Rising Student Loan Interest Rates: Who’s Safe from Soaring Rates?

Federal student loan interest rates are projected to increase later this summer. This is the fourth straight year in which these rates have gone up.

But the rate increase won’t impact everyone — only those with newly-disbursed federal student loans. Borrowers with existing, fixed-rate federal student loans will see no interest rate changes. 

Federal and private student loan borrowers with variable-rate loans likely already have fairly high interest rates given the current market. They are unlikely to see a rate jump unless the market changes for the worse.

Meanwhile, the Biden administration has taken several steps to mitigate interest accrual and capitalization for current borrowers through various initiatives, including student loan forgiveness.

New federal student loans come with sticker shock

The interest rate increase set to go into effect this summer will only impact new federal student loan disbursements for the 2024-2025 academic year. Here’s what to expect:

• Undergraduate federal Direct Stafford student loans: Rates rise from 5.5% to 6.53%. 
• Graduate federal Direct Stafford loans: Rates increase from 7.05% to 8.08%.
• Federal Direct Parent PLUS and Graduate PLUS loans: Rates jump from 8.05% to 9.08%, the highest interest rates in recent memory. 

While the roughly 1% average rate hike only directly impacts new 2024-2025 borrowers, it’s still significant. On a federal student loan balance of $40,000, it could mean an extra $2,500 in interest payments over a 10-year repayment term.

Borrowers with existing fixed-rate federal student loans won’t feel the impact

Most federal student loanhave fixed interest rates. That means that the rates are set at the time of disbursement, and they don’t change with the market over time. 

If you fall into this group, you won’t feel the effects at all from the projected interest rate increases — unless, of course, you plan to return to school this year and take out new federal student loans. Even then, your current federal student loan interest rates won’t change. Only new loans taken out this fall or next spring will have the higher rates.

Related: How Does Student Loan Interest Work?

Have a variable interest rate loan? You’re safe… for now

Some borrowers with older federal student loans, as well as many private student loan borrowers, have variable interest rates. That means that the rates can change over time with market conditions, often indirectly related to rates set by the Federal Reserve. 

If you have variable-rate private or federal student loans, your interest rates won’t be impacted by this 2024-2025 interest rate increase for new federal student loans. The process for setting those rates — which is based on the high yield of the 10-year Treasury note at auction (a process which itself is established by Congress) is different from how interest rates are calculated on variable-rate loans. Typically, the underlying loan promissory note establishes the process for calculating a student loan’s variable interest rates. 

Unless market conditions generally allow for further interest rate increases, borrowers with variable-rate student loans shouldn’t see a rate jump. In fact, if the Federal Reserve winds up lowering interest rates later this year (which is a possibility), they may see a reduction in their interest rate.

Biden administration plans for to mitigate or forgive student loan interest

The Biden administration is in the process of implementing several initiatives to mitigate interest accrual and capitalization for current federal student loan borrowers.

Last year, the Education Department enacted new regulations that limit the circumstances in which accrued interest can be capitalized, or added back onto the loan principal balance (which can have a compounding effect over time). Borrowers will no longer experience interest capitalization when exiting a forbearance or changing repayment plans. Borrowers also won’t  face interest capitalization penalties for failing to recertify their income for an Income-Driven Repayment (IDR) plan or defaulting on their student loans.

The Biden administration’s new Saving on a Valuable Education (SAVE) plan — the newest IDR option — also has major interest benefits. Under SAVE, “If you make your full monthly payment, but it is not enough to cover the accrued monthly interest, the government covers the rest of the interest that accrued that month,” says Education Department guidance. “This means that the SAVE Plan prevents your balance from growing due to unpaid interest.” 

Related: 5 Myths About the New SAVE Plan, Demystified

This effectively operates as periodic student loan forgiveness for accrued interest during periods of negative amortization while a borrower is enrolled in SAVE.

Help for borrowers with runaway interest accrual

Last month, President Biden announced a new student loan forgiveness plan to potentially result in student loan forgiveness for borrowers who have experienced runaway interest accrual that has led to significant balance increases. 

The plan, if enacted, would “cancel up to $20,000 in interest for all borrowers who have accrued or capitalized interest on their loans since entering repayment,” according to the department. In addition, “Low and middle-income borrowers enrolled in the SAVE Plan or other income-driven repayment (IDR) plans would be eligible for their entire interest balance since entering repayment to be cancelled” as long as they made $120,000 in annual income individually or as married-filing-separately, $180,000 or less as a head of household, or $240,000 or less as married-filing-jointly. 

The plan may also provide relief to several other groups of borrowers including those who attended schools that lost their eligibility for federal aid, those who entered repayment more than 20 or 25 years ago, and borrowers experiencing significant financial hardships. 

The Education Department is expected to finalize the governing regulations for this new program this summer, and officials hope to start implementing relief by this fall. However, observers widely expect there to be legal challenges, which could jeopardize the program’s benefits.