Signs that inflation is easing have reignited hopes that the Federal Reserve Board will reduce interest rates as early as this summer. But even if that happens, the rate cut will come too late for thousands of college students and their families.
The interest rate for federal undergraduate student loans disbursed between July 1, 2024, and June 30, 2025, will be 6.53%, the highest rate in 16 years. The rate for federal Parent PLUS loans, which parents can take out to cover the cost of a child’s college attendance, will jump to 9.08%, a 33-year high.
Interest rates for federal student loans are adjusted annually, based on the high yield of the last 10-year Treasury auction in May. The rate is fixed for the life of the loan, even if overall interest rates decline. However, because rates are fixed, outstanding federal student loans won’t be affected. For example, if you took out a federal student loan between July 1, 2023, and June 30, 2024, your rate will remain at 5.5%
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Private student loans
As college costs continue to rise, the rate increase will make it even more difficult for families to pay for college. Although loans from private lenders may offer more competitive rates, they’re available only to students who have a co-signer with excellent credit, says Mark Kantrowitz, author of How to Appeal for More College Financial Aid. Plus, parents who co-sign are on the hook if the primary borrower defaults and their credit history could suffer if the borrower misses or makes late payments.
In addition, private student loans typically lack many important features of federal student loans, including deferment, income-based repayment and loan forgiveness, Kantrowitz says.
Limit your debt
A better strategy for both students and their parents is to limit debt as much as possible. Students who stay within the thresholds for federal student loans are unlikely to overborrow, Kantrowitz says. In 2024, the maximum an undergraduate dependent student can borrow in subsidized and unsubsidized federal student loans is $5,500 for the first year, $6,500 for the second year, and $7,500 for the third year and beyond. The total limit on borrowing is $31,000.
If that’s insufficient to cover college costs, parents can take out PLUS loans up to the total cost of a child’s attendance, but that doesn’t mean it’s a good idea — especially at current interest rates. Kantrowitz recommends that parents limit total borrowing for all of their children’s college education to the amount of their annual income. If you plan to retire in 10 years or less, you should borrow proportionately less — half of your annual income if you plan to retire in five years, for example, he says.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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