Student Loan Interest Rates: What You Need to Know  

When it comes to paying for college, many students and families rely on student loans to help cover the cost. Understanding how student loan interest rates work is important for students and families financing college. These rates can be complex but knowing how they’re determined, when they change, and how they impact loan repayment can help borrowers make informed financial decisions. 

Interest Rates on Federal Student Loans Are Updated Every Year 

Each year on July 1st, the U.S. Department of Education sets new interest rates for federal student loans. These new rates apply only to loans disbursed between July 1st and June 30th of the following year.  

For example: 

• A loan disbursed on June 30, 2025, will apply the previous year’s interest rate. 
• A loan disbursed on July 1, 2025 or later will use the next year’s rate. 

If you take out a loan after July 1st, the interest rate is fixed for the life of the loan and it will not change, regardless of future rate changes. Federal student loans have fixed rates set by the year you take out the loan, rather than being uniform across different years. 

How Are Federal Student Loan Interest Rates Determined? 

Federal student loan interest rates are linked to the 10-year U.S. Treasury note, a benchmark for long-term government borrowing. This rate reflects the cost for the U.S. government to borrow money for 10 years. Each May, the U.S. Treasury auctions these notes. The yield from that auction becomes the base rate for federal student loans issued in the upcoming academic year. The Department of Education then adds a fixed margin, varying by loan type, to cover administrative costs and lending risks. 

Here’s a look at the margins for different types of federal loans: 

• Direct Subsidized Loans (undergraduate students): +2.05% 
• Direct Unsubsidized Loans (undergraduate students): +2.05% 
• Direct Unsubsidized Loans (graduate students): +3.60% 
• Direct PLUS Loans (parents and graduate students): +4.60% 

Here’s how the rate is calculated: 

10-Year Treasury Note Yield + Fixed Margin = Student Loan Interest Rate 

Direct Loan Interest Rates for 2025-2026 

Interest Rates for Direct Subsidized Loans,
Direct Unsubsidized Loans, and Direct PLUS Loans 
First disbursed on or after July 1, 2025 and before July 1, 2026 

Loan Type	Origination  Fees	10-Year Treasury Note High Yield	Add-On	Fixed Interest Rate
Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduate Students	1.057%	4.342%	2.05%	6.39%
Direct Unsubsidized Loans for Graduate and Professional Students	1.057%	4.342%	3.60%	7.94%
Direct PLUS Loans for Parents of Dependent Undergraduate Students and for Graduate or Professional Students	4.228%	4.342%	4.60%	8.94%

Federal Student Loan Origination Fees

Federal student loans also come with an origination fee, which means the disbursement received might be slightly less than the amount agreed to. This fee is a one-time charge by the Department of Education as a percentage of the loan amount to cover processing expenses. All Direct Subsidized and Unsubsidized Loans incur a fee of 1.057%, while Direct PLUS Loans have a fee of 4.228%.

What This Means for Borrowers 

• Your rate is locked in: Once your federal loan is disbursed, the interest rate will remain fixed, regardless of any future fluctuations in rates. 

• Each year can have a different rate: When borrowing over several years, you could end up with loans that have different interest rates.
• Rates reflect market trends: Since student loan rates are tied to the Treasury yield, they tend to rise when the economy is strong and borrowing costs increase.

Federal vs. Private Loan Interest Rates 

While federal student loan interest rates are set by the government, private student loan rates are determined by individual lenders and can vary based on factors like: 

• Credit score of the borrower (and cosigner, if any) 
• Income and employment history 
• Market interest rates (often tied to the SOFR or Prime Rate) 

Private loans can come with either fixed or variable interest rates, but they typically do not offer the same borrower safeguards as federal loans. Private loans with variable interest rates have the risk of increasing over time. Interest rates can be lower than Federal parent PLUS loans, but are typically higher than Federal student Loans. Private loans may have limited options for reducing payments, deferring them, or offering flexible terms.

Student Loan Interest Rates Impact on Repayment 

Understanding student loan interest rates and their impact on loan repayment is key for effective college funding planning. While the principal (the amount borrowed) may seem manageable, the interest added over time can increase the total cost. Private loans and most federal loans accrue interest from disbursement, particularly Unsubsidized and PLUS loans. 

During school or grace periods, interest builds and, if unpaid, is capitalized, raising the principal and future interest charges. Paying off interest before the grace period ends can be financially beneficial, reducing the loan’s overall cost by minimizing accruing interest. This strategy is particularly effective with student loans, as early interest payments significantly lower debt after graduation. 

Student loan interest rates can significantly affect repayment amounts and duration, highlighting the need for students and parents to understand their impact for responsible borrowing. Prioritize scholarships, grants, and savings options before borrowing. If loans are necessary, being informed about the current interest rates and how they affect the life of a loan will help in managing your financial future. 

For more information go to westfacecollegeplanning.com.