Federal Student Loan Rates
Federal student loan interest rates are set by Congress under 20 U.S.C. § 1087e using a formula tied to the 10-year Treasury note yield from the May auction, plus a statutory add-on that varies by loan type — creating rates that reset annually for new loans while remaining fixed for the life of each individual loan. For the 2025–2026 academic year: undergraduate Direct Subsidized and Unsubsidized Loans carry 6.53%; Graduate Direct Unsubsidized Loans carry 8.08%; and Parent PLUS and Graduate PLUS Loans carry 9.08% — among the highest federal student loan rates in more than a decade, driven by the Federal Reserve's rate-hiking cycle. Congressional add-ons are capped: undergraduate rates cannot exceed 8.25%, graduate unsubsidized rates are capped at 9.5%, and PLUS rates at 10.5%. Unlike private student loans, federal loan rates are uniform regardless of creditworthiness — a recent graduate with no credit history pays the same rate as any other borrower in the same loan category. The rate formula was established by the Bipartisan Student Loan Certainty Act of 2013, which replaced the old fixed-rate system with market-indexed rates. Rising rates have renewed pressure on income-driven repayment plans and Public Service Loan Forgiveness as the primary mechanisms for managing long-term student debt costs — particularly for graduate and professional school borrowers facing 8%+ rates on balances that can reach six figures.
Current Law (2026)
Federal student loan interest rates are set annually based on the 10-year Treasury note yield from the May auction, plus a statutory margin. Rates are fixed for the life of each loan.
| Loan Type | Rate Formula | 2025-26 Rate (est.) |
|---|---|---|
| Undergraduate Direct | 10-yr Treasury + 2.05% | ~6.5% |
| Graduate Direct | 10-yr Treasury + 3.60% | ~8.1% |
| Parent/Grad PLUS | 10-yr Treasury + 4.60% | ~9.1% |
| Rate cap (statutory) | 8.25% (undergrad), 9.5% (grad), 10.5% (PLUS) | N/A |
Legal Authority
- 20 U.S.C. § 1087e(b) — Interest rate provisions for Direct Loans (Bipartisan Student Loan Certainty Act of 2013; Treasury-based formula with statutory margins and caps)
- 20 U.S.C. § 1077 — Eligibility of borrowers and terms of federally insured loans (legacy FFEL interest rate provisions)
How It Works
Each year's federal loan rates are set by a formula under 20 U.S.C. § 1087e(b): the 10-year Treasury note yield from the May auction, plus a statutory margin by loan type (2.05% for undergraduate Direct, 3.60% for Graduate Unsubsidized, 4.60% for PLUS). Once established, rates are fixed for the life of that specific loan — borrowing in a high-rate year means that rate persists indefinitely regardless of future Treasury movements. Each academic year's loans carry a separate fixed rate; borrowers with loans from multiple years hold a portfolio of different fixed rates. See Federal Student Loan Limits for annual and aggregate borrowing caps by loan type.
Unlike private student loans, federal rates carry no credit-based pricing — creditworthiness, income, school attended, or field of study don't affect the rate. Every borrower in the same loan category pays the same rate for the same academic year. Statutory caps prevent rates from rising above 8.25% for undergraduate loans, 9.5% for Graduate Unsubsidized, and 10.5% for PLUS, regardless of Treasury yields. If rates fall significantly, the only way to capture lower rates is through private refinancing — which permanently ends access to income-driven repayment, PSLF, and federal deferment protections.
Interest capitalization — when accrued but unpaid interest is added to the principal balance, creating interest-on-interest — is the mechanism by which balances grow during non-repayment periods. Capitalization triggers include the end of grace periods, the end of most deferments and forbearances, and when borrowers leave income-driven repayment without recertifying income. The SAVE plan had eliminated most capitalization events before being struck down; current rules have reverted to the prior framework. Subsidized Direct Loans — need-based loans available only to undergraduates — avoid this problem during school, grace periods, and certain deferments: the federal government pays the interest that accrues during those periods, so subsidized loan balances don't grow the way unsubsidized balances do.
