Federal student loan interest rates just fell for the first time in 5 years—here’s what borrowers will pay on new loans

For the upcoming school year, students and families who are taking out loans for college will experience a slight relief. The Department of Education announced that the interest rate for federal undergraduate student loans disbursed between July 1, 2025, and June 30, 2026, will be 6.39%, a decrease from the 6.53% rate for the previous school year. Graduate loans will have a rate of 7.94%, while Parent Plus loans will carry an 8.94% interest rate, both lower than the previous year.

The interest rates for federal student loans are fixed for the duration of the loan and are determined annually by the federal government based on a formula linked to the yield of the 10-year Treasury bond. These bonds are auctioned by the Treasury Department, and their prices can fluctuate depending on various economic factors.

Student loan expert Mark Kantrowitz explained that bond yields are influenced by factors such as changes in buyer demand, tariffs, and trade imbalances. In 2024, student loan interest rates increased due to rising bond yields, reaching their highest level in over a decade, partly due to inflation and interest rate hikes by the Federal Reserve.

While borrowers for the upcoming school year will have slightly lower repayment costs, uncertainties persist in the broader student loan landscape. Federal student loans have historically been preferred over private loans by financial planners and experts due to lower interest rates and additional benefits such as subsidized interest and flexible repayment options.

Although some borrowers with good credit may secure lower interest rates from private lenders, they may miss out on the advantages that federal loans offer. However, proposed changes by Republicans in Congress could potentially alter the benefits for federal borrowers, including fewer repayment options and borrowing limits.

While the current benefits of federal student loans remain unchanged for now, potential modifications are being considered in Congress. Despite the uncertainties, experts advise students to explore federal loan options first before turning to private loans. Private student loans may be the only option for some students who are not eligible for federal loans, but it is crucial to consider interest rates, fees, and repayment terms when comparing loan options.