Federal student loans have historically been known for their low rates and generous terms. As recently as 2021, federal loans had rates as low as 2.75%, making them a very inexpensive form of debt.
However, those rates are long gone, thanks to high inflation. As a result, federal student loan interest rates have skyrocketed, reaching record highs.
Continue reading to learn about the rationale behind these significant rate hikes and what the rates mean for you as a borrower.
Changes to Federal Student Loan Interest Rates
Loans issued under the federal Direct loan program have fixed rates, meaning the rates stay the same for the duration of their repayment period. However, the rates change every year for new borrowers.
The Federal Reserve is charged with controlling inflation. In this effort, it adjusts the Federal Funds Rate up or down. When inflation is high, it raises interest rates to curb lending and borrowing. Banks and credit unions use the Fed’s recommendations to set their own rates, so the Fed’s changes can have significant implications for credit cards, auto loans, mortgages and student loans.
When the Federal Reserve has increased rates, student loan rates usually increase too, and that’s true for the upcoming academic year. Below are the annual percentage rates (APRs) for loans issued between July 1, 2024, and June 30, 2025, as well as the rates of the previous years for comparison:
| Direct Subsidized | Direct Unsubsidized (Undergraduate) | Direct Unsubsidized (Graduate) | Parent and Grad PLUS | |
| Loans issued between July 1, 2024 and June 30, 2025 | 6.53% | 6.53% | 8.08% | 9.08% |
| Loans issued between July 1, 2023 and June 30, 2024 | 5.50% | 5.50% | 7.05% | 8.05% |
| Loans issued between July 1, 2022 and June 30, 2023 | 4.99% | 4.99% | 6.54% | 7.54% |
| Loans issued between July 1, 2021 and June 30, 2022 | 3.73% | 3.73% | 5.28% | 6.28% |
| Loans issued between July 1, 2020 and June 30, 2021 | 2.75% | 2.75% | 4.30% | 5.30% |
Between 2020 and now, the changes have been significant. For undergraduate student loans, rates have more than doubled.
How the Student Loan Interest Increase Impacts Repayment
If you have existing student loans, the rate changes don’t impact you; your federal loan rates will stay the same for the duration of their repayment. But if you take out new loans, you’ll qualify for a loan with a much higher rate than you would’ve gotten a few years ago.
Over time, the higher rates will impact your overall repayment cost. For example, here is how much you’d repay over 10 years if you borrowed $5,000 at different rates:
| Loan at 2.75% | Loan at 4.99% | Loan at 6.53% | |
| Repayment Term | 10 Years | 10 Years | 10 Years |
| Monthly Payment Amount | $47.71 | $53.01 | $56.85 |
| Total Interest | $724.66 | $1,361 | $1,822.04 |
| Overall Repayment Cost | $5,724.66 | $6,361 | $6,822.04 |
If you borrowed $5,000 at 2.75% APR, you’d pay just over $700 in interest. But if you borrowed the same amount at 6.53%, you’d pay over $1,800 in interest — $1,100 more thanks to the higher rate.
3 Ways the Student Loan Interest Hike May Affect You
A higher interest rate may have a substantial impact on you as a student loan borrower. Here are three ways the interest rate hike can affect you that you may not have thought about:
1. You’ll Have a Higher Monthly Payment
Your minimum monthly payments are determined by your loan balance and your interest rate. With a higher rate, your monthly payments will also be higher. Interest rate hikes can make it more difficult to afford your payments.
2. Your Overall Repayment Cost Will Be Higher
High interest rates increase your overall repayment cost. More interest builds, so your balance can grow when you’re not making payments.
3. More Interest Will Accrue During Deferments
If you need to defer your payments, such as returning to school, interest continues to accrue on all federal loans except Direct Subsidized loans. With all other loan types, interest will build. With a higher interest rate, more interest can accrue, causing you to owe even more.
How Student Loan Interest Rates Are Set
How student loan interest rates are determined is dependent on the loan type. The two main types are federal and private.
Federal Student Loans
Federal student loan interest rates are set by federal law. They are adjusted yearly and can rise or fall depending on market conditions, including the Fed’s benchmark rate.
The interest rate is fixed, so it stays the same for the entirety of your repayment term. If you are following a Standard Repayment Plan — the default option — your monthly payments are the same for the duration of the loan.
Rate changes only affect new loans, so you may have multiple federal loans with differing interest rates by the time you graduate.
Private Student Loans
With the latest federal student loan interest rate increase, private student loans can be appealing. They can fill the gap when you exhaust other financial aid options and may offer lower rates.
Private student loans can have fixed or variable interest rates. While fixed rates stay the same for the entire repayment period, variable rates start low. Over time, they can change along with market conditions.
Currently, the rates on private student loans may be lower than you’d get with federal loans, particularly if you have excellent credit or a co-signer. Variable rates are as low as 4.98% for undergraduate loans, and fixed-rate loans have rates as low as 8.42%.
Interest rates vary by lender, but rates are usually based on a public index, such as the LIBOR plus a margin rate. Your rate is determined by several factors, including your creditworthiness, income, and the selected loan term.
ELFI offers private student loans for undergraduates, graduate students, and parent borrowers. Using the Find My Rate tool, you can view rates and loan options without affecting your credit score.