How It Affects You
If you're borrowing for undergrad this year: Your rate is 6.53% for loans disbursed in the 2025-2026 academic year — locked for the life of those specific loans. On a $27,000 balance (the current average federal loan balance at graduation), that's roughly $310/month on the standard 10-year plan with about $10,000 in total interest. Each year's loans get a new rate set at the May Treasury auction; loans taken next year may be higher or lower. The Direct loan origination fee (1.057% in 2025-26) reduces what you actually receive: a $5,500 loan disburses approximately $5,442. Log into studentaid.gov to see all your federal loans, current balances, accrued interest, and your loan servicer — that's your primary account management tool for the life of the debt. If rates drop in future years, you can only access those lower rates by private refinancing — which permanently eliminates your IDR, PSLF, and deferment/forbearance options.
If you're a graduate student: Grad Direct loans at 8.08% and PLUS loans at 9.08% (2025-2026) are the most expensive federal borrowing available, and the math is stark: a master's degree borrower taking $60,000 in Grad Direct loans pays roughly $740/month on the standard 10-year plan, with over $28,000 in total interest. Law and medical school borrowers who take $200,000+ in PLUS loans face monthly payments above $2,500 on the standard plan. This is why income-driven repayment and PSLF are essential planning tools for graduate borrowers, not afterthoughts. The core decision at graduation: if you're pursuing PSLF (120 qualifying payments in public service = tax-free forgiveness), enroll in IDR immediately and pay the minimum. If you're a high earner not pursuing forgiveness, model private refinancing — qualifying borrowers with 760+ credit and stable income can find rates well below 8%, but refinancing permanently eliminates federal protections.
If you're a parent taking PLUS loans: Parent PLUS at 9.08% (2025-2026) carries the highest interest rate of any federal loan — and the 4.228% origination fee is the highest too. On a $30,000 disbursement, you pay $1,268 upfront and receive $28,732 in loan proceeds. A family borrowing $30,000/year for four years ($120,000 total) faces payments over $1,500/month on the standard 10-year plan with approximately $55,000 in total interest. Parent PLUS loans do NOT qualify for SAVE or PAYE income-driven repayment directly — you must first consolidate them into a Direct Consolidation Loan, which qualifies for Income-Contingent Repayment (ICR), a less generous plan. One critical detail: if you consolidate Parent PLUS loans together with your child's loans, the combined consolidation loan may only qualify for ICR. If you consolidate them separately, each can qualify for its own IDR plan independently. Use the Loan Simulator at studentaid.gov to model payments before consolidating.
If you're considering private refinancing: Private refinancing can reduce your rate — borrowers with 760+ credit scores and high, stable income can qualify for rates below 5-6% — but it permanently ends your access to the federal system. Once refinanced, you can never return to IDR plans, PSLF, federal deferment, or income-based forbearance. If you lose your job or face a financial hardship, your private lender has no obligation to lower payments the way IDR does. The clearest breakeven case: a high-earning professional (engineer, dentist, attorney) with $100,000 in loans at 8% who refinances to 5.5% saves about $7,500 in interest over 10 years and has stable, growing income making hardship scenarios unlikely. The worst case for refinancing: any borrower who might pursue PSLF, work for a nonprofit, or face income uncertainty. For those borrowers, the federal protections are worth more than any rate differential.
