Trump did not actually cut federal student loan interest rates through legislation. Despite campaign promises to reduce borrowing costs, the president’s student loan reforms—packaged in the “One Big Beautiful Bill Act”—did not include a direct cut to interest rates. Instead, the administration restructured how borrowers pay for loans and added government subsidies to help with repayment. To understand why interest rates remain unchanged, you need to know how they’re actually set: federal student loan interest rates are determined by a mathematical formula tied to the U.S.
Treasury’s 10-year note auction, not by presidential decree or Congress. The government holds this auction each May, and whatever yield the Treasury securities fetch that day becomes the base for student loan rates for the following academic year. Currently, federal student loan interest rates for the 2025-26 academic year sit at 6.39 percent for undergraduate loans, 7.94 percent for graduate loans, and 8.94 percent for PLUS loans—rates set entirely by market conditions, not legislation. A student borrowing $30,000 as an undergraduate today would pay that 6.39 percent rate for the entire life of their loan, regardless of what happens to Treasury rates after they graduate. While these rates did decrease slightly from the previous year’s 6.53 percent for undergraduates, this was due to the formula-based system responding to lower Treasury yields, not because of any Trump administration action.
Table of Contents
- How Federal Student Loan Interest Rates Are Determined by the Treasury Formula
- What Trump’s Legislative Changes Actually Do (And Don’t Do) for Interest Rates
- The New Repayment Assistance Plan (RAP) as the True Relief Mechanism
- How These Changes Affect Different Types of Borrowers Differently
- Limitations and Tradeoffs Borrowers Should Understand
- Graduate and Professional Student Borrowing Limits as a Separate Mechanism
- What Borrowers Should Expect Starting July 1, 2026
- Conclusion
How Federal Student Loan Interest Rates Are Determined by the Treasury Formula
Federal student loan interest rates operate under a statutory formula that Congress established, and that formula cannot be changed without new legislation. Each year, the Department of Education calculates rates by taking the yield from the U.S. Treasury’s 10-year note auction (held in May) and adding a fixed percentage on top. For undergraduate Direct Loans, the formula adds 1.79 percentage points to the Treasury rate. Graduate loans add 2.79 percentage points, and PLUS loans add 4.29 percentage points. This means that regardless of who sits in the White House or what they promise, interest rates move automatically based on Treasury market conditions. This formula-based system has been in place since 2013 and was designed to tie student loan costs directly to government borrowing costs. When the Treasury’s 10-year note yields drop (which happens when investors believe the economy is weakening or inflation is falling), student loan rates fall automatically. When Treasury yields rise, so do student loan rates.
A president cannot simply declare lower rates into existence. Even Trump’s legislation could not override this mechanism—the formula remains unchanged. The most recent Treasury auction that set rates for the current academic year determined those 6.39 percent undergraduate rates, and future rates will depend entirely on what happens in Treasury markets. The practical consequence is that a borrower who took out a $20,000 undergraduate loan in 2023 locked in the 6.53 percent rate from that year. A new borrower in 2025 locks in the 6.39 percent rate. That new borrower cannot see a cut in their rate unless Congress changes the formula itself, which would require legislation. Understanding this distinction is critical because it reveals the gap between campaign rhetoric and what a president can actually control—Trump can restructure repayment programs and add government subsidies, but he cannot reach into the Treasury formula and lower the percentages.
What Trump’s Legislative Changes Actually Do (And Don’t Do) for Interest Rates
The Trump administration’s student loan package focuses on restructuring how borrowers pay rather than lowering what they owe in interest. The centerpiece is a new Repayment Assistance Plan (RAP) that takes effect July 1, 2026. Under RAP, monthly loan payments are capped based on a borrower’s adjusted gross income and family size—a significant change from existing income-driven repayment plans. The critical distinction is this: RAP doesn’t lower interest rates, but it does use government subsidies to soften the impact of higher interest rates on monthly payments. Here’s where the government subsidy matters. If a borrower’s RAP payment doesn’t cover all the interest accruing on their loan in a given month, the government will pay the difference.
