How Federal Student Loan Interest Rate Caps Work

Federal student loan interest rate caps are set by statute at 8.25 percent for undergraduate Direct Loans, 9.50 percent for graduate Direct Loans, and 10.50 percent for Direct PLUS loans borrowed by parents and graduate students. A separate 6 percent ceiling applies to active-duty servicemembers on debt taken out before military service. For loans first disbursed between July 1, 2025, and June 30, 2026, the actual rates sit well below the ceilings: 6.39 percent for undergraduates, 7.94 percent for graduate students, and 8.94 percent for PLUS loans.¹

The Caps by Loan Type

The ceilings are written into Section 455(b)(8) of the Higher Education Act, codified at 20 U.S.C. § 1087e. They apply to all Direct Loans first disbursed on or after July 1, 2013, and they don’t expire. Whichever is lower governs your rate: the annual formula result or the cap.

Undergraduate Direct Subsidized and Unsubsidized Loans are capped at 8.25 percent.²
Graduate and professional Direct Unsubsidized Loans are capped at 9.50 percent.²
Direct PLUS Loans, for parents and graduate students, are capped at 10.50 percent.²

Once a rate is set at disbursement, it’s fixed for the life of that loan. A borrower whose rate landed at the cap keeps that rate; a borrower whose rate came in below the cap keeps the lower number. Two people with the same type of loan taken in different years can carry very different fixed rates.

How the Annual Rate Is Calculated

Each spring the Department of Education looks at the high yield of the 10-year Treasury note from the final auction before June 1. A fixed statutory margin is added, and the sum becomes the rate for loans disbursed during the coming academic year, July 1 through June 30.³

The margin depends on the loan type: 2.05 percentage points for undergraduate Direct Loans, 3.60 points for graduate Direct Unsubsidized Loans, and 4.60 points for Direct PLUS Loans.² For the 2025–2026 loan year, the qualifying Treasury auction produced a high yield of 4.342 percent, which is how the current rates were reached.¹

The caps become meaningful when Treasury yields spike. If the 10-year yield rose above roughly 6.20 percent, for instance, the undergraduate formula would produce a rate over 8.25 percent, and the 8.25 percent cap would take over automatically. Rates for the 2026–2027 loan year will be announced shortly after the final qualifying Treasury auction before June 1, 2026.

Origination fees are a separate cost and aren’t capped in the same fashion. For Direct Loans first disbursed between October 1, 2020, and October 1, 2026, the fee is 1.057 percent for Subsidized and Unsubsidized Loans and 4.228 percent for PLUS loans, deducted from each disbursement.³

The 6 Percent Cap for Active-Duty Servicemembers

The Servicemembers Civil Relief Act sets a lower ceiling for people on active duty. Under 50 U.S.C. § 3937, any loan taken out before military service cannot charge more than 6 percent during the period of active duty.⁴ The rule reaches federal student loans, private student loans, credit cards, car loans, and other pre-service obligations.

The interest above 6 percent isn’t deferred or added to the balance later. It’s forgiven. Any interest that would have accrued above the 6 percent line during active duty is permanently wiped out.⁴

To claim the benefit, servicemembers give their loan servicer written notice with a copy of their military orders. The deadline is no later than 180 days after termination or release from active duty, and the request can be made any time during service. Once the servicer receives the documentation, the reduction applies retroactively to the date active duty began.⁵ Many federal servicers now check Department of Defense databases and apply the cap automatically, but the system doesn’t catch everyone, so it’s worth checking your account and submitting written notice if the reduction hasn’t appeared.

