According to the CME FedWatch, there’s a 95% chance that the Fed will cut its target interest rate by 25 basis points at its meeting on Sept. 17, 2025.
“The Federal Reserve is attempting to balance the desire to lower inflation (which is still above the Fed’s 2% goal) with the goal of increasing economic activity,” says Hailey Crimmins, financial planner at Wealth Enhancement Group.
The Fed has suggested two rate cuts could occur in 2025, and only three meetings are left this year — making the September meeting a strong candidate for a cut. If the Federal Reserve cuts interest rates, student loan borrowers could see interest rates drop — but it’s not guaranteed. Whether a rate cut affects you depends on the type of student loan and whether it makes sense to refinance.
Most student loan borrowers won’t feel the impact of a Fed rate cut right away, but it’s good to have a game plan if lower rates become available. Here’s what to expect if rates drop, and how to consider whether to take action or carry on.
[Read: Best Student Loan Refinance Lenders.]
How a Fed Rate Cut Affects Student Loans
Private student loan borrowers tied to variable interest rates could see their rate and monthly payment nudge a bit lower. Most private student loans base their rates on benchmark rates such as the Secured Overnight Financing Rate, which typically respond quickly to Fed rate decisions.
“Most private student loans base interest rates on the one-month or three-month SOFR index,” says Mark Kantrowitz, president of PrivateStudentLoans.Guru. “The three-month index will effectively phase in the interest-rate reduction over a three-month period.”
But a potential 0.25 rate cut would be modest. It would lower rates slightly, but not dramatically lower monthly payments on variable-rate student loans. Borrowers with fixed-rate private or federal student loans wouldn’t see changes unless they refinanced.
Federal student loans aren’t affected by short-term Fed rates. Interest rates on new federal student loans are reset annually on July 1 based on the May 10-year Treasury auction. Any changes from a 2025 fall rate cut wouldn’t affect federal loan rates until July 2026, and only for new loans. Existing federal student loans would stay the same unless refinanced into private student loans.
Should You Refinance Student Loans?
If rates drop, private student loan borrowers could refinance into a lower rate, but experts say refinancing might not make a meaningful difference unless you can realize significant savings with about a 0.5- to 1-percentage-point lower rate.
“Refinancing student loans now is only a good idea if you can lower your rate by (1 percentage point) or more,” says Jay Zigmont, certified financial planner and founder of Childfree Trust. “The challenge is that you need to look at the average rate across all of your loans to determine your rate.”
Borrowers with federal student loans might refinance with private student loans, but there are drawbacks to taking federal loans private. For example, you’d lose federal loan features such as income-driven repayment plans and Public Service Loan Forgiveness.
Keeping your federal loans intact may offer more long-term value than a slightly lower interest rate — especially if you might benefit from an income-driven repayment plan and/or loan forgiveness. But refinancing could be worth considering if your credit is strong and the rate drop is large enough to justify the change.
[Read: Best Private Student Loans.]
What to Do if the Fed Cuts Rates
If you hope to benefit from lower student loan rates, understand your loan terms and prepare for your next move. Determine whether you have private or federal student loans and whether the loans have a fixed or variable interest rate.
Don’t rush to refinance, as small rate cuts may not be worth the trouble. Consider the bigger picture and whether the numbers work in your favor. Refinancing could lower your monthly payments but may extend your repayment timeline or forfeit federal protections.
“Borrowers can refinance private student loans multiple times, every time interest rates drop,” says Kantrowitz. “But it may be better to wait until interest rates drop by half a percentage point or more, rather than churn the loans.”
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What Happens to Student Loans if Rates Fall? originally appeared on usnews.com
