Interest rates for new federal student loans are set to increase for the upcoming school year, rising from 6.39 percent to 6.52 percent. While this change reflects a relatively small uptick, students are already grappling with escalating college expenses amid ongoing inflation affecting grocery and gas prices. Additionally, a major overhaul of the federal student loan repayment program is complicating matters, notably with new limits on how much can be borrowed.
The new rates, announced recently by the Education Department, will apply to loans issued between July 1 of this year and June 30 of the next year. Importantly, these rates remain fixed for the duration of the loans and do not affect previously issued loans.
While a temporary interest rate reduction will be available starting July 1 for borrowers already in repayment, those taking out new loans for the upcoming academic year will not be eligible. This reduction is available to borrowers who enroll by September 30 to have their monthly payments automatically deducted from their bank accounts. However, as the new loans will not yet be in repayment, new borrowers are excluded from this benefit. There is a potential exception for students who have completed their undergraduate degrees and are moving into graduate studies, as they may be allowed to waive “in-school” deferment and continue making payments.
The higher interest rates will affect both subsidized and unsubsidized loans — the former not accruing interest while the student is enrolled in college, whereas the latter begins accruing interest immediately. This year’s rate is the highest since the 2024-25 school year, when rates stood at 6.53 percent. Despite the increase being considered minimal, it can still add significant costs over the life of a loan. For instance, a $5,500 loan could cost an additional $44 in interest over a standard 10-year repayment plan.
Recent Republican-backed proposals aimed to impose borrowing limits to help students and families avoid overwhelming debt and to encourage colleges to decrease tuition costs. However, advocates for student borrowers caution that these limits may inadvertently push students towards riskier private loans. “It’s definitely a hard place for students and families to be right now,” noted Persis Yu, deputy executive director of Protect Borrowers.
The increase also affects rates for graduate and professional students, which have risen from 7.94 percent to 8.07 percent. Meanwhile, PLUS loans—designed for parents and certain graduate students—now have an interest rate of 9.07 percent, up from 8.94 percent. Importantly, graduate PLUS loans have been eliminated for new borrowers as of July 1, though there is an exception for those already enrolled before this date.
Federal student loan interest rates are determined annually based on a formula set by Congress, which incorporates yields from the 10-year Treasury note auction and a fixed percentage. This year, the yield from the auction was 4.468 percent, plus an additional fixed amount of 2.05 percent for undergraduate loans. There are statutory caps preventing undergraduate loan rates from exceeding 8.25 percent and 9.5 percent for graduate and professional loans.
Starting July 1, significant changes will also affect borrowing limits, particularly for graduate students and parents taking out PLUS loans. Previously, graduate students could borrow amounts covering the total cost of attendance, but new regulations cap borrowing at $20,500 per year, with a total limit of $100,000. This restriction does not apply to those who borrowed federal loans before July 1. For students pursuing specific professional degrees, caps are set at $50,000 per year and a total of $200,000.
Parents will face similar restrictions; previously unrestricted borrowing for PLUS loans will now be limited to $20,000 per year per student, with a cumulative cap of $65,000. Concerns have been magnified by the realization that previous borrowing allowances led some families into serious debt.
With these changes to federal borrowing caps, financial planners advise families to strategize their financing for higher education more meticulously. Many families may now find themselves considering private loans to fill financial gaps, although this avenue carries potential risks and may lead some students to forgo completing their education entirely.
Some states are already starting to establish their own graduate loan programs in response to federal limitations, though broader state-level options may take time to implement. As the education funding landscape shifts, students and families face mounting challenges in navigating the complexities of financing higher education.
