How the Fed’s Interest Rate Decisions Impact Student Loan Borrowers [CNET]

I was determined to find out how lower interest rates could affect me and millions of other borrowers.

Student loan debt is a burden to nearly 43 million borrowers in the US. For many, including myself, it’s the price we pay for a higher education. 

I have federal student loans totaling about $27,000, and every monthly payment I make toward my debt includes interest. While covering the Federal Reserve’s recent policy decisions, I started to wonder how interest-rate adjustments affect future student loan borrowers. In my case, since I have a fixed interest rate of 4.5%, it won’t change over the life of the loan, no matter what the Fed decides. 

However, a small percentage of current borrowers with private (not federal) student loans have variable interest rates that fluctuate over time. Those borrowers could feel the ripple effects when the Fed hikes or lowers interest rates, as could future borrowers who plan on taking out loans in the future.

When you take out money to further your education, it’s important to know how the government’s decisions can impact your finances. Here’s what I found out from talking to student loan experts.

How student loan interest works 

First, the basics. Interest is the amount you’re charged as a borrower to take out a loan or use credit. Your interest rate plays a huge role in determining the total amount you’ll end up paying on your loan on top of the principal (the original amount you borrowed). 

However, with student loans, there are various questions that will help you determine your interest rate and accrual timeline, including: 

• Do you have a private or federal student loan?
• Do you have a fixed or variable rate?
• Is your loan for undergraduate or graduate education? 
• When did you take out the loan? 
• Is your loan subsidized or unsubsidized? 

Let’s start with loans you get directly from the government, aka direct federal student loans. 

Congress sets the federal student loan interest rate in May each year. The rates apply to new federal student loans disbursed from July 1 of the current year through June 30 of the following year. So even if you have a federal student loan with a fixed interest rate, your rate might look different from your best friend’s depending on the type of loan and when it was disbursed. 

For example, if you took out an undergraduate direct loan in August 2020 at the height of the pandemic, you’d have a 2.75% fixed rate, whereas if you took out a graduate direct loan in August 2023, you’d have a 7.05% fixed rate. The higher the interest rate, the more you’ll owe over time. 

Here are the current fixed interest rates for federal student loans disbursed on or after July 1, 2024, and before July 1, 2025:

Loan type	Borrower	Fixed interest rate
Direct subsidized and direct unsubsidized loans*	Undergraduate	6.53%
Direct unsubsidized loans	Graduate	8.08%
Direct PLUS loans	Parents and Graduate or Professional Students	9.08%

Federal student loan borrowers: what to know

Interest rates on student loans are complicated. But since nearly 93% of borrowers already have fixed-rate federal student loans, including myself, our interest payments won’t be impacted if the Fed decides to cut rates before the end of the year. 

However, the Fed’s moves will still impact future federal loan borrowers (those who take out loans after July 1, 2025) since the government sets those rates once a year, according to Robert Farrington, founder and CEO of The College Investor. 

“If the Fed does lower rates, it could lower the rates for the next school year,” Farrington said. Once a new rate is established in July 2025, all federal student loan borrowers will be locked into that new rate for the duration of their repayment period. 

Private student loan borrowers: what to know

If you currently have private student loans with a variable, also known as an adjustable, interest rate, you could feel the effects of Fed rate changes, according to Mark Kantrowitz, a financial aid expert and CNET Money expert review board member. “For private loans, if you opt for a variable-rate loan, you’ll benefit from rates decreasing.” 

Although variable interest rates fluctuate based on market conditions, private lenders typically determine your personal rate based on a few factors, including your credit score, income and financial history. Just like applying for any other line of credit, the better your financial health, the lower your interest rate will be. If you don’t have an established line of credit, turning to a trusty co-signer can help you secure a lower rate.

Expert tips for student loan borrowers 

Before anything else, it’s important to know your balance and how much your interest rate is. Log in to your account via your student loan servicer’s website and check your statement. 

My loan is through Edfinancial, and I have access to all my loan details via the “Account Summary” tab. From there, I’m able to see my loan type, balance, interest rate and more. 

No one wants to end up with a ton of student loan debt, so only borrow what you need and not as much as you can, Kantrowitz said. “Aim to have total student loan debt at graduation that is less than your annual starting salary.”

Kantrowitz also advises student loan borrowers to sign up for autopay, which automatically transfers loan payments from your bank account to the loan servicer. “Many lenders will provide a small interest rate reduction as an incentive,” he said. 

Finally, when tax season rolls around, don’t forget to claim the student loan interest deduction on your federal income tax return. “It is an above-the-line exclusion from income for up to $2,500 in interest paid on federal and private student loans, which can save you a few hundred dollars on your taxes,” Kantrowitz said. 

If you have private loans with a high interest rate, refinancing your loan after the Fed lowers rates could help you lower your monthly payment and interest charges. 

However, refinancing federal student loans into private student loans will result in the loss of certain benefits, according to Farrington. This includes access to income-driven repayment plans, loan forgiveness programs, and deferment or forbearance plans. 

You can also consolidate federal loans if you have more than one with various interest rates. It will take a weighted average of all your total loans, but in some cases, it can save you money.