New federal student loan rates are down slightly: Should you refinance?

Interest rates on new federal education loans are set each year on July 1, based on the last (and only) 10-year Treasury Note auction in May. While these rates are fixed for the life of the loan, each academic year brings a new fixed rate for newly disbursed loans. 

The 10-year Treasury Note auction on May 6, 2025 yielded a high yield of 4.342 percent. Consequently, the interest rates for federal student loans disbursed during the 2025-2026 award year will be 6.392 percent fixed for the Federal Direct Stafford Loan for undergraduate students, 7.942 percent fixed for the Federal Direct Stafford Loan for graduate students, and 8.942 percent fixed for the Federal Direct Grad PLUS Loan and Federal Direct Parent PLUS Loan.

How federal student loan rates are set

Since July 1, 2013, the interest rates for federal education loans have been calculated using a formula tied to the high-yield of the 10-year Treasury Note auction, plus a specific margin that varies by loan program, as shown in this table.

How changing interest rates change student loans

The modest increase in interest rates will have a corresponding effect on monthly payments for those getting new federal loans in the 2025-26 school year. (Because federal loans have fixed interest rates, payments on existing federal loans will not change.)

The new interest rates will decrease the monthly payment on a 10-year $10,000 loan from $113.72 to $113.00, yielding a $85.85 decrease in total payments over the life of the loan. This translates to a 0.63 percent decrease in the overall cost of borrowing new federal student loans.

Will private loan rates be impacted?

In contrast to federal loans with their fixed annual rates, private student lenders provide both fixed and variable rates and often adjust the rates they offer monthly. They are based on a variable index rate, such as the Secured Overnight Financing Rate (SOFR) or the prime rate, plus a fixed margin based on the credit scores of the borrower and cosigner.

The fixed margin is usually tiered based on credit score ranges, and even a small change in credit score can potentially lead to a significant interest rate adjustment if a borrower is near the edge of a tier. 

Having a creditworthy cosigner can be beneficial, as lenders typically use the higher of the borrower’s and cosigner’s credit scores. Indeed, per Enterval, a high percentage of private undergraduate (96 percent) and graduate (71 percent) student loans need a cosigner. Students often have a thin or non-existent credit history, preventing them from qualifying for a private student loan on their own. 

Most private lenders offer both variable and fixed interest rate options. Fixed rates are generally priced to yield similar revenue to variable rates over the loan term, based on projections of the variable rate’s trajectory. Consequently, fixed rates tend to be higher when prevailing interest rates are rising and are also influenced by the loan’s repayment term.

Should you refinance your student loans now?

Both federal and private student loans can be refinanced at any time without prepayment penalties. 

Prepayment penalties are illegal on student loans.

The Higher Education Opportunity Act of 2008 bans prepayment fees on private student loans, while the terms and conditions of federal education loans, as specified in the Higher Education Act of 1965, allow borrowers to prepay their loans without having to pay a prepayment penalty.

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However, it’s crucial to understand the pros and cons of refinancing federal loans into private loans, as this action forfeits the valuable benefits of federal loans. These include generally lower fixed interest rates, more flexible deferment and forbearance options, income-driven repayment plans, and various loan discharge and forgiveness programs.

The best reason for considering student loan refinancing is the potential for saving money. Consistent on-time debt payments over several years often contribute to a better credit profile. If your credit score has improved significantly or prevailing interest rates have decreased since you took out your original loans, you might qualify for lower student loan refinance rates. 

Given that federal student loans have fixed interest rates determined at the time of disbursement, refinancing them into a private loan with a lower interest rate might be appealing.

Currently, the best private student loan rates start lower than federal rates at around 3.5 percent fixed and 5 percent variable, although only a small percentage of borrowers qualify for these rates.

When comparing refinancing options, focus on both the monthly payment and the total amount repaid over the entire loan term — use a student loan calculator to easily view both. It’s best to compare loans with the same repayment term to make an accurate assessment, as longer terms will result in lower monthly payments but higher total payments.