Implementing Regulations
- 34 CFR Part 685 — William D. Ford Federal Direct Loan Program (Direct Subsidized, Unsubsidized, PLUS, and Consolidation loans: borrower eligibility, interest rates, repayment plans including IDR, deferment, forbearance, discharge conditions; 52 sections)
- 34 CFR Part 668 — Student Assistance General Provisions (institutional eligibility for Title IV aid; student eligibility; satisfactory academic progress; verification; Return of Title IV funds; 202 sections — the operational backbone of federal student aid)
- 34 CFR Part 682 — Federal Family Education Loan Program (FFELP) (interest rates, special allowance payments, guarantee agency procedures, default resolution)
- 34 CFR Part 674 — Federal Perkins Loan Program. The Perkins program expired September 30, 2017 — no new Perkins Loans have been issued since, but roughly $10 billion in existing loans are still being serviced by institutions. Key provisions still in effect for outstanding loans:
- § 674.12 — Loan maximums: $5,500/year for undergraduates (aggregate cap $27,500 for students who completed two years); $8,000/year for graduate or professional students (aggregate cap $60,000); Perkins was uniquely institution-administered through a revolving fund, not a direct government-to-borrower loan
- § 674.33 — Repayment: minimum installment $40/month; 10-year repayment period; 9-month grace period after leaving school (longer than the 6-month grace period for Direct Loans); institutions set repayment schedules with no less than 4 installments per year
- § 674.34 — Deferment: borrowers may defer during graduate school, unemployment, economic hardship, military service, and other qualifying circumstances — no interest accrues during deferment (unlike Direct Unsubsidized Loans)
- § 674.39 — Loan rehabilitation: borrowers with defaulted Perkins Loans may rehabilitate by making 9 on-time payments; rehabilitated loans are removed from the credit report default notation; institutions must offer rehabilitation to all eligible borrowers
- §§ 674.53–674.60 — Cancellation provisions (unique to Perkins): up to 100% cancelled for full-time teaching in low-income schools (§674.53), full-time service as a nurse or medical technician (§674.56), full-time law enforcement or corrections officer (§674.57), full-time Head Start staff (§674.58); cancellation accrues in increments over years of service (15–20–20–20–25% over 5 years); military service also qualifies (§674.59); these cancellation benefits are specific to Perkins and are not available for Direct Loans (which use PSLF instead)
- 34 CFR Part 681 — Health Education Assistance Loans (interest rates, insurance, default)
Pending Legislation
- HR 7810 — Lowering Student Loans Act: set a 2% fixed interest rate for many federal student loans starting July 1, 2026; reset some existing loans to 2%. Status: Introduced.
- S 3538 — Student Loan Tax Elimination Act: repeal origination fees for Federal Direct student loans and consolidation loans. Status: Introduced.
- HR 8045 — Eliminate interest on student loans entirely; establish the Education Affordability Trust Fund. Status: Introduced.
- S 4119 — Student Loan Marriage Penalty Elimination Act: apply the $2,500 student loan interest deduction limit to each spouse, potentially $5,000 combined. Status: Introduced.
- Variable rate: Occasional proposals to allow variable-rate federal loans.
- HR 1764 — Ending Administrative Garnishment Act of 2025: pauses federal wage garnishment for student loans and creates a one-year process to either resume or end garnishment. Status: Introduced.
- HR 1559 — Know Before You Owe Federal Student Loan Act: renames entrance counseling, makes borrowers confirm exact loan amounts, and requires quarterly statements during payment pauses. Status: Introduced.
Recent Developments
- SAVE plan legal uncertainty: The SAVE (Saving on a Valuable Education) income-driven repayment plan, introduced by the Biden administration in 2023-2024, has been challenged in federal courts. Multiple injunctions have paused key SAVE provisions, including the lower payment formula (5% of discretionary income for undergrad) and accelerated forgiveness timelines. Borrowers enrolled in SAVE have been placed in administrative forbearance during the litigation, with no payments due but no progress toward forgiveness.
- Origination fees persist: Federal student loans continue to carry origination fees (approximately 1.057% for Direct loans, 4.228% for PLUS loans in 2025-26). S 3538 would eliminate these fees, which effectively increase the cost of borrowing beyond the stated interest rate.
- Rate-setting for 2026-27: The 2026-27 rates will be set based on the 10-year Treasury note yield at the May 2026 auction. With Treasury yields remaining elevated in the 4-4.5% range, expect rates similar to or slightly higher than 2025-26 levels. The statutory caps (8.25% undergrad, 9.5% grad, 10.5% PLUS) remain the backstop.
- Student loan interest deduction: The $2,500 above-the-line deduction for student loan interest remains available, phasing out at $80,000-$95,000 MAGI ($165,000-$195,000 MFJ). S 4119 would double the deduction for married couples. At current rates, the full $2,500 deduction saves $550-$925 depending on tax bracket.