How the Fed Rate Cut Impacts Student Loans

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Updated Dec 10, 2025 · 1 min read

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The Federal Reserve cut the key interest rate by a quarter of a percentage point on Dec. 10 , following previous cuts on Sept. 17 and Oct. 29. While interest rates on private student loans could drop and refinancing may become more attractive, federal student loan interest rates won’t be immediately affected.

But this rate cut doesn’t mean that private loans are a better option for everyone. Only federal loans offer income-driven repayment plans and student loan forgiveness pathways like Public Service Loan Forgiveness. Federal loans also offer more extensive forbearance and deferment options than private lenders do. On top of that, federal loans are available to all student borrowers — regardless of their credit score, income level or ability to get a cosigner.

Here are the details to know.

» MORE: Current student loan interest rates and how they work

No immediate impact on federal student loan rates

Federal student loan interest rates are calculated annually, so these rates don't immediately respond to Federal Reserve actions. The government changes federal student loan rates once a year, in May, by taking the yield of the latest U.S. Treasury note auction and adding a fixed percentage. That yield will be higher or lower depending on the broader economy; federal student loan rates fell for the 2025-26 school year.

The current interest rates for federal student loans are:

6.39% for direct undergraduate loans.
7.94% for direct graduate loans.
8.94% for graduate and parent PLUS loans.

Federal student loan rates become effective the following July 1, and apply to all federal loans taken out that upcoming school year. They remain fixed throughout repayment.

So, if you borrow a $5,000 undergraduate loan this year at the current 6.39% interest rate, you will keep that rate until you pay off the loan or refinance. On the standard 10-year repayment plan, you can expect to pay nearly $1,780 in additional interest over the life of your loan.

You must submit the Free Application for Federal Student Aid (FAFSA) to become eligible for federal student loans.

Private student loan rates could fall

Private student loan interest rates may drop following the latest Fed rate cut. Whether you can qualify for the lowest rates, though, depends on factors like your credit score and income.

If you're looking for a private student loan, shop around with vetted private student loan lenders to find the lowest interest rate for which you qualify, and only borrow what you need. Prioritize lenders that offer rate estimates with a soft credit check, which won’t ding your credit score.

Because private loans have fewer repayment options and borrower protections than federal loans, they’re best used as a last resort to fill in funding gaps after you take out the maximum you’re allowed in federal student loans.

Look at the full picture before refinancing

If you borrowed a fixed-rate private student loan when rates were higher, refinancing can save you money by lowering your interest rate. That also reduces the total amount you'll pay for the loan, since you'll pay less interest overall. There’s not usually a downside to refinancing private student loans to get a lower interest rate. Shop around to compare refi rate offers from potential lenders.

If you have an existing variable rate private student loan, your rate may fall automatically in the coming months. Consider locking in that lower rate by refinancing to a fixed-rate loan.

» CALCULATOR: How much can student loan refi save you?

But think twice before refinancing federal student loans — even if you can get a lower rate. Refinancing will replace your federal loans with a private loan. That means you’ll permanently forfeit access to loan forgiveness programs, generous deferment options and other borrower protections, like payments based on your income.

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1. Federal Reserve. Federal Reserve issues FOMC statement.