Starting July 1, 2024, federal student loan interest rates for the 2024-25 academic year will rise by slightly more than 1%, nearly a 20% increase. These rates will apply to loans disbursed between July 1, 2024, and June 30, 2025. If you take out a loan during this period, you will repay it with a higher interest rate. Here’s a detailed breakdown of the new rates and their implications.
New Federal Student Loan Rates for 2024-25
Federal student loan interest rates are determined using a formula incorporating the high yield from May’s most recent 10-year Treasury Note auction. The May 8, 2024, auction yielded a rate of 4.48%, which helps calculate the new rates for various Direct loans. See the table below:
| STUDENT LOAN FIXED INTEREST RATES | |||
| LOAN TYPE | BORROWER | DISBURSEMENT DATES | INTEREST RATE |
| Direct Subsidized Loans Direct Unsubsidized Loans |
Undergraduate Students | 7/1/2024-6/30/2025 | 6.53% |
| 7/1/2023 – 7/1/2024 | 5.50% | ||
| Graduate Direct | Graduate & Professional Students | 7/1/2024-6/30/2025 | 8.08% |
| 7/1/2023 – 7/1/2024 | 7.05% | ||
| Graduate PLUS Loan | Graduate & Professional Students | 7/1/2024-6/30/2025 | 9.08% |
| 7/1/2023 – 7/1/2024 | 8.05% | ||
| Parent PLUS Loan | Undergraduate, Graduate, & Professional | 7/1/2024-6/30/2025 | 9.08% |
| 7/1/2023 – 7/1/2024 | 8.05% | ||
Source: The U.S. Department of Education
How Rates Are Calculated
Each year, federal Direct student loan interest rates are recalculated based on a formula outlined in the Higher Education Act of 1965. This formula adds a set percentage to May’s last 10-year Treasury Note auction yield. For 2024, the formula is as follows:
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- Undergraduate Direct Loan: 4.48% Treasury Yield + 2.05% = 6.53%
- Graduate Direct Loan: 4.48% Treasury Yield + 3.60% = 8.08%
- Graduate PLUS Loan: 4.48% Treasury Yield + 4.60% = 9.08%
- Parent PLUS Loan: 4.48% Treasury Yield + 4.60% = 9.08%
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Caps on Interest Rates
Fortunately, there are limits to how high federal student loan interest rates can go. According to Federal Student Aid, the Higher Education Act places caps on student loan interest rates to protect borrowers from excessively high rates.
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- Undergraduate Direct Loans: 8.25%
- Graduate Direct Loans: 9.50%
- PLUS Loans: 10.50%
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This means that even if Treasury yields continue to rise, your interest rate will not exceed these caps, providing financial protection for borrowers.
Reasons Behind the Increase
Federal Direct student loan rates are rising due to increasing Treasury yields, which have increased since 2022. This increase is tied to the Federal Reserve’s efforts to combat inflation by maintaining high interest rates.
Understanding these economic factors can help you comprehend the reasons behind the rate increase, giving you a clearer picture of the financial landscape.
Comparing Federal and Private Student Loan Rates
While you might consider private student loans an alternative, they are generally not a better deal. Private student loan interest rates currently range from 4% to 18%, compared to the new federal Direct loan rates of 6.53% to 9.08%. Only the most creditworthy borrowers can secure the lowest rates on private loans.
On the other hand, federal student loans do not require a credit check (except for PLUS loans) and come with fixed rates. If you cannot secure a federal student loan, you may have to rely on private loans, resulting in higher interest rates and less favorable repayment terms.
Impact on Borrowers
These new rates will affect all federal Direct student loans disbursed on or after July 1, 2024. Federal Direct student loans, including Direct Subsidized Loans, Direct Unsubsidized Loans, and PLUS Loans, are funded by the U.S. Department of Education. It’s important to note that these changes will not affect any existing federal Direct loans, as their interest rates are fixed for their lifetime and will not change. Additionally, federal student loan rate changes do not impact private student loans.
With the Federal Reserve likely to maintain high rates to curb inflation, student loan rates are expected to continue rising in the coming years. However, loans taken out this year will retain their rates for the life of the loan, allowing students and families to plan and budget accordingly. Staying informed about these changes and understanding interest rate trends will empower you to make better financial decisions regarding your education funding.
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