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On March 19, 2025, the rate remained within the target range of 4.25% to 4.5% as no changes occurred at the Federal Reserve Conference. This interest rate is only a benchmark and does not indicate the lender’s fee. This means that borrowing costs can still be high.
If you’re one of the millions of Americans who have student loans, you might wonder how changes in the Fed rate will affect your payments. Federal student loans come with a fixed interest rate. This means it will not change during the life of the loan. If the Federal Reserve raises or lowers interest rates, your payments and interest payments will not change.
That said, borrowers with personal loans with fluctuations in interest rates may see changes when the Fed raises or lowers interest rates. New borrowers may be able to get a favorable rate depending on their finances, but new borrowers will probably see a slightly lower rate across the board.
How will the Fed rate change affect student loan interest?
Both federal and private student loans accumulate interest at some point. How you calculate your interest depends on the type of loan you have and the fees and who your lender is.
Federal funds fees are not the exact interest rates charged to earn credit, but they affect the lender’s borrowing costs, and these costs are passed on to the consumer. In other words, when the Fed increases interest rates, the average loan interest rate also increases over time. Similarly, if the Fed cuts interest rates, lenders could gradually lower interest rates.
How the Fed’s decision will affect federal student loans
For federal student loans, interest rates are determined by Congress each year. This interest rate is valid from July 1 of the current year to June 30 of the following year and is always fixed.
With federal student loans, everyone gets the same interest rate regardless of their credit score and income. However, the exact rate will depend on whether you are an undergraduate, graduate student, or professional student, or whether you are taking a plus loan, which is the student’s parent.
If you already have federal student loans, the decisions the Federal Reserve has made will not affect you at all. However, if you are taking a new federal student loan this year after the Fed has raised interest rates, your loan will have a higher interest rate than the interest you earned last year.
For example, loans without direct subsidies were a fixed interest rate of 5.50% for undergraduates in grades 2023-24. Currently, they have a fixed profit of 6.53% for the 2024-25 academic year.
How the Fed’s decision will affect private student loans
Private student loan lenders use London Interbank Offering Rate (LIBOR) in addition to the average market fee to determine interest rates. With private loans, the exact rate depends on factors such as your credit score and income, and you can choose between a fixed or variable interest rate.
If you have private student loans with a variety of interest rates, you will feel that the Fed rate will change the most. Interest rates could respond over time as the Fed raises or cuts costs. This could result in more or less interest payments over the lifespan of the loan.
If you have a fixed-rate private student loan, the Fed changes will not affect existing loans. Whether it’s a fixed or variable, if you’re getting a new private loan, you may see a higher or lower fee based on your Fed shift.
How to respond to FRB rate changes
In an environment where interest rates are fluctuating, the next best step can vary depending on your loan refinance because you do nothing. Below are some tips that can guide you based on the type of student loan you have.
- If you have a federal student loan: Changes in rates do not affect loan payments or payments. It is best to stick to current loans, especially as these come with benefits that private loans don’t offer.
- If you have a fixed-rate private student loan: If you have a fixed-rate private student loan, changes to the Fed will not affect you. Fixed interest rates are locked up during the repayment period, but if the fees are lowered, it could allow you to refinance into a new loan with a lower fixed interest rate.
- If you have a private student loan with variable interest rate: If you have private student loans with a variety of interest rates, you will see that monthly payments and monthly interest rates will change based on market conditions. If a change in fee increases your monthly payments, shop to get the highest refinance rate available based on your credit score and other factors.
Time to refinance your student loan
Whether you have a federal or private student loan, you have the option to refinance your student loan to get a better deal. Refinancing is taking out a new loan with new (usually better) interest rates and repayment terms, paying off the old loan, and making one payment on the new loan.
You will need to refinance your student loan if:
- You have a solid credit score: Since you have a loan with a private lender, your credit score and credit history will determine your new interest rate. If you don’t have a good credit score or a good score, your interest rate will be higher than those with a better score.
- You have a private student loan: Federal student loans offer several protections, including deferrals, lenient and income-driven repayment plans. When you refinance, they disappear. If you already have private student loans, you will not set up losing these benefits.
- You get a lower interest rate: If you have a high interest rate, whether fixed or variable, a significant portion of your monthly payments may be directed towards interest in place of your principal balance. If you can secure a lower interest rate, your monthly payments will be lower. If you’re struggling to make payments now, this may be your biggest decision to refinance.
Next Steps
The Fed’s decision does not necessarily affect student loans. That being said, if you have a fluctuating student loan rate or are hoping to take away a new student loan, it is worth noting how the rate of federal funds changes. Right timing your student loans can help you save interest over time.
