Student loan interest rates: Why they matter and how to budget

Working on paying down your student loans? Staying informed about student loan interest rate changes and building a thoughtful budgeting strategy can go a long way in helping you stay on track and feel in control of your financial future.

Whether you’re fresh out of college or several years into repayment, understanding how student loan interest rates work can help you take control of your money and move toward your goals with confidence. A small percentage change can mean thousands of dollars in added costs, or savings. The more you pay in interest, the less money is available to save, invest, and enjoy the lifestyle you’ve worked hard to build.

How does interest on student loans work?

Interest on student loans is the cost of borrowing money, calculated as a percentage of your loan balance. Subsidized loans don’t accrue interest while you’re in school, but unsubsidized and private loans do. Interest typically accrues daily and adds to your total balance, increasing the amount you’ll repay if you delay payments or only pay the minimum. Paying off accrued interest early and making extra payments can reduce your overall costs and help you reach your financial goals faster.

Why student loan interest rates matter 

Student loan interest rates directly impact how much you’ll pay over time. A small percentage change can mean thousands of dollars in added costs – or savings. For someone with a debt load of $35,000 or more, even a 1% rate shift can significantly affect monthly payments and long-term financial planning.

The more money spent on interest, the less money is available to save, invest and enjoy the lifestyle you’ve worked hard to build. Whether it’s traveling, dining out or investing in your future, managing your student loan debt wisely helps you maintain financial flexibility and peace of mind.

Understanding how interest accrues and compounds can also help you make smarter decisions. For example, unsubsidized loans begin accruing interest while you’re still in school, which means your balance could grow before you even make your first payment. Knowing this can help you plan ahead and minimize surprises.

What is the rate of interest on student loans?

The specific interest rate for your student loans depends on the type of loan you have. Federal student loans have fixed rates determined by Congress, while private student loans have rates set by individual lenders like banks and credit unions.

Federal student loan interest rates: New federal loans have rates set for the upcoming academic year. It's important to know that legislation can influence these rates from year to year.

Private student loan interest rates: Private student loan interest rates can be either fixed or variable. A fixed rate remains the same over the loan's term, offering predictable monthly payments. A variable rate can fluctuate based on market conditions, meaning your payment could rise or fall. Lenders determine these rates based on your credit score, income, and other financial factors.

Subsidized vs unsubsidized student loans 

Understanding the difference between subsidized and unsubsidized loans is key to managing your debt, as the type of loan you have directly impacts how interest accrues.

Subsidized loans: For the 2025-2026 school year, the interest rate on a new Direct Subsidized Loan is 6.39% for undergraduate students. The primary benefit of a subsidized loan is that the U.S. Department of Education pays the interest for you while you're in school at least half-time, during the six-month grace period after you leave school, and during periods of deferment. This means the loan balance won't grow while you're focused on your studies. These loans are awarded based on financial need.

Unsubsidized loans: For the 2025-2026 school year, the interest rate on a new Direct Unsubsidized Loan is 7.94% for graduate or professional students. Unlike subsidized loans, unsubsidized loans are not based on financial need, and interest begins to accrue from the moment the loan is disbursed. You are responsible for all the interest that accumulates, even while you are in school. If you don't pay the interest as it accrues, it will be capitalized, meaning it's added to your principal loan balance. This can significantly increase the total amount you repay.

How do I lower my interest rate on student loans?

While federal rates are fixed, there are still powerful strategies you can use to potentially lower your overall borrowing costs. Taking control of your repayment plan can help you lower your interest rate or pay off your loan faster.

1. Enroll in autopay

Many federal and private lenders offer a small interest rate reduction, typically 0.25%, just for signing up for automatic payments. It’s a simple way to save money and ensure you never miss a payment, which also helps protect your credit score.

2. Explore refinancing

If you have a strong credit score and a stable income, you may qualify to refinance your student loans with a private lender. Refinancing replaces one or more existing loans with a new one, hopefully at a lower interest rate. This could lower your monthly payment and reduce the total interest you pay over time. Keep in mind that refinancing federal loans into a private loan means you'll lose access to federal benefits like income-driven repayment plans and loan forgiveness programs.

3. Check for forgiveness programs

You may qualify for federal loan forgiveness, cancellation, or discharge programs, which can eliminate a portion or all of your student loan debt. These programs are often available for those working in public service sectors, including:

• Teachers in eligible roles

• Government and nonprofit employees

• Borrowers on an income-driven repayment (IDR) plan for 20-25 years

• Individuals with a total and permanent disability

Budgeting for your future

Interest rates may feel out of your control, but your budget is where you have the power. Here are some ways to build a strategy that works for you:

• Prioritize your payments: Treat your student loan payment as a non-negotiable expense. Building it into your monthly budget helps you stay consistent and avoid late fees.

• Try the 50/30/20 rule: This framework can help you balance your finances. Allocate 50% of your after-tax income for needs (housing, groceries, minimum loan payments), 30% for wants (hobbies, dining out), and 20% for savings and extra debt repayment.

• Make biweekly payments: Instead of one monthly payment, consider splitting it in two and paying every other week. You’ll end up making one extra full payment each year, which can help you chip away at your principal balance more quickly.

Paying off student loans isn’t just about eliminating debt; it’s about unlocking your financial future. Visualizing how good it will feel when you’re debt-free is great motivation. Whether you’re saving for a home, investing in your career or planning a dream vacation, budgeting around your loans helps you move forward with confidence. With the right approach and tools, you can make strides toward financial freedom sooner than you think.

Read up on more strategies for how to save while also working toward your lifestyle goals.