How does an interest rate change affect my student loan?

By Carolyn Morris | Published on February 16, 2026

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Interest rates have been in the news a lot lately. All throughout 2023, the Federal Reserve (essentially the banking authority of the federal government) continuously raised interest rates. Those higher rates trickled down to student borrowers, making it more expensive to both refinance existing loans and take out new loans. The interest rate hike also made federal student loans more expensive. In September of 2024, the Federal Reserve dropped rates for the first time in a while, finally making it less expensive to refinance. Following this rate cut, the Fed further reduced rates in December, ending the year with an additional rate cut of .25%.

Rate drops make it less expensive to borrow, but they can also affect those with existing student loan debt. If you’re still paying off the cost of your higher education, decreased rates could mean decreased monthly payments. That’s especially true if you have variable-rate student loans.

Here’s what you need to know about changing interest rates and how it might affect you.

Why do interest rates change?

When national interest rates spike or plummet, the Federal Reserve often has something to do with it. The Reserve is the federal government’s financial arm. It’s in charge of monitoring and regulating the U.S. economy. It’s also in charge of setting the federal funds rate, the target rate the government recommends all lenders and borrowers strive for.

Sometimes, the Reserve raises the federal funds rate by a few percentage points to try to stem inflation. More recently, however, the Reserve has done the opposite: dropping rates to encourage borrowing and stimulate the economy.

Can I refinance my student loans to get a lower rate?

If you have high rates on your current student loans, refinancing now could give you the opportunity to lower those rates¹. If you’re able to take advantage of the current market and qualify for a lower rate, that could help you lower your monthly payment or save money in interest over the life of the loan². And, if you combine a lower rate with a shorter term, that could help you pay off your debt faster.

Keep in mind that a lender’s lowest rates are reserved for the most credit-qualified borrowers. So, you’ll generally be able to get a lower interest rate on your refinance loan only if you have good to excellent credit, and if rates have dropped significantly since you first took out your loans. Do some math (or use a refinance calculator) to make sure getting a new rate will save you enough money to make refinancing worth it.

Refinancing is most useful if you have private loans with fixed rates. If you have variable rates on your loans, those rates are already linked to federal rates. So, they should drop automatically as federal rates drop.

Does it make sense to refinance federal student loans?

Refinancing is available to all types of student loans — both federal and private. If you have federal student loans, these automatically have fixed interest rates. That means your current rates are locked in, and the rate drop won’t affect them. So, it can make sense to refinance federal loans if you hope to pay them off soon and want to save money in interest in the meantime.

However, before you refinance federal loans, make sure you understand the consequences. Refinancing federal debt turns it into private debt — which means you’ll give up protections like the generous forbearance, deferment, loan forgiveness, and income-driven repayment options that come with federal loans.

If you’re happy with your current federal rates, you can still simplify your bill and get a new repayment term via federal student loan consolidation. But because federal loan rates aren’t based on your credit score or financial standing, federal consolidation just results in an average of your previous interest rates — not a lower rate.

Will my existing student loan interest rates change?

Your rates will change in accordance with the rate drop if you have a variable-rate loan. Variable interest rates are exactly what they sound like: They vary, or change, according to national trends. And though a student loan’s annual percentage rate (APR) isn’t based directly on the federal funds rate, it’s still pretty connected. That’s because student loan servicers set their interest rates based on a “reference rate” — a sort of national average rate that’s published regularly by a big national bank and used as a benchmark.

In the case of Earnest, and many other student loan servicers, this reference rate is the “Secured Overnight Financing Rate” (SOFR), which is published monthly by the Federal Reserve Bank of New York. Because it’s a national average, it tends to go up when the federal funds rate goes up, and down when the federal funds rate goes down.

In short, when the federal funds rate goes up, SOFR goes up. When SOFR goes up, so do the interest rates on your variable-rate student loans.

What are student loan rates now?

You can view current federal student loan rates on the studentaid.gov website. As of 2024, some federal rates are sitting at record highs. Private loan rates, however, have dropped among many lenders. You can view those rates here.

How often do rates change for private student loans?

Private student loan servicers aren’t beholden to rigidly set annual rates like federal servicers are. Instead, private lenders more closely follow national trends, often updating their rates on a monthly basis to reflect those trends. If you have variable-rate loans, your bill will likely vary from month to month as well.

How often do rates change for federal student loans?

Federal student loans have fixed interest rates, which means they won’t vary over the life of the loan. However, the interest rates offered to new borrowers change on an annual basis.

Federal student loan interest rates — including those for Parent PLUS and Grad PLUS loans— are set by Congress. These rates are based on the 10-Year Treasury Note auction, which happens each spring. Rates are announced for the upcoming academic year shortly after the auction, then implemented for new loans starting July 1.

What happens to my loan payment when rates change?

