Rates on New Student Loans Will Rise on July 1

Interest rates on new federal student loans will rise for the coming school year.

While the increase is not big — 6.52 percent versus 6.39 percent this year — student borrowers are already grappling with steep college costs. At the same time, borrowers are navigating stubbornly higher prices at the grocery store and gas station and a major overhaul of the federal student loan repayment program, including new limits on how much can be borrowed.

The new rates, which the Education Department announced this month, apply to loans made between July 1 this year and June 30 next year. The rates remain fixed for the life of the loans and do not apply to loans taken out earlier.

Students taking out the new, higher-rate loans are unlikely to benefit from a temporary interest rate reduction announced by the Education Department on Thursday.

Starting July 1, the department said, it will offer a temporary rate reduction to borrowers who are repaying their student loans and sign up by Sept. 30 to have their monthly payments automatically deducted from their bank account. But the perk applies only to borrowers who are already in “active” repayment, the department’s press office said in an email.

Students who take out loans July 1 or later for the coming academic year can’t benefit from the discount because they won’t yet be in repayment, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, an industry group. (One possible exception: Students who already earned their undergraduate degrees and had begun repaying their loans, but who are now in graduate school, may be allowed to waive the “in-school” deferment of their loans and continue making payments. Because they would still be making payments, he said, they could benefit from the temporary discount.)

Mr. Buchanan said that while Parent PLUS loans typically entered repayment relatively soon after they were issued, in most cases such loans borrowed on July 1 or later would not be able to meet the Sept. 30 enrollment deadline to qualify.

The higher rates for the new loans affect both those based on financial need, known as subsidized loans, and those that are not. (With subsidized loans, students aren’t charged interest on the debt while they are enrolled in college. The other loans accrue interest from the time the money is sent to the school.)

The new rate is the highest since the 2024-25 school year, when it was 6.53 percent, said Mark Kantrowitz, a financial-aid expert.

To be sure, the increase is minimal. On a loan of $5,500, the new rate would cost a borrower about $44 more in interest over the course of a standard repayment plan with a 10-year term, according to an online student loan calculator.

Republican proponents of the new loan limits argued that curbs on federal borrowing would help keep students and families out of debt and force colleges to reduce their prices. But advocates for borrowers warn that in practice, the limits could funnel students toward riskier private loans, if they can qualify for them, and restrict access to higher education.

“It’s definitely a hard place for students and families to be right now,” said Persis Yu, deputy executive director and managing counsel at Protect Borrowers, an advocacy group.

Are rates on loans taken by parents and graduate students rising, too?

Yes. Rates for graduate and professional students rose to 8.07 percent from 7.94 percent. Rates on PLUS loans, which provide extra financing to parents and (some) graduate students, ticked up to 9.07 percent from 8.94 percent. Graduate PLUS loans have been eliminated for new borrowers as of July 1. There is an exception for graduate students who were already enrolled and have taken out loans before July 1.

How are rates on federal student loans set?

Rates are determined annually for new loans. They are based on a formula established by Congress that takes the high yield from the final 10-year Treasury note auction in May and adds a fixed amount. (This year, for example, the high yield at the May 12 auction was 4.468 percent, plus an extra 2.05 percent, for undergraduate loans. The extra amount is larger for graduate and PLUS loans.)

Is there a cap on federal student loan interest rates?

Yes. By law, rates on undergraduate loans can’t top 8.25 percent, while maximum rates are 9.5 percent for graduate and professional loans and 10.5 percent for PLUS loans.

What are the limits on how much I can borrow?

Limits for certain types of loans are changing on July 1 as part of the big tax and policy bill that Republicans passed last summer.

The law also made major changes in the menu of affordable repayment plans. In some cases, options depend on the timing of your borrowing. (For details, see the student loan primer by my colleague Tara Siegel Bernard.)

Here’s the rundown on federal loan borrowing limits:

For undergraduate students, caps remain the same. If you’re a dependent student — meaning you rely on parents or family for support — you can borrow up to $5,500 in your first year, up to $6,500 the second year, and $7,500 in the third and later years for an overall total of $31,000. (Limits are higher for independent students.)

Significant changes, however, to borrowing by graduate students and by parents who are taking out PLUS loans to pay for their children’s education start July 1.

Until now, graduate students could borrow up to their program’s total cost of attendance by taking out both direct loans and PLUS loans. After this month, however, the graduate PLUS option is eliminated. Instead, borrowing by students in many graduate programs will be limited to $20,500 a year, and $100,000 total. (The new limits don’t apply to “legacy” graduate borrowers who enrolled and borrowed federal loans before July 1, as long as they remain in the same program.)

Graduate students pursuing certain “professional” degrees like medicine, dentistry, law and veterinary medicine can borrow more — up to $50,000 a year, and $200,000 overall.

Parents, too, will face new restrictions on how much they can borrow on behalf of their children. Parents have been able to take out PLUS loans up to the full cost of their child’s attendance. But now, the loans will be capped at $20,000 a year, per dependent child, with a total limit of $65,000 per child.

Concern has been growing in recent years that the ability to borrow virtually any amount on a Parent PLUS loan was getting some families into serious debt that they couldn’t afford to repay.

Ms. Yu, however, said that restricting borrowing without also tackling the high cost of college meant it would be more difficult for some students, including those from lower-income and minority families, to afford higher education.

What is the effect of the new PLUS cap on parents?

Some families may think about borrowing for college only after exhausting accrued savings, said Ann Garcia, a certified financial planner in Portland, Ore., and author of the book “How to Pay for College.”

“Parents would say, ‘We’ll spend what we have, then figure out how to pay for the rest of it,’” she said. But because of the tighter borrowing caps on PLUS loans, she said, it’s now especially important to map out financing for a student’s entire course of study. “You have to have more of a plan,” she said.

What alternatives are available?

Many families may turn to the private loan market to cover the gap — if they can qualify. Government PLUS loans require a cursory credit review. But private lenders evaluate borrowers with a full credit check, including their credit score. Those with excellent credit may get lower rates than those offered on federal loans, but those with poor credit may qualify only for higher rates or may need someone to co-sign for the loan.

Private loans may also be riskier because they typically lack certain protections that federal loans offer, like income-linked payment plans and options to postpone payments during times of financial hardship.

If they can’t qualify for private loans, some students may be unable to complete their course of study — ending up with debt but no degree, making it more difficult for them to repay the loans, said Betsy Mayotte, founder and president of the Institute of Student Loan Advisors, a group that offers advice to borrowers. “Those are the people who default.”

Are there options besides private loans?

Some states, including Connecticut and Minnesota, are creating their own graduate loan programs to fill the gap left by the new federal limits. But it may take time for more states to develop their own options.