A few limits matter. Joint loans where both the servicemember and spouse are named borrowers qualify; loans held only in a spouse’s name do not. Parent PLUS loans don’t get the cap when the student enters service, because the parent is the borrower. And consolidating during active duty can be a trap: a new consolidation loan originated while on active duty may be treated as a new obligation rather than a continuation of the old ones, forfeiting the 6 percent protection on the underlying debt.⁵

Caps on Older FFEL Variable-Rate Loans

The Federal Family Education Loan Program ended in 2010, but millions of borrowers still carry FFEL loans with variable rates that reset each July 1. These have their own caps, published annually by the Department of Education in the Federal Register.⁶ The ceiling depends on when the loan was first disbursed:

Stafford Loans, subsidized or unsubsidized, disbursed between July 1, 1994, and July 1, 2006: 8.25 percent.
Stafford Loans disbursed between October 1, 1992, and July 1, 1994: 9.00 percent.
FFEL PLUS Loans disbursed between July 1, 1994, and July 1, 2006: 9.00 percent.
FFEL PLUS Loans disbursed between October 1, 1992, and July 1, 1994: 10.00 percent.
FFEL PLUS Loans disbursed before October 1, 1992: 12.00 percent.

The variable rate can move up or down with each annual reset, but it can never break the ceiling for its era. FFEL borrowers can escape variable rates by consolidating into a Direct Consolidation Loan, which converts the rate to a fixed weighted average. The FFEL-specific cap no longer applies after consolidation.

Consolidation and Perkins Loans

Direct Consolidation Loans don’t use the Treasury-plus-margin formula. The rate equals the weighted average of the loans being combined, rounded up to the nearest one-eighth of one percent, and then fixed for life.²

For applications received on or after July 1, 2013, there is no standalone cap on Direct Consolidation Loans.² The rate is limited indirectly, because the underlying loans are themselves capped at 8.25, 9.50, or 10.50 percent, so the weighted average can’t exceed the highest cap among them. Someone consolidating only undergraduate loans lands at or below 8.25 percent; someone including PLUS loans could see a weighted average close to, but not above, 10.50 percent. Consolidation doesn’t lower your rate; the rounding-up rule means the new rate is always at least the blended average.

Older FFEL Consolidation Loans did carry an explicit cap. For applications received between October 1, 1998, and July 1, 2010, the rate was the lesser of the weighted average (rounded up to the nearest eighth) or 8.25 percent, and borrowers still repaying those loans keep that cap.⁷

Federal Perkins Loans work differently again. They carry a fixed 5 percent rate set directly by statute.⁸ There is no cap mechanism because there is no variable component. No new Perkins Loans have been issued since 2017, but borrowers still in repayment keep the 5 percent rate for the life of the loan.

If Your Servicer Is Charging the Wrong Rate

If the rate on your account doesn’t match your promissory note or the applicable statute, contact your servicer and request a written explanation of the calculation. Most errors trace back to loans transferred between servicers with the rate recorded incorrectly, or to SCRA reductions that were never applied.

If the servicer won’t resolve the issue, the Federal Student Aid Ombudsman Group is the next step. You’ll need to document the problem, describe what you’ve already tried, and state what the correct rate should be. Cases can be submitted online, by phone at 800-433-3243, or by mail, but the Ombudsman won’t open a case unless you’ve first tried to resolve it with your servicer.⁹ Keep records of every call and every letter.

1
Federal Student Aid Partners. Interest Rates for Direct Loans First Disbursed Between July 1, 2025, and June 30, 2026
2
Office of the Law Revision Counsel. 20 USC 1087e – Terms and Conditions of Loans
3
Federal Student Aid. Federal Interest Rates and Fees
4
Office of the Law Revision Counsel. 50 USC 3937 – Maximum Rate of Interest on Debts Incurred Before Military Service
5
U.S. Department of Justice. 6% Interest Rate Cap for Servicemembers on Pre-service Debts
6
Federal Register. Annual Notice of Interest Rates for Variable-Rate Federal Student Loans Made Under the Federal Family Education Loan Program Prior to July 1, 2010
7
Office of the Law Revision Counsel. 20 USC 1077a – Applicable Interest Rates
8
Office of the Law Revision Counsel. 20 USC 1087dd – Terms of Loans
9
Federal Student Aid Partner Connect. Office of the Ombudsman FSA