Your student loan payments may or may not change as national interest rates trend up or down. It all depends on the type of loan you have — and on your payment habits.

If you have a variable-rate loan…

Variable rates are only offered by private student loan servicers. Variable-rate loans are often cheaper than fixed-rate loans when you first apply for them, but they essentially put you at the mercy of the U.S. economy. As national interest rates tick up or down, so will the interest rates on your student loan. They may change monthly, quarterly, or annually, depending on your loan servicer. So, if the Fed hikes rates in the future, you could end up stuck with higher interest rates.

As for the cost of your actual student loan payment? It depends. That’s because your minimum payment and your monthly payment are not always the same thing.

Each loan has a minimum due amount. This is the minimum monthly amount that you’re required to pay to remain in good standing, and it’s precise down to the penny. If you’re paying the exact minimum due every month — for example, $544.96 — you will see your payment increase or decrease to reflect a new minimum on your variable-rate loan.

However, if you’re in the habit of paying more than your minimum due (a tactic you should use if you’re able to, since it will pay down your loan principal faster and decrease the interest owed each month), your actual payment may not increase at all.

For example, if you were paying $600 per month and your minimum due increased from $544.96 to $588.32, you could continue to pay $600 each month. The only thing that would change is the amount of your payment that’s applied to interest and the amount that is applied to your principal.

With your Earnest loan, you can always view your current minimum due or adjust your payments.

If you have a fixed-rate loan…

With a fixed-rate loan, your interest rate is locked in for the entire life of the loan. That means you don’t have to worry about your rates changing on you, no matter what’s going on with the national economy.

All federal student loans have fixed rates. Some private loan servicers, including Earnest, also offer fixed-rate options. If you’re not sure what you have, log in to your student loan account to check the terms of your loan.

How do rate changes affect getting a new loan?

Decreased rates make borrowing less expensive. Here’s how it affects the loan application process.

Applying for new private student loans

If you’re in the process of refinancing a loan or planning to get a new private loan, you can choose between variable and fixed-rate loans. Choosing wisely can help you save money when rates are volatile. Here are some general guidelines to consider if you’re taking a new private loan or refinancing.

Variable rates are better when:

• Your budget can handle an increased minimum payment.
• You have a shorter loan repayment term, which limits the chances for rates to change.
• You believe interest rates will decrease or stay flat in the near future.

Fixed rates are better when:

• You have a longer loan term, and you don’t want to be affected by moving rates.
• You don’t want your minimum payment to increase.
• You believe rates will increase in the future and want to lock in a lower interest rate now.

Applying for new federal student loans

If you’re looking to take out new federal student loans, there’s not much you can do to control your interest rates. Still, most experts recommend maxing out federal loans before you max out private loans.

That’s because federal loans offer forbearance and deferment, income-driven repayment plans, and other major perks. And unlike private loan servicers, the U.S. Department of Education doesn’t typically look at your credit score at the time of origination, which means there won’t be a penalty for less-than-stellar credit on top of the higher set interest rate. (This is always true for undergraduate students. Some graduate students, however, may have to undergo a rate check in order to qualify for Grad PLUS loans.

Can I switch from a variable-rate loan to a fixed-rate loan?

Student loan refinancing is a method for combining existing loans into a single, new loan. When you refinance through a private lender, you get a new interest rate, loan term, and repayment plan. So, yes — if you’re worried about your variable interest rates going up in the future, you can switch to a fixed interest rate by refinancing your private student loans. (Refinancing also has other benefits, like allowing you to release a cosigner.)

Keep in mind that your new fixed rate may be higher than your old rates at first. The benefit is that it won’t go up if the Fed implements a rate hike. That will save you money over the long term if rates increase again in the future.

What will happen with interest rates in the future?

First, a big disclaimer: It’s impossible to know for sure what rates are going to do. There’s no limit to how much the reference rate can rise or fall in any one year. However, some loan servicers, like Earnest, provide a little built-in protection by setting a maximum annual percentage rate (APR).

Right now, the Federal Reserve expects to drop rates a few more times over the next year or so. So, if you have full faith in that expectation, you may want to consider holding off on a refinance until rates drop more. And if you’re hoping to take out federal loans, you may want to wait until next year, when we could see those lower rates reflected in federal student loan rates.

See how much you could save with Earnest

Federal Reserve rate changes have ripple effects that reverberate throughout the U.S. economy. These affect all kinds of financial markers — including student loan interest rates. The best way to stay on top of rate changes is to make smart decisions when it comes to taking out new loans, and to carefully consider your refinancing options for existing private loans.

With Earnest, you can get a free estimate using our online refinance calculator or rate calculator — neither of which will affect your credit score. Earnest also offers other benefits, like fee-free origination³, customized repayment terms, and deferment options to help provide peace of mind amid unexpected rate hikes. Check it out today, and see how much you could save.