Additionally, the government will contribute up to $50 toward the principal balance each month that a payment is made on time. This is a meaningful benefit, but it operates within the fixed interest rate framework—the rate doesn’t change, but the government is helping pay it down faster and preventing interest from compounding out of control. A borrower with a $40,000 loan at 6.39 percent interest accruing about $214 per month in interest could see the government cover unpaid interest and contribute toward principal. However, this borrower is still paying 6.39 percent interest; that rate has not been cut. A limitation to understand: the interest subsidy and principal assistance only apply to on-time payments under the RAP. If a borrower misses a payment or falls behind, these benefits do not accrue. Additionally, RAP is not automatic—borrowers will need to enroll in it starting July 1, 2026. Some borrowers may be better off staying in existing income-driven repayment plans, depending on their circumstances, so comparing options before July will be important.
The New Repayment Assistance Plan (RAP) as the True Relief Mechanism
The RAP fundamentally changes how the government helps borrowers afford their loans. Rather than cutting interest rates (which it cannot do), the plan uses two mechanisms to reduce the effective cost of borrowing. First, it caps monthly payments based on income—borrowers with lower earnings will pay less per month. Second, it uses government subsidies to prevent unpaid interest from accumulating and to chip away at the principal balance. The Department of Education projects this approach will make monthly payments more manageable for millions of borrowers, particularly those in low-income households or with large loan balances relative to their earnings. Consider a practical example: a teacher earning $45,000 per year with $60,000 in undergraduate loans would previously have had limited repayment options.
Under RAP, that teacher’s monthly payment would be calculated as a percentage of discretionary income (income above 225 percent of the federal poverty line for their household size). The government would then subsidize any unpaid interest and contribute $50 per month toward principal, assuming payments are made on time. Over a decade, that $50 monthly principal contribution adds up to $6,000 directly reducing the balance, which is a genuine relief—but again, the interest rate itself remains unchanged. The downside is that RAP extends repayment timelines for some borrowers. If you’re paying less each month, you’re paying for longer, which means more total interest accumulates over the life of the loan. A borrower with a manageable income might benefit from paying faster rather than extending payments to lower the monthly burden. RAP enrollees should consider whether the monthly payment relief is worth the trade-off of a longer repayment timeline. The Department of Education will release enrollment procedures and individual payment estimates before July 1, so borrowers can make informed decisions before the plan launches.
How These Changes Affect Different Types of Borrowers Differently
The new federal student loan framework created different rules for undergraduate and graduate borrowers, which means the impact varies depending on what level of education a borrower is pursuing or has pursued. For undergraduate borrowers, the current 6.39 percent interest rate will continue to apply, and those who enroll in RAP will benefit from the income-based payment cap and government interest subsidy. For graduate students, the picture is more constrained. The Trump administration’s legislation capped new graduate student borrowing at $20,500 per year and $100,000 over a lifetime. Professional degree students (those pursuing medicine, law, dentistry, or veterinary medicine) face different limits: $50,000 per year and $200,000 over a lifetime. These borrowing caps represent a significant constraint on future graduate debt.
A student pursuing a three-year law degree who would previously have been able to borrow the full cost of attendance now faces a $150,000 aggregate limit ($50,000 per year for three years). If tuition, fees, housing, and other costs exceed that, the student must cover the difference through other means—private loans, scholarships, employment, or parent loans. This affects the debt burdens of future graduate students but does not directly change the interest rates on existing graduate loans, which remain at 7.94 percent. The practical outcome is that borrowers in graduate or professional degree programs face tighter borrowing constraints going forward, potentially increasing reliance on private student loans (which typically carry higher interest rates) or on family financing. Undergraduate borrowers, especially those with lower incomes, see the most benefit from RAP’s payment structure. This creates a situation where graduate student borrowers may actually face higher effective borrowing costs overall, even though federal interest rates have not been cut, because they’re forced to borrow private funds or from family at rates that may exceed federal rates.
