Student Loan Update: Borrowers Catch a Break as Interest Rates Drop

Newsweek

05-06-2025

Based on facts, either observed and verified firsthand by the reporter, or reported and verified from knowledgeable sources.
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The U.S. Department of Education announced a decrease in federal student loan interest rates for the first time in five years, easing financial pressure for upcoming borrowers.
For loans disbursed between July 1, 2025, and June 30, 2026, undergraduate rates will be set at 6.39 percent, a decline from last year's 6.53 percent. Rates for graduate students and parent borrowers have also fallen, the Department confirmed at the end of May.
"In a world where everything keeps getting more expensive, I'll take any win we can get," one expert told Newsweek.
Why It Matters
The rate cuts provide tangible, if modest, relief to millions of Americans heading to college or graduate school who face rising education costs and mounting debt. In a year marked by inflation and economic uncertainty, the lower rates could help families manage the burden of financing higher education.
Amid renewed student loan collections and increased credit stress for delinquent borrowers, a reduction in future interest charges represents a crucial adjustment for American households.
Harvard graduates celebrate their school's accomplishments in Harvard Yard on May 29, 2025 in Cambridge, Massachusetts.
Harvard graduates celebrate their school's accomplishments in Harvard Yard on May 29, 2025 in Cambridge, Massachusetts.
Libby O'Neill/Getty Images
What To Know
New Rates for 2025-2026
The Department of Education set new fixed interest rates for federal student loans based on the May 2025 auction of 10-year Treasury notes, which produced a yield of 4.342 percent. For loans first disbursed between July 1, 2025, and June 30, 2026:
Direct Subsidized and Unsubsidized Loans (Undergraduates): 6.39 percent
6.39 percent Direct Unsubsidized Loans (Graduate/Professional): 7.94 percent
7.94 percent Direct PLUS Loans (Parents and Graduates): 8.94 percent
These rates are down 0.14 percentage points across all categories compared to the previous year—marking the first reduction since 2020.
In practice, borrowers with a $12,500 undergraduate loan will save approximately $100 over 10 years with the new rates, experts say.
"Not huge, but hey, better than nothing," Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek. "The catch? This only applies to new loans starting this fall. Your existing loans? Still stuck at their original rates."
How Rates Are Determined
Federal student loan interest rates are set annually, based on a statutory formula linked to the 10-year Treasury note yield plus a fixed add-on determined by loan type.
Each loan, once disbursed, retains its rate for its full term, according to the Department of Education. The 2025 decline followed a lower Treasury yield, which reflected changes in investor sentiment and broader economic conditions over the preceding year.
Federal vs. Private Loans
Student financial aid advisors continue to recommend federal loans over private alternatives due to their relatively lower interest rates and flexible repayment terms, including options like income-driven repayment, forbearance, and deferment.
However, pending Congressional proposals could change key features of federal lending, such as borrowing limits and repayment options, creating uncertainty for future borrowers.
Rising Pressure on Borrowers
The news comes as federal student loan collections resumed after an extended pandemic pause.
As of May 2025, only 38 percent of federal loan borrowers were current on payments. More than 5 million have not made a payment in over a year, and 4 million were in late-stage delinquency.
The Department of Education stated it will restart involuntary collections, such as wage garnishment and Treasury offsets, targeting those in default.
Credit Score Implications
Borrowers who missed payments since collections resumed have seen steep declines in credit scores—more than 100 points for 2.2 million people from January to March 2025, according to the Federal Reserve Bank of New York.
Dropping into lower credit tiers can make it harder and more expensive to secure loans, buy homes, or access credit for large purchases.
Legislative Uncertainty
Legislative proposals under consideration in Congress could alter borrowing limits, eligibility, and repayment plan structure, potentially making federal loans less advantageous in the future.
As a result, borrowers are urged to stay informed about changes and to carefully consider loan products available each academic year.
Newsweek reached out to the Department of Education via email.
"Don't get too comfortable, rates could easily bounce back up next year depending on what the economy does," Ryan said.
What People Are Saying
Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek: "A Fed Funds cut of 100 basis points has allowed interest rates on the 10-year note to come down a smidge. Now we know that the Fed truly does not impact the longer end of the bond curve without artificially buying mortgages or lowering overall rates through open market operations, yet the Fed rate cut had a somewhat minor impact to help bring down student loan financing cost."
Drew Powers, the founder of Illinois-based Powers Financial Group, told Newsweek: "Since interest rates on student loans have gone down, we know 10-year Treasury yields have fallen, and that is because Treasury prices have risen due to high demand. The conditions that put Treasuries in high demand can be economic uncertainty such as tariffs, trade imbalances, and stock market instability. So, in a roundabout way, the current economic storm is an unexpected boon for student loan borrowers."
Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek: "It's not life-changing money, but it's something. In a world where everything keeps getting more expensive, I'll take any win we can get. Just remember, borrow only what you absolutely need. That 'extra' loan money always seems tempting until you're paying it back later."
Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek: "The interest rate drop for undergraduate student loans is a modest one, falling to 6.39 percent. Still every point downard can add up to hundreds or even thousands of dollars saved over time depending on the size of the loan. While this is good news, student loan borrowers should remember this drop shouldn't be taken as encouragement to acquire more student debt at lower rates."
What Happens Next
The newly announced interest rates will apply to federal student loans disbursed from July 1, 2025, through June 30, 2026. However, some analysts say for the average borrower, the new rates will not make a significant impact.
"This won't impact borrowers materially as rates are still north of 6 percent once you factor in the add-on of 2.05 percent for subsidized loans or the 3.6 percent for unsubsidized loans," Thompson said.
The Department of Education has indicated that further guidance on repayment, delinquency assistance, and upcoming legislative changes will be provided on StudentAid.gov and through outreach campaigns over the coming months.
"Borrowers should truly understand that loan forgiveness is out of the cards moving forward and any loan that is taken out will need to be repaid in full, or you may face disruptions in regard to future borrowing down the line," Thompson said.