Why Are Student Loan Interest Rates So High? 2025 Causes and Fixes

Student loan interest rates are at their highest levels in over a decade due to continued inflation and Federal Reserve policy decisions. For the 2024 – 2025 school year, undergraduate federal loans rose to 6.53%, more than double their 2020 rate. Parent and graduate loans are even higher, reaching 9.08%.

Private student loans range more widely, from 3.47% to 17.99%, and depend on your credit, cosigner, and lender. These elevated rates make borrowing more expensive and push many students to seek alternatives or better terms.

Let’s break down why student loan rates are so high and how to find the lowest possible rate.

Loan type	Current rates (2024 – 2025)*
Federal undergraduate	6.53%
Federal graduate	8.08%
Federal parent	9.08%
Private	3.47% – 17.99%

*Federal rates haven’t yet been determined for the 2025 – 2026 school year.

Table of Contents

1. What causes today’s high student loan interest rates?
2. How the Fed influences loan rates
3. How federal student loan rates are set
4. How private student loan rates are determined
5. How your rate affects student loan costs
6. How to get a lower student loan interest rate

What causes today’s high student loan interest rates?

1. The Federal Reserve’s aggressive rate hikes

The No. 1 reason student loan interest rates are so high in 2025 is that the Federal Reserve increased the federal funds rate multiple times between 2022 and 2024 to fight inflation. Although the Fed paused hikes in late 2024 and is expected to cut rates in the second half of 2025, current rates are still near a 20-year high.

2. Student loan rates are catching up post-COVID

From 2020 to 2022, student loan interest rates were historically low. For example, federal undergraduate loans sat at just 2.75% in 2020. The sharp rise in rates since then reflects the Fed’s effort to stabilize inflation, not a sudden change in loan policy.

How the Fed influences loan rates

The Fed sets the federal funds rate, which is the benchmark for most interest rates in the U.S., including those for student loans.

Higher Fed rates → Higher borrowing costs for banks → Higher rates for consumers (including student borrowers)

• The current federal funds rate is 4.25% – 4.50% (as of May 2025)
• Federal student loan rates are directly tied to the 10-year Treasury note, which moves with expectations about Fed policy

When the Fed cuts rates (potentially later in 2025), we may see relief in student loan interest for new borrowers, but not for those with existing fixed-rate loans.

How federal student loan rates are set

Each year, Congress sets federal student loan interest rates based on:

• The 10-year Treasury note yield
• A fixed margin added on top (varies by loan type)

Rates are fixed for the life of the loan, so once you borrow, your rate won’t change.

Loan type	Borrower	Rate
Direct Subsidized	Undergrad	5.50%
Direct Unsubsidized	Undergrad	5.50%
Direct Unsubsidized	Grad or professional	7.05%
Direct PLUS Loans	Parents or grad students	8.05%

How private student loan rates are determined

Private lenders use a different approach. Each lender sets its own rate ranges based on:

Factor 1: Market conditions

Rates are influenced by the prime rate and other benchmark indexes tied to Fed policy.

Factor 2: Your credit and cosigner

Lenders offer lower rates to borrowers (or cosigners) with strong credit scores, solid income, and low debt.

Factor 3: Loan structure

Most private lenders offer both fixed- and variable-rate loans. Variable rates can rise or fall, while fixed rates stay the same.

Sample rates from top private lenders (2025)

Lender	Rates (APR)
Sallie Mae	4.50% – 15.49%
SoFi	4.44% – 14.30%
College Ave	4.39% – 16.49%
Ascent	4.29% – 15.76%*

How your rate affects student loan costs

Even small differences in interest rates can add up to thousands over time.

Example: $10,000 loan over 10 years

Loan type	Rate	Monthly pmt.	Total interest paid
Federal	6.53%	$113.70	$3,644.08
Private	3.49%	$98.84	$1,860.68

How to get a lower student loan interest rate

We recommend considering federal loans first because they offer more benefits and flexible repayment options. However, if you want the lowest rate possible, consider private student loans following the steps below:

1. Apply with a cosigner

A creditworthy cosigner can cut your rate substantially.

2. Prequalify with multiple lenders

Use comparison tools—Credible is our favorite—or visit individual lenders to check your rates without affecting your credit score.

3. Refinance after graduation

Once your credit improves, refinancing could lower your rate. Some lenders even let you skip a payment annually or offer other benefits.

2025 student loan interest rate recap

Loan type	Current rates (2024 – 2025)
Federal undergraduate	6.53%
Federal graduate	8.08%
Federal parent	9.08%
Private	3.47% – 17.99%