You might expect that this week’s decision from the Federal Reserve to hold interest rates steady means your student loan rates likely won’t change. And while it’s true they won’t change, the Fed probably isn’t the reason. With more than 90% of student debt in federal loans, the vast majority of student loans aren’t affected by the Fed rate at all.
But if you’re one of the few who either has a variable-rate private loan or is considering borrowing from a bank to pay for school, you may want to keep tabs on the Federal Reserve’s future decisions.
How does the Federal Reserve affect what you pay for federal student loans?
The Federal Reserve doesn’t have any direct impact on what you pay for federal student loans. That’s because Congress sets federal student loan interest rates based on the 10-year Treasury note — not the Fed rate. Even so, changes to the interest rate will affect only new borrowers and those with variable federal loans — which haven’t been issued since 2006. If you have a fixed-rate federal student loan, like most borrowers do, you’ll continue paying the same interest rate regardless of changes to the Fed rate or 10-year Treasury yield.
How Congress sets federal student loan interest rates
Congress sets a new rate every spring based on the high yield of the 10-year Treasury note, plus a few extra percentage points that vary depending on the type of borrower and loan. This new interest rate takes effect July 1 of that year.
This can get confusing, so let’s take a look at how this broke down in 2024:
Congress met to set interest rates on May 8, 2024, when the 10-year Treasury note had a high yield of 4.483%.
Congress took that 4.483% and added 2.05% to 4.60%, setting interest rates at 6.53% to 9.08% for the 2024–2025 year. The lowest rates went to undergraduate Subsidized Loans while the highest rates went to PLUS Loans.
While Congress set these rates in May, they took effect on July 1, 2024. So if your student loans for the Spring 2024 semester came in late, you still would have paid the 2023–2024 interest rate.
How rate changes affect variable-rate federal loans
If you have a loan issued before 2006, you’re probably paying a variable interest rate. Unlike variable-rate private loans, which typically change every month, variable-rate federal loans change every year when Congress sets interest rates. This means that your monthly payments may change once a year, starting on July 1. Also, these rate changes are based on the 10-year Treasury note — not the Fed rate.
Interest rate caps for federal loans
While federal student loan interest rates are based on the 10-year Treasury note, there are limits to how much interest Congress can charge on federal student loans if the yield is too high.
The Higher Education Act of 1965 states maximum interest rates for federal student loans, based on the type of loan and student.
Type of federal student loan | Type of student | Maximum interest rate |
Direct Subsidized and Unsubsidized Loans | Undergraduate students | 8.25% |
Direct Subsidized and Unsubsidized Loans | Graduate students | 9.50% |
Direct PLUS Loans | Graduate students or parents | 10.50% |
This can make federal student loans particularly attractive in a high-rate environment. While private student loan interest rates often start lower than the current federal loan rates, the maximum interest rates available from private lenders are typically higher. Currently, you can expect to pay as much as 14% to 18% on a new private student loan.
Dig deeper: When’s the next Federal Reserve meeting? What to expect — and how it affects your money
How does the Federal Reserve affect what you pay for private student loans?
The Federal Reserve has more of a direct impact on private loans than it does on federal loans. That’s because most private lenders are banks, and the Fed rate is a target for how much banks should charge one another for overnight lending — essentially, an overhead cost for making loans. How the Fed rate impacts private student loans rates depends on whether you already have a loan and the type of interest rate you have.
How the Fed Rate impacts new borrowers
If you’re considering taking out a private student loan, the interest rate you receive will be directly impacted by the federal funds rate in a couple of ways. First, the range of interest rates available is tied to the federal funds rate. So, if the Fed rate goes up by 1%, then you can expect the minimum and maximum rate for a private loan to also increase by around 1% within a few months.
Significant changes to the Fed rate can also impact who can qualify for a private student loan. When the Fed rate is high, banks become more risk averse because it’s more expensive for them to lend out money.
