the country’s economic stability through regulations, monetary policies and acting as a market stabilizer. One of its biggest tasks is managing inflation. While some level of inflation is necessary for economic growth, if the inflation rate gets too high, it can cause significant damage to the economy.
The Federal Reserve adjusts the federal funds rate — the rate banks refer to when lending to each other — to manage inflation. When inflation gets too high, the Federal Reserve will raise the federal funds rate, making it more expensive to borrow money. Conversely, when inflation dips too low or if borrowing levels have gotten too high, it will decrease the federal funds rate.
That scenario was evident in 2020 in the midst of the coronavirus pandemic. To stimulate the economy, the Fed slashes rates to 0.05% — the lowest level in years. As a result, all kinds of loans, from mortgages to student loans, had historically low rates.
How Student Loan Interest Rates Are Set
Federal loan interest rates are set by the federal government, and they’re fixed for the duration of the loan’s term. However, the rates can change from year to year along with market changes. For example, federal undergraduate loans are currently at 6.53%. That’s a big change from 2021, when rates were just 2.75%.
Private student loans work differently. Individual lenders can set their own rates. ELFI uses Prime as a benchmark, while other lenders may use the Secured Overnight Financing Rate (SOFR) as a baseline, so as those rates change, student loan interest rates can fluctuate, too. For instance, in 2021, private student loans were available with rates under 2.00%. Today, lenders often charge 4.5% or higher.
Effects of Rate Cuts on Borrowers
With the Fed’s latest rate cut, you may be wondering what impact (if any) this change will have on you. Whether you experience any changes depends on the type of loans you have and what stage of your borrowing journey you’re in:
Existing Borrowers
For existing borrowers — those who already received their loans — there are several factors to consider.
- Loan type: If you have federal loans, there won’t be any change; your loans’ interest rates are fixed for the entirety of your repayment period. If you have private loans, you may have a fixed or variable interest rate.
- Rate type: For those with private student loans, you may see a rate change if your loan has a variable interest rate. Variable-rate loans can change over time, so your rate may decrease to correspond with the rate cut.
Future Borrowers
For students and parent borrowers who need to take out new loans, the rate cut is good news. Lenders use the Fed’s rates when setting their own rates, so student loan interest rates may dip.
[Note: Federal student loan rates are set well in advance, and the rate is locked. All loans issued between July 1, 2024, and June 30, 2025, will have the same rate, regardless of any Fed changes.]
Impact on Student Loan Refinancing
Refinancing can be an excellent way to make your debt more manageable. When the Fed cuts rates, refinancing lenders typically follow suit, so interest rates on refinancing loans may drop.
To maximize your chances of securing the best rates, follow these tips:
- Boost your credit: Lenders usually reserve the best rates for borrowers with stellar credit scores. Improve your credit by making all of your recurring payments on time, and reducing your debt.
- Choose a shorter loan term: You can usually qualify for a lower rate by opting for a shorter loan term, such as terms shorter than 10 years.
- Find a co-signer: If you don’t have a high credit score, adding a co-signer to your loan application can help you secure a better rate.
- Check your rates: With ELFI, you can prequalify for a loan and view your loan options with only a soft credit check, which doesn’t hurt your credit. You can use that information to check your eligibility and view different repayment scenarios.
