Here's why the Department of Education lower student loan interest rates

College students taking out federal loans for the 2025-26 academic year will benefit from slightly lower interest rates, according to the U.S. Department of Education.

The reduction comes after rates reached a 16-year high last year, driven by inflation and a series of interest rate hikes by the Federal Reserve.

Each spring, federal student loan rates are recalculated based on the results of the U.S. Treasury’s 10-year note auction held in early May.

For 2025, the auction on May 6 produced a yield of 4.342%, which resulted in a modest 0.14 percentage point reduction in interest rates for all new federal student loans disbursed between July 1, 2025, and June 30, 2026.

Here’s how the rates will change from the previous academic year:

• Direct Subsidized and Unsubsidized Loans for Undergraduates: 6.39% (down from 6.53%)
• Direct Unsubsidized Loans for Graduate and Professional Students: 7.94% (down from 8.08%)
• Direct PLUS Loans for Parents and Graduate Students: 8.94% (down from 9.08%)

These interest rates are fixed for the life of each loan and apply only to loans first disbursed during the designated 12-month window.

What Drives the Change in Loan Rates?

Federal student loan interest rates are set using a formula outlined in the Higher Education Act. The formula adds a fixed percentage-known as the “add-on”-to the high yield of the 10-year Treasury note from the final auction held before June 1 each year.

The add-on amount varies based on the type of loan and whether it is for an undergraduate or graduate student.

For 2025-26, the add-ons are:

• 2.05% for undergraduate Direct Loans
• 3.60% for graduate Direct Loans
• 4.60% for Direct PLUS Loans

The Treasury yield’s decline this year reflects a more tempered economic environment. After a year of rising interest rates and aggressive Federal Reserve policy moves in 2024, bond markets have cooled slightly, contributing to lower yields.

However, volatility remains due to investor concerns, including global tariff threats and uncertain long-term economic forecasts.

“Last year, borrowers who took out loans did so with the highest interest rates since 2008,” a Department of Education statement noted, pointing to the economic environment that led to higher yields during the 2024 auction cycle.

Rate Caps and Long-Term Considerations

Despite the annual fluctuations, federal law caps the maximum interest rates on these loans. Undergraduate borrowers will never pay more than 8.25%, while graduate loans are capped at 9.50%, and PLUS loans have a maximum of 10.50%.

It’s important to note that these new rates only apply to loans disbursed starting July 1, 2025. Borrowers with older loans will continue to repay at the fixed rate set when their loan was first issued.

With student debt continuing to be a national concern and interest rates playing a significant role in overall repayment costs, this slight reduction provides modest relief to students and families planning for the 2025-26 academic year.

Borrowers are encouraged to consider the long-term financial implications and explore available repayment options that best fit their individual needs.