Existing federal loan rates are fixed. Private loans, refinancing and next year's rate are not

The Federal Reserve voted unanimously to raise its benchmark interest rate by a quarter of a percentage point Sept. 16, bringing its target range to 3.75% to 4%, the first increase since July 2023. 

“The plain fact is that inflation is too high and has been for too long,” Fed Chair Kevin Warsh said in a news conference following the decision.

About 91% of U.S. student loan debt is federal, which doesn’t change in parallel to interest rate changes. Congress sets the rate once a year and the rate is locked for its life.

Federal Direct Loans first disbursed between July 1, 2026, and June 30, 2027, carry a 6.52% interest rate for undergraduates, 8.07% for graduate and professional students and 9.07% for PLUS loans, according to the Department of Education.

The Fed’s increase can, however, affect private student loans. 

Banks and lenders such as Sallie Mae price them off benchmarks like the prime rate, which banks typically move in step with the Fed. Borrowers with variable-rate private loans may see the change within a billing cycle or two, while fixed-rate loans already signed are unaffected. Anyone shopping for a new private loan or a refinance pays the new price.

Americans owed $1.65 trillion in student loans as of June, according to the Federal Reserve Bank of New York.

About 43 million Americans have some college experience but without a degree or certificate. In a Gallup and Lumina Foundation survey of adults who dropped out, cost was cited as the reason most often, with 87% said cost was very or moderately important in why they were not currently enrolled.

At UF, 16% of 2025 graduates who entered as freshmen borrowed while enrolled, according to UF’s Common Data Set. The roughly 2% who took out private loans averaged about $32,500, twice the federal average.

Matt Schulz, chief consumer finance analyst at LendingTree, an online lending marketplace, said the place a student is most likely to feel the Fed’s decision isn’t a student loan.

“Credit card rates will be where people will see the impact of this rate increase the most quickly,” Schulz said. 

Even there, he said, a quarter-point increase adds a dollar or two to most cardholders’ monthly bills. Students, who tend to carry lower limits and less debt, may feel less of an impact.

“People have more power over these things than they think they do,” he said. “Take a little bit of legwork sometimes, but it’s usually worth the effort.” Schulz recommended students contact their financial aid offices or  credit card companies with questions about their options.

The Fed can change what a loan costs, but it doesn’t determine how much federal financial aid a student is offered. That process begins with information submitted through the Free Application for Federal Student Aid, said Somanth Chatterjee, a former financial aid director at a research university.

After a student submits the FAFSA, the federal government uses information from the form to  calculate the Student Aid Index, or the student’s ability to pay. Schools use it with the cost of attendance to help determine a student’s financial need.

Chatterjee said schools then build financial aid packages that can include scholarships, grants, work-study and federal loans.

On an unsubsidized federal loan, interest builds from the day the money is disbursed, he said. For subsidized loans, it typically doesn’t accrue interest until the student isn’t enrolled in school or during the six-month grace period after leaving school.

A financial aid package can also change after it’s awarded if a student’s enrollment, cost of attendance or other eligibility factors change, Chatterjee said.

Starting in 2026-27, the One Big Beautiful Bill Act reduces federal loan limits for students enrolled less than full time, so dropping a class can reduce loan eligibility, he said, and a student who already received the money may have to pay some of it back. For UF students, enrolling in fewer than 12 credits is considered less than full time.

Chatterjee’s key advice for prospective students is to submit the FAFSA early, carefully review the information before submitting it, read notifications from the financial aid office and contact the office with questions. Students should also find out how dropping a class could affect their aid before doing so, he said. 

Krishang Surapeneni, a 19-year-old UF finance sophomore, has a federal Direct Unsubsidized Loan at 6.39%, the undergraduate rate for loans first disbursed in 2025-26. His parents cover most of his tuition and living costs through a 529 college savings plan, he said, and he expects to borrow about $24,000 over four years to make up the difference.

He chose federal loans over private ones because of their rates and repayment protections, he said. The Fed’s increase makes him even less inclined to take out a private loan, he added.

His advice to freshmen is to understand why they’re borrowing and to weigh paying tuition in cash against taking a loan.

“It’s an investment in your future,” he said.

Alejandro Rivera Torres, a 20-year-old UF business administration junior, is taking out a federal loan whose interest rate will also be unaffected by the Fed’s Sept. 16 decision. 

Rivera Torres accepted a $7,000-per-year federal Direct Unsubsidized Loan after his Pell Grant was eliminated over the summer, he said. Some common reasons Pell Grants are eliminated are income or household changes, dropping below the required credit load, or a high Student Aid Index or scholarship.

The money was supposed to arrive at the start of the semester, he said, and as of Sept. 23 it had not. When it arrives, the rate will be 6.52%, fixed for the life of the loan.

He filed the FAFSA as soon as it opened for 2026-27 and was awarded a smaller grant for 2026-27. Then, in midsummer, an email notified him that his aid had been recalculated, and the grant was gone. Bright Futures still covers his tuition, but the Pell Grant money he had used for rent and groceries disappeared.

While some of his friends who lost Pell Grants were offered subsidized loans, Rivera Torres said, he was offered only unsubsidized loans.

“I felt like I was backed into a corner when I agreed to take it,” he said.

He said he understands why the Fed raised rates, but “we’re at a point right now where everything is already super unaffordable for middle and lower class people.”

“Don’t sacrifice your college experience for the cost of paying back a loan,” he said.

Contact Jessie Yang at jyang@alligator.org. Follow her on X @jessie_yang_22.

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