Student Loan Interest Rates for the 2024-25 School Year
Rising interest rates are a boon to savers but a curse to borrowers. Federal student loan interest rates are based on the 10-year Treasury yield at the May auction. That auction took place last week, so next year's interest rates are set-- and they are more than 1% higher than last year's rates.
Each loan type-- Direct Student Loan, Parent PLUS Loan, and Grad Student Loan-- has a fixed markup from the 10-year Treasury yield. The yield was 4.48%, more than 1% higher than a year ago. Markups and corresponding interest rates for the coming school year and previous school year are:
| Loan Type | Markup | 2024-25 Rate | 2023-24 Rate |
|---|---|---|---|
| Direct Undergraduate Loan | 2.05 | 6.53% | 5.50% |
| Parent PLUS loan | 4.6 | 9.08% | 8.05% |
| Direct Graduate Loan | 3.6 | 8.08% | 7.05% |
Federal student loans have fixed interest rates for their lifetimes. That means that student loans taken out for the 2023-24 school year will have a 6.53% rate until they are paid off. Last year's student loan will keep its 5.498% rate until it is paid off. "School years" for student loan purposes, run from July 1 through June 30. So any loan disbursed between July 1, 2024 and June 30, 2025, will have the above interest rates.
Federal student loans also have fees: 1.057% of the loan for direct undergraduate or graduate loans and 4.228% for PLUS loans.
Parents sometimes choose Parent PLUS loans over student loans because they don't want their student to graduate with debt. I generally recommend that families start with the direct student loan because of the lower interest rate and fees. Here are lifetime costs for the two loans for a first-year student, assuming the maximum $5,500 is borrowed (unsubsidized) in either loan, using a 10 year repayment period.
| $5,500 Loan | Direct Student Loan | Parent PLUS Loan |
|---|---|---|
| Origination fee | $86 | $233 |
| Accrued interest at repayment start | $1,617 | $2,248 |
| Loan balance at repayment start | $7,117 | $7,748 |
| Monthly payment | $81 | $98 |
| Total loan cost | $9,710 | $11,818 |
In addition, because of the high cost of Parent PLUS loans and the low borrowing limits for direct student loans-- $5,500 for first-year students, $6,500 for second-year students and $7,500 for remaining years-- most families are better off borrowing the direct student loan every year rather than delaying borrowing and taking out both the direct student loan and Parent PLUS loans in later college years.
Despite the high interest rates, federal student loans are almost always a student's-- and family's-- best starting point. That's because federal loans have far stronger borrower protections than do private loans: income-driven repayment plans, forgiveness programs, and more. In addition, it's unlikely that a student could qualify for the best interest rates on private loans without a parent co-signer, which makes the parent equally responsible for the loan balance. Finally, while federal loans can always be refinanced into private loans should better terms become available, the same is not true of private loans: once private loans are taken out, borrowers have no option to refinance to federal loans.
Higher interest rates always mean one thing: borrowers need to be more mindful of how much they are borrowing. Students who are able to earn high wages for summer jobs would be well-served to use that money to reduce borrowing as much as possible.
