2024 student loan interest rates drop for third time this year

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Student loan interest rates can have a dramatic impact on both the total cost of your loans, and how long it will take to pay them off. These interest rates tend to go up or down based on rate benchmarks set by the Federal Reserve.

On December 18, 2024, the Federal Reserve lowered interest rates by an additional .25%, making this the third and final rate cut of the year. This rate cut decision comes less than two months after a jumbo cut of 0.50% point in September, bringing the current interest rate range roughly at 4.5% to 4.75% from its current 4.75% to 5% level.

This additional 25-basis point decrease will provide some welcomed relief for student loan borrowers.

It it’s important to understand how the rate-setting process works so that you can plan for the future. While it’s been impossible to predict exactly when the Fed will raise or drop rates, we can look at past interest rate trends, Federal Reserve communications, and external financial analysis to build a reasonable model.

How and why did student loan interest rates change in 2024?

Although student loan interest rates are now lower than they were in the last year, they will continue to change based on several factors. Here’s how recent trends could affect rates in 2024 and 2025.

A look back: Why rate hikes persisted through 2023

During the height of the Covid-19 pandemic, the Federal Reserve dramatically dropped its Federal Funds Rate (FFR). The FFR is a national benchmark that many financial institutions use to set their own interest rates.

In March of 2020 the FFR was set at 0% to 0.25%. As a result, other loan rates — including mortgage loan interest rates — dropped below 3%, a historic low.

These low rates were designed to encourage hesitant shoppers to spend more money. The Fed hoped that increasing consumer spending would help keep various industries afloat during the pandemic.

Then, the economy picked back up in 2021, but interest rates remained low. As a result, consumer spending skyrocketed. However, many supply chains remained disrupted due to both the pandemic.

As you may remember from your Econ 101 class, during periods of high demand and low supply, vendors tend to raise their prices. In this case, prices shot up across the U.S., and inflation hit an all-time high. That made all kinds of products and services — from rent to groceries — unaffordable for millions of Americans.

In an effort to reign in rising prices, the Federal Reserve decided to increase the FFR. The Fed figured that hiking rates would discourage big purchases, reducing demand. In theory, that would cause prices to go down or stabilize.

When inflation continued to rise throughout 2023, the Fed decided to be more aggressive with its rate hikes. By October of 2023, the FFR was set at 5.25% to 5.50%. In response, student loan rates and mortgage rates both hit historic highs, as well.

Rates stabilized in 2023 and remained steady through most of 2024

In the final quarter of 2023, inflation finally began to calm. The Consumer Price Index had hit a high of 9.1% in June of 2022, dropped to 3.1% by November.

The Federal Reserve took this as a sign that its FFR rate hikes had worked. The economy seemed to be headed for a soft landing — not the dire recession that some people had feared.

In late 2023, the Fed decided to stop hiking rates leaving them in the 5.25 to 5.50% range until September 18, 2024. A stabilized FFR, in turn, gave lenders the confidence to lower their own rates. By Christmas of 2023, mortgage rates were hovering near 7.01% — down from their 7.90% October high.

The forecast called for lower rates in 2024

In late 2023, most financial analysts expected interest rates to continue dropping in 2024. In a press release, the Federal Reserve’s Open Market Committee (FOMC) signaled that it planned on making a series of rate cuts in 2024.
However, this did not happen until September 18, 2024 likely because the Fed felt that inflation had not cooled significantly enough.

Mortgage rates will likely fall from October 2023, and federal and private student loan interest rates will also drop. For the latest information on student loan rates, visit studentaid.gov.

However, we won’t know what federal rates will be until the U.S. Department of Education announces them. Since private student loan rates usually change on a rolling basis, expect lenders to lower their rates as well. At Earnest, we’re lowering our rates for both refinancing and private student loans. You can check your refinancing rate here and get your student loan rate here.

How the new interest rates will affect student loan borrowers

Financial institutions — including private student loan lenders — use official benchmark interest rates to set their own rates. These official benchmark rates are often based on the Federal Funds Rate (FFR).

So, when the FFR goes up, student loan interest rates tend to go up. When the FFR drops, student loan rates tend to drop as well.

