(NerdWallet) – Federal student loan interest rates for the 2024-25 school year have been announced, and some are hitting record high rates, raising the cost of college for those who borrow student loans next school year.
Here's how current 2024-25 federal student loan interest rates compare to 2023-24 rates.
Direct subsidized and unsubsidized loans for undergraduate students: interest rates will increase from 5.50% to 6.53% for 2024-25. Direct unsubsidized loans for graduate students: interest rates will increase from 7.05% to 8.08% for 2024-25. PLUS loans, which parents and graduate students can use to cover financial shortfalls: interest rates will increase from 8.05% to 9.08% for 2024-25.
Interest rates on all federal student loans have been fixed since 2006. The last time interest rates on undergraduate Direct Loans have been this high is 16 years ago, since the 2008-09 academic year. (The record for loans issued between 2006 and 2008 was 6.8 percent.) Interest rates on graduate Direct Loans and PLUS Loans have never been this high.
The recent federal interest rate hike comes on the heels of a serious error in the FAFSA that affected and delayed the delivery of financial aid, including federal loan eligibility, for millions of students. While private student loans with lower interest rates may seem more attractive to some families this year, private loans offer fewer borrower protections and no forgiveness options.
Rising interest rates increase total cost of college
Each spring, the government sets federal student loan interest rates for the upcoming academic year. These rates are in effect from July 1, 2024 to June 30, 2025, and apply to all borrowers who take out new federal student loans in the 2024-25 academic year. Federal student loan interest rates are fixed, meaning they don't change over the course of your repayment period, which is usually between 10 and 25 years, depending on your repayment plan. (If you've already paid off your old student loans, this interest rate increase won't affect you.)
Ultimately, rising interest rates will make college more expensive for millions of students and their families who take out loans. According to Department of Education data, 42.8 million people currently owe a combined $1.62 trillion in federal student loan debt.
And that number is likely to grow: According to a recent NerdWallet analysis, high school graduates in 2024 who start college this fall could face roughly $37,000 in student loan debt while pursuing a bachelor's degree. Dependent undergraduates can only borrow up to $31,000 in federal loans, which could lead to more students turning to private loans to make up the shortfall.
Here's an example of how rising interest rates can hit your wallet: If you start college in the fall and borrow $31,000 worth of unsubsidized federal direct loans over the course of your undergraduate education at a 6.53% interest rate, you would end up paying back about $42,315 on a standard 10-year repayment plan. If you start college in 2020-21 and borrow the same $31,000 in unsubsidized federal loans at a record-low 2.75% interest rate, you'd end up paying back about $35,510 over 10 years, a difference of $6,805.
In reality, you may end up paying even more back. You can't borrow the entire $31,000 all at once. The maximum amount is paid back in installments over the course of your time at university. If you're a college freshman in the fall, your interest rate could rise over the next three years (or more).
Run the math with our student loan calculator to see how much your debt will cost you in the long run.
Federal and private student loan interest rates
In recent years, federal student loans have offered lower interest rates than private loans, but that may no longer be the case for some borrowers. Currently, interest rates on private student loans for undergraduates range from 3.85% to 15.9%, according to a May 2024 NerdWallet analysis.
“Now more than ever, we're encouraging families to be good consumers,” said Stacey McPhetre, senior director of education finance at Bright Horizons EdAssist.
Just like with mortgages, research private student loans and compare interest rates, McFetres adds.
To qualify for the lowest interest rates on private student loans, borrowers must have a high credit score, and many students will need a parent or cosigner with good credit to cosign the loan and be equally legally responsible for repayment.
Co-signers are not allowed on federal student loans, and only Federal PLUS loans require a credit check. Other federal student loan borrower protections that private lenders typically do not offer include:
As a general guideline, borrowers should prioritize their federal student loans. If there are still outstanding balances, private student loans are a good option to fill the gap.
But when it comes to PLUS loans, if you qualify for a lower interest rate, a private alternative may be a better choice this year. PLUS loans don't offer the same strong protections and flexible repayment options as other types of federal student loans, and they carry a 4.228% origination fee that most private lenders don't require.
File the FAFSA to free up cash flow and minimize borrowing
McPhetress says families should evaluate their out-of-pocket ability or consider saving or investing to cover education costs this year. “We're trying to encourage everyone to try all other options before borrowing, including federal student loans.”
You can also minimize your total college debt and interest payments by relying on sources of funding that don't require repayment, such as scholarships, grants, and work scholarships. To qualify for most grants and work scholarships, you must submit a FAFSA for each year of study. This includes the federal need-based Pell Grant, which can provide up to $7,395 per year in free money to help pay for college expenses. Many scholarships require applicants to submit the FAFSA. You must also submit this form to qualify for federal student loans.
The Free Application for Federal Student Aid is open through June 30, 2025, for the 2024-25 academic year, but you should fill it out as soon as possible to improve your chances of getting more funding. Some aid is drawn from a limited pool of funds and may run out of funds.
Another strategy to reduce your debt: First, look for places where you and your child can cut back on college costs.
“Your student doesn't need to live in the best dorms right now, or you might not need the 21 Meal Plan if you've never eaten breakfast in your life,” McPhetre says. “Even the little things that may not seem like they have a big impact can definitely help reduce your overall expenses.”