Federal Student Loan Interest Rates: How They Work and What They Are

Introduction to Federal Student Loan Interest

Federal student loans are a common way to pay for college, and understanding how interest works on these loans is essential for managing your debt. Interest is the cost you pay to borrow money, and for federal student loans, it is charged as a percentage of your unpaid principal balance. The interest rate you receive depends on the type of loan you have and when the loan is first disbursed.

For federal student loans, the interest rate is fixed, meaning it stays the same for the life of the loan. This provides predictability in your monthly payments and total cost over time. Rates are set annually for new loans, but once you accept a loan, the rate is locked in.

This article explains how federal student loan interest rates are determined, what the current rates are for the 2026–2027 award year, how interest accrues on subsidized and unsubsidized loans, and strategies to minimize the interest you pay.

Sources: Federal Student Aid (U.S. Department of Education), U.S. Department of Education (FSA Partners)

How Federal Student Loan Interest Rates Are Determined

The U.S. Department of Education sets federal student loan interest rates each year for loans disbursed between July 1 and June 30 of the following year. The rates are based on the high yield of the 10-year Treasury Note auctioned at the final auction before June 1, plus a statutory add-on percentage. This formula is defined by law.

For the 2026–2027 award year, the 10-year Treasury Note high yield was 4.468%. Adding these percentages to the Treasury yield gives the interest rates for the year. The statutory add-on percentages are 2.05 percentage points for Direct Subsidized and Unsubsidized Loans for undergraduate students, 3.60 percentage points for Direct Unsubsidized Loans for graduate and professional students, and 4.60 percentage points for Direct PLUS Loans.

The rates are capped by law: the maximum rate is 8.25% for undergraduate Direct Subsidized and Unsubsidized Loans, 9.50% for graduate and professional Direct Unsubsidized Loans, and 10.50% for Direct PLUS Loans. These caps ensure that rates do not exceed a certain level even if Treasury yields rise significantly.

Sources: U.S. Department of Education (FSA Partners), The Institute for College Access & Success (TICAS)

Current Interest Rates for Federal Student Loans (2026–2027)

The interest rates below apply to loans first disbursed between July 1, 2026 and June 30, 2027. These are fixed rates for the life of the loan. The table shows the rates for each loan type.

In addition to interest, federal student loans have an origination fee, which is a percentage of the loan amount deducted from the disbursement. For Direct Subsidized and Unsubsidized Loans, the origination fee is 1.057%. For Direct PLUS Loans, the fee is 4.228%. These fees are for loans first disbursed on or after October 1, 2020, and, in the case of Direct Subsidized and Unsubsidized Loans, apply through September 30, 2027.

Sources: Federal Student Aid (U.S. Department of Education), U.S. Department of Education (FSA Partners), The Institute for College Access & Success (TICAS), FinAid

Fixed vs. Variable Interest Rates

Federal student loans have fixed interest rates, meaning the rate does not change over the life of the loan. This is different from variable rates, which can fluctuate based on market conditions. Fixed rates provide certainty: your monthly payment and total interest cost are predictable from the start.

While private student loans may offer variable rates that start lower, they carry the risk of increasing over time. Federal loans' fixed rates are often comparable or lower than private loan rates, especially for borrowers with limited credit history.

If you are comparing federal and private loans, consider that the federal fixed rate is the same for all borrowers regardless of credit score, and it includes borrower protections such as income-driven repayment and forgiveness options.

Sources: U.S. Department of Education (FSA Partners), The Institute for College Access & Success (TICAS)

How Interest Accrues: Subsidized vs. Unsubsidized Loans

One of the most important distinctions between federal student loans is whether they are subsidized or unsubsidized. This directly affects when interest begins to accrue.

Direct Subsidized Loans are available to undergraduate students who demonstrate financial need. On these loans, the government pays the interest while you are enrolled at least half-time and during the six-month grace period after you leave school. This means that no interest accrues during these periods, and the loan balance does not grow simply because you are in school.

Direct Unsubsidized Loans are available to both undergraduate and graduate students, regardless of financial need. On these loans, interest begins accruing from the time the loan is disbursed. Even though you may not be required to make payments while in school, the interest that accrues during this time can be capitalized (added to your principal) if you do not pay it, increasing the total amount you owe.

Direct PLUS Loans are unsubsidized loans, and interest accrues similarly to Direct Unsubsidized Loans.

Sources: Federal Student Aid (U.S. Department of Education), The Institute for College Access & Success (TICAS)

Interest Capitalization and Its Impact

Interest capitalization is the process of adding unpaid interest to the principal balance of your loan. This can happen when you enter repayment after a period of deferment, forbearance, or when you are in school and not making interest payments on an unsubsidized loan. When unpaid interest is capitalized, it becomes part of your principal, and future interest is then charged on that higher balance, which can significantly increase the total cost of your loan.

To minimize the impact of capitalization, you can voluntarily pay the interest on your unsubsidized loans while you are in school or during deferment/forbearance, even though payments are not required. This prevents the interest from being added to your principal.

• Interest on federal student loans accrues daily.
• If you can, pay the interest on unsubsidized loans as it accrues to avoid capitalization.
• Capitalization can occur at repayment entry, after deferment/forbearance, and in certain other situations.

Sources: FinAid

Strategies to Reduce Interest Costs

While you cannot change the interest rate on your federal loans, there are strategies to reduce the total interest you pay over time.

One effective way is to make payments while you are in school or during the grace period, especially on unsubsidized loans, to prevent interest from capitalizing. Even small payments can reduce the principal and ultimately the total interest.

Enrolling in automatic payments can provide an interest rate reduction, which adds up over the life of the loan.

Another strategy is to choose a repayment plan that allows you to pay off the loan faster, such as the Standard Repayment Plan, which sets a fixed payment to pay off the loan in 10 years. While your monthly payments are higher than on income-driven plans, you pay less interest overall because the loan is repaid sooner.

Additionally, you may be eligible for loan forgiveness under certain programs, such as Public Service Loan Forgiveness (PSLF), if you work in qualifying public service jobs and meet other requirements. This can forgive the remaining balance after 120 qualifying payments, reducing the total interest cost significantly.

Sources: The Institute for College Access & Success (TICAS), U.S. Department of Education

Historical Federal Student Loan Interest Rates

To provide context, here are the federal student loan interest rates for loans first disbursed in recent award years. These rates show how rates have changed over time, impacting the cost of borrowing for students.

Rates have fluctuated with Treasury yields. This upward trend reflects higher interest rates in the broader economy.

When choosing loans, keep in mind that the rate for the year in which the loan is first disbursed applies for the life of that loan. If you are borrowing for multiple years, you may have a mix of rates.

Sources: FinAid