In 2020, for example, the federal student loan interest rate dropped to just 2.75% for both Direct Subsidized and Direct Unsubsidized undergraduate federal loans. Federal PLUS loans had rates of 5.30%, and graduate and professional Direct Loans were 4.30%.

Private loan rates were also relatively low during the pandemic. But after the 2023 rate hikes, student loan interest rates rose across the board. Private student loan rates have now dropped. For the most up-to-date interest rate information on federal student loans, visit studentaid.gov.

Current federal borrowers won’t see their rates change

For existing borrowers, the interest rates on federal student loans are fixed at the time of disbursement, as in they do not change throughout the life of the loan. That means fluctuations in national interest rates won’t directly impact repayment terms or monthly payments for these borrowers.

For example, if you borrowed an undergraduate student loan between July 1, 2023 and July 1, 2024, your rate was 5.50%. That rate will not change, no matter what happens in the national economy.

That said, interest rate fluctuations can still indirectly affect federal borrowers. For example, rising national interest rates may correspond with fewer job opportunities, which can mean difficulty repaying your loans no matter their rate.
Higher national interest rates also mean higher rates on refinancing loans. So federal borrowers hoping to replace their federal loan with a new, lower-rate private loan are generally better off waiting until rates drop.

Borrowers with private student loans may see their rates drop

Private student lenders generally offer borrowers a choice between fixed-rate loans and variable-rate loans.

• Fixed-rate loans have rates that remain constant throughout the life of the loan.

• Variable-rate loans have rates that fluctuate with national interest rates.

If you have a variable-rate loan from a private lender, you will likely see it change based on national market conditions. If you have variable-rate student loans and the FFR drops, your rates are likely to drop.

Refinancing may be more appealing in 2024

If you got stuck with high-interest student loans — either federal or private — during the rate hike period between 2022 – 2023, now may be a better time to consider refinancing.

Student loan refinancing¹ involves replacing your existing loans with a single new loan, often with a lower interest rate. The best time to refinance is usually when interest rates are trending low. After all, the lower your refinance rate, the more you’ll save in interest charges over the life of the loan.

To refinance your student loans, you must first find a new lender you’d like to work with. If you qualify for a refinance, that lender will pay off all your existing loans for you. It will then issue you a single new loan.

Once the refinance is complete, your old loans will be gone, and you’ll start making monthly payments to your new lender instead.

2024 may be a better time to borrow

Maybe you’ve been waiting to start your undergraduate degree or you’re considering going to grad school. Regardless, if you’ve been waiting for the opportune moment to pursue an education, this could be it.

With lower-cost student loans on the horizon, college may be more affordable in 2024-2025. If you don’t act now and rates rise again in the future, you could miss your window. And if rates continue to drop, you can always refinance again at an even lower rate.

Lower rates may signal a better job outlook for new and recent grads

When interest rates are high, businesses tend to borrow funds more conservatively. But when rates drop, loans become more affordable. Companies often begin to take out new business loans, launch expansion projects, and hire more personnel. So, with the 2024 rate drop, the economy could rev up, fueling a growing job market.

Learn more about Earnest student loan refinancing

The best time to refinance your student loans is when interest rates are low and when you feel ready. With new low rates in 2024, this could be the golden window for refinancing.

If you’re interested in reducing your interest rate, lowering your monthly payment, or paying off your loans faster, consider a refinance loan from Earnest². We never charge origination fees or prepayment penalties, and we let borrowers in good standing skip one monthly payment per year³, fee-free. Choose a refinance loan that fits your financial goals. Visit our rate-calculator today to see how much you could save. It’s fast, free, and won’t affect your credit score.

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Please note that you may lose benefits associated with your underlying federal loans, such as federal Income-driven Repayment Plans (an example of which is the SAVE plan), Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options, if you refinance into a private loan. If you file for bankruptcy, you may still be required to pay back this loan.

2 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.

3 Earnest clients may skip a payment through a one, one-month forbearance during a 12 month period. Your first request to skip a pay can be made once you’ve made at least 6 months of consecutive on-time full principal and interest payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Any unpaid accrued interest may capitalize (added to the principal balance) at the end of the forbearance period by adding unpaid accrued interest to the outstanding principal as permitted by law and the terms of the loan agreement.

Interest will not be capitalized on loans originated to Michigan residents under the Regulatory Loan Act of 1963. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest's discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.