So for example, if the Fed suddenly raises interest rates, someone who might have previously qualified for the lowest interest rate could find themselves in the mid- to high-interest-rate range. Someone who might have qualified for a high-rate loan in the past likely wouldn’t qualify at all.
How the Fed rate impacts fixed vs. variable-rate borrowers
Unlike federal loans, most private lenders offer a choice between fixed and variable-rate loans. If you currently have a fixed-rate student loan, then changes to the Fed rate won’t have any effect on your monthly payments because they remain … well, fixed. If you have a variable-rate loan, then changes to the Fed rate could affect your monthly payment.
How often the Fed rate impacts your monthly payment depends on two factors:
How much the Fed rate increases or decreases
How often your interest rate changes.
Variable-rate student loans are typically made up of a benchmark rate — usually the Secured Overnight Financing Rate (SOFR) — plus a few percentage points. That benchmark rate increases and decreases in response to the Fed rate, causing your interest rate to change, and therefore your student loan payment along with it. If the Fed rate increases by 1%, then your student loan interest rate will likely increase by 1% as well. The only exception is when you reach the variable rate limit, which most private lenders set to protect borrowers from the kind of sky-high interest rates we saw in the 1980s. But you likely won’t reach it unless the country experiences extremely high inflation.
How often changes to the Fed rate impacts your student loan depends on the type of benchmark rate you have. Many private student loan providers like Citizens Bank and SoFi use a 30-day SOFR rate, which means that your variable rate can change as often as every month. Since the Fed meets eight times a year to discuss rate changes, this means you’ll feel it every time the Fed rate changes if you have a 30-day benchmark rate.
But if you have a loan that’s tied to a 90-day or 180-day benchmark, then your interest rate will only change every three or six months. This means the Fed rate could have changed multiple times before your interest rate — and, therefore, your monthly payment — budges.
How it works: Variable rate change
Most of the time, changes to the Fed rate won’t have an enormous impact on your payments every month. Generally you’ll see more of a difference if the Fed makes more aggressive changes — especially on higher monthly payments.
Let’s take a look at a couple of examples. Say you owe $10,000 a variable-rate student loan with five years left in your term. When the Federal Reserve decreases the Fed rate by 0.25%, the SOFR decreases by the same amount. If your interest rate was 6% before the Fed rate cut, your monthly payment would go down from $193.33 to $192.17, saving you about $1. Even if the Fed cuts interest rates by 1%, you’d only pay $188.71, saving you less than $5.
But say you have a $100,000 loan with a 20-year term and the same rates. This time, a Fed rate decrease of 0.25% would lower your monthly payment from $716.43 to $702.08 — a difference of about $14. If the Fed cut interest rates by 0.5%, then your payment would be $687.89, saving you almost $29 from last month. And if the Fed cut rates by 1%, you’d save almost $57 compared to the previous month, giving you a payment of $659.96.
Dig deeper: 6 smart money moves to make before and after the Fed’s rate decision
What to do with your student loans after a Fed rate decision
Most of the time, a single Fed rate cut or bump shouldn’t affect what you do with your student loans. However, there are a few situations where a trend in the Fed rate may make you want to take action.
When the Fed rate is trending up
If the Fed rate is trending upward with no end in sight, this may be a good time to think about refinancing your variable-rate loans for a fixed-rate loan — if you can. You won’t lock in the lowest rate you could’ve gotten if you’d done it earlier, but you could protect yourself from high payments in the near future. When interest rates come down, you can always refinance again for a lower rate.
When the Fed rate is trending down
If the Fed rate is trending down and you have a fixed- or variable-rate private student loan, then you might want to consider refinancing your student loans for a lower interest rate, especially if it’s unclear whether the low-rate period is going to last.
If it seems like lower interest rates are here to stay — barring any unforeseen circumstances like, say, a global pandemic that shuts down the economy — then it could be worth waiting for rates to reach their bottom before you to refinance.
