There’s one small bit of good news for college students heading to campus in the fall who are borrowing to fund their education: The rates on new federal loans will fall, though ever so slightly.
The modest drop, announced by the federal Education Department on May 30, was the first in five years and translates into slightly less interest paid on money borrowed for college.
Specifically, the rate on loans for undergraduate students fell to 6.39 percent from 6.53 percent this year. The rate applies both to loans that are based on financial need, known as subsidized loans, and to those that aren’t. (With subsidized loans, students don’t have to pay interest on the debt while they attend college.)
On a loan of $5,500, the new rate would save a borrower just under $50 in interest over a standard 10-year repayment plan, according to an online student loan calculator.
Rates on loans for graduate and professional students eased to 7.94 percent, from 8.08 percent, while rates on PLUS loans — extra financing available to graduate students and to parents of undergraduates — fell to 8.94 percent from 9.08 percent.
The rates apply to student loans borrowed from July 1 through June 30 of next year.
Despite the dip, rates remain higher than they were in the past, said Mark Kantrowitz, a financial-aid expert. Rates on undergraduate loans averaged 4.77 percent over the last 10 years, he said, and were as low as 2.75 percent during the 2020-21 school year.
“People have gotten used to lower interest rates in recent history and want a return to those rates,” he said in an email.
Will rates drop on loans that I have already taken out?
No. Rates on new federal student loans are set annually, and they remain the same for the life of the loans. That means if you borrowed for the current academic year or earlier, the rate on those loans won’t change.
How are rates on federal student loans determined?
The rates are set by a formula established by Congress, which applies the high yield at the spring 10-year Treasury note auction, plus an extra, fixed amount. This year, for instance, the high yield at the May 6 auction was 4.342 percent, plus an additional 2.05 percent for undergraduate loans. (Add-on amounts are higher for graduate and PLUS loans.)
Is there a maximum interest rate for federal student loans?
Yes. By law, interest rates for undergraduate loans are capped at 8.25 percent. Maximum rates are 9.5 percent for graduate and professional loans and 10.5 percent for PLUS loans.
Do federal loans have fees?
Yes, federal loans have one-time borrowing fees, based on a percentage of the amount borrowed (currently about 1 percent, but more than 4 percent for PLUS loans).
How much can I borrow?
Dependent undergraduate students — those who are supported by their parents — can borrow $5,500 in federal loans for the first year of college, $6,500 for the second year and $7,500 for the third and fourth years. There’s a cumulative cap of $31,000, if a student attends for more than four years.
A rule of thumb is that students should borrow no more in total than their expected first-year salary after graduation. Michele Zampini, senior director of college affordability with the Institute for College Access & Success, a student advocacy group, said that while students shouldn’t take on more debt than necessary, they should also borrow enough so that they don’t have to work excessively while in school.
“Working too much can impede a student’s ability to complete their degree,” she said. “It’s really a balance.”
Are other changes in store for student loans?
The loan rates for the coming school year are dipping amid turmoil in student loan and financial aid programs and in higher education overall. The Trump administration, which aims to dismantle the Education Department, and Republicans in Congress are weighing significant changes that could affect how students and families finance college. A host of measures are under review as part of the federal budget reconciliation process, although certain proposals put forth by the House have been scaled back in a Senate version, education finance experts said.
The House, for instance, had proposed eliminating subsidized loans for undergraduate students. But a version of the proposal from the Senate committee overseeing education, released Tuesday, retains the subsidy. “That’s a win for students,” said Megan Walter, senior policy analyst at the National Association of Student Financial Aid Administrators.
The Senate committee, however, retained some changes proposed by the House, such as elimination of PLUS loans for graduate students.
The changes, if enacted, wouldn’t take effect until July 1, 2026, Ms. Walter said, so students have some breathing room. “They don’t have to worry about drastic changes for the coming school year,” she said.
Still, she said, students should be mindful of how the new policies, if signed into law by President Trump, could affect their overall plan to finance their education. “It’s important to stay informed,” she said.
The Senate committee, for instance, retained the House’s proposal to eliminate several student loan repayment plans that tie monthly payments to a borrower’s income and replace them with an option known as R.A.P., for “repayment assistance plan.” It may be less generous than current plans for some borrowers.
Students who enrolled in college and borrowed federal loans before July 1, 2026, however, would still have access to at least one current option, known as “income-based repayment,” or I.B.R., according to a summary of the committee’s proposals.
Mr. Kantrowitz suggested that students entering college this fall might consider taking out a federal loan for the 2025-26 year, if they want to retain eligibility for the older repayment option.
For students who have already taken out loans and are in or entering the repayment stage, it may be wise to enroll in income-based repayment before July 1, 2026, to secure it as an option, Ms. Walter said. They can later switch to the repayment assistance plan, once more details of the new plan are known, if it proves to be a better choice for them.
Do the new rates apply to student loans borrowed from banks?
No, the rates don’t apply to private student loans, which are made by banks and lenders other than the government. Rates on private loans vary and can be competitive with federal loans, especially for borrowers with stellar credit.
But traditionally, private loans have been considered riskier because federal loans have offered robust consumer protections, like the ability to postpone monthly payments if the borrower runs into financial trouble. The Senate committee’s proposal, however, like the House version, would repeal deferments for unemployment and periods of economic hardship, chipping away at borrower protections.
Federal loans still offer other benefits, like a payment plan tied to borrower income, the public service loan forgiveness program and cancellation if the borrower becomes disabled, Mr. Kantrowitz said. For now, borrower protections on federal loans remain superior to those for private loans, he said, “but the difference is narrowing.”
The post Good News for College Students: You May See a Dip in Student Loan Rates appeared first on New York Times.