If you have federal student loans
Federal student loan borrowers will likely want to hold on to their loans, even if private student loan rates appear to be lower. That’s because federal loans come with a wider range of protections that aren’t available through private lenders, including:
Flexible deferment and forbearance options if you lose your job or go back to school
Income-driven repayment plans
Nine months of missed payments before you default
Eligibility for programs like Public Service Loan Forgiveness
Loan discharge if you become disabled or die, or face other hardships
By contrast, most private lenders offer only a few months of forbearance and deferment if you lose your job or otherwise face financial hardship. And if you die, your cosigner becomes responsible for the loan, if you have one. There are generally no options for forgiveness and your loan could be in default after as few as three months as missed payments.
Dig deeper: What happens to your loan debt after you die?
Should you refinance your student loans? When it makes sense
Refinancing student loans can come with many benefits if done right. But you need to wait for the right time and make sure it offers more benefits than drawbacks.
Generally, refinancing makes sense if you have a private student loan and your income and credit score has increased since you took out your current loan. Even if the Fed rate has increased slightly, there’s a chance that you’ll qualify for a lower rate. You might also want to refinance your private student loan to remove a cosigner — especially if your cosigner is planning on getting a mortgage soon. While some lenders offer cosigner release, others require you to refinance to move the loan under your name.
If you have a federal student loan, refinancing only makes sense if you have a secure, high-paying job, few other debts, near-perfect credit and no plans to take advantage of the other unique benefits available of federal student loans.
Ideally, you should be comfortable to repay your current balance in as short a period as possible — no more than 10 years. In that case, you might be able to benefit from the lowest interest rates that private lenders offer, which are typically lower than the federal student loan interest rate. If you’re in the kind of financial position to consider refinancing your federal student loans, you can probably also afford to consult a trusted financial advisor to make sure that refinancing is the right choice for you.
Dig deeper: When to refinance your mortgage: 4 key times when refinancing can make sense
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Frequently asked questions
Get answers to common questions about the Fed rate and student loans. And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.
What’s the difference between the Fed rate and the 10-year Treasury note?
While both the Fed rate and 10-year Treasury note follow the same general trends, you’ll find key differences between the two. For one, the Fed rate is a tool that the Federal Reserve uses to heat up or cool off the economy when inflation or jobs numbers aren’t where its board wants them to be. It’s a reflection of what has already happened in the economy.
The high yield on a 10-year Treasury note is based on how much investors are willing to pay for the long-term government bond. This means that it’s influenced by what investors think will happen when it comes to inflation, the stock market, geopolitical conflicts and other areas of economic activity. Rather than reacting to what has happened, economists tend to look at the 10-year treasury yield to help predict where the economy is headed.
Can changes to the Fed rate or Treasury rate affect Direct Consolidation Loan rates?
No. If you decide to consolidate your federal loans with a Direct Consolidation Loan, the interest rate you receive will be a weighted average of the interest rates you’re currently paying. The point of a Direct Consolidation Loan is to make your monthly payments more manageable, rather than saving on interest.
Why does the Federal Reserve change interest rates?
The Federal Reserve’s job is to help balance out the economy. One of its tools to do this is the ability to set a target for the interest rate that banks charge one another to lend money — called the federal funds rate (or Fed rate). When the Fed changes the target Fed rate, this affects the amount that banks are able to charge in interest on new loans and current loans with variable interest rates. Credit cards, car loans and other types of consumer credit — including new and variable-rate private student loans — are affected by changes to the Fed rate.
Sources
Interest Rates for Direct Loans First Disbursed Between July 1, 2024 and June 30, 2025, U.S Department of Education. Accessed May 7, 2025.
Interest Rates and Fees for Federal Student Loans, U.S Department of Education. Accessed May 7, 2025.
About the writer
Anna Serio-Ali is a trusted lending expert who specializes in consumer and business financing. A former certified commercial loan officer, Anna’s written and edited more than a thousand articles to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in Business Insider, CNBC, Nasdaq and ValueWalk, among other publications, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
Article edited by Kelly Suzan Waggoner
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