Limitations and Tradeoffs Borrowers Should Understand
One of the most important limitations is that Trump’s reforms, while substantial, do not address the underlying issue that federal student loan interest rates are determined by Treasury market conditions. If Treasury yields spike in the coming years, future student loan rates will rise automatically—no action needed, just the formula at work. A president elected in 2028 could face the same question: how to help borrowers when rates have climbed beyond 7 or 8 percent. The structural problem remains unsolved. The Treasury formula could theoretically be changed by Congress to reduce the add-on percentages, but that would require legislation and would lower rates for future borrowers, not those already in repayment. Another limitation is that the government subsidies in RAP are contingent on borrowers making on-time payments. If a borrower falls behind or defaults, the interest subsidy and principal contribution stop. This means borrowers in financial hardship may not receive the maximum benefit, which defeats the purpose for those most in need.
Additionally, RAP is a new program, and its long-term costs to taxpayers are substantial—the government is essentially paying interest and principal for millions of borrowers. If future Congresses become concerned about federal spending, they could modify or reduce these subsidies, creating uncertainty for borrowers relying on them. The final limitation worth noting is messaging. Because Trump’s campaign promised to “cut student loan interest rates,” many borrowers may believe the rates they see in their loan servicer accounts have been cut. They have not. The 6.39 percent rate on an undergraduate loan is unchanged. What has changed is the repayment structure and government assistance. Borrowers need to understand this distinction, because it affects their long-term planning. Expecting a rate cut that never occurred could lead to financial disappointment when loan statements arrive on July 1, 2026, showing the same interest rates as before.
Graduate and Professional Student Borrowing Limits as a Separate Mechanism
The borrowing caps for graduate and professional students represent a distinct policy lever that functions independently of interest rates. These caps aim to limit the overall debt burdens of future graduate degree holders. A graduate student pursuing a master’s degree will now face a $20,500 annual borrowing limit, regardless of their school’s cost of attendance. A professional degree student pursuing medicine, law, or dentistry will have a $50,000 annual limit.
These students will, for the first time, face meaningful federal borrowing constraints that previous cohorts never faced. The intent appears to be preventing graduate students from taking on six-figure debt loads, which has become common, particularly in professional degree programs. However, the constraint does not include any interest rate reduction—in fact, it potentially forces borrowers to seek private alternatives at higher rates. A dental student who cannot borrow $75,000 federally might borrow $50,000 federally at 7.94 percent and $25,000 from a private lender at 8.5 or 9 percent. The overall debt burden might be similar, but the effective cost is higher due to mixed-rate debt.
What Borrowers Should Expect Starting July 1, 2026
The implementation of these changes on July 1, 2026, will be a major transition date for federal student loan administration. Current borrowers under existing income-driven repayment plans will need to decide whether to transition to RAP or remain in their current plan. The Department of Education will provide tools to help borrowers compare plans and understand their potential monthly payments under RAP versus current arrangements. For some borrowers, staying in an existing plan may be preferable; for others, RAP’s government subsidies and principal assistance will clearly be better.
New borrowers in the 2026-27 academic year will enter the system under the new interest rate formula and RAP as the default income-driven option. Graduate students will encounter the borrowing caps immediately. The Department of Education has indicated it will roll out detailed enrollment information, payment calculators, and guidance before the July date, but borrowers should begin thinking about these changes now rather than waiting until summer. Understanding the distinction between unchanged interest rates and changed repayment structures will help borrowers navigate the transition successfully and make informed decisions about their educational financing.
Conclusion
Trump’s student loan reforms do not include interest rate cuts despite campaign promises to do so. Federal student loan interest rates are set by a mathematical formula tied to Treasury market conditions, and that formula remains unchanged. A borrower’s interest rate is determined by when their loan is disbursed and is locked in for the life of that loan. The current 6.39 percent rate for undergraduate loans, 7.94 percent for graduate loans, and 8.94 percent for PLUS loans reflect Treasury market conditions, not legislative action.
What Trump’s “One Big Beautiful Bill Act” does accomplish is restructuring repayment through the new Repayment Assistance Plan, capping graduate student borrowing, and providing government subsidies for interest and principal payments to qualifying borrowers. These are meaningful changes that will help many borrowers, particularly those with lower incomes, but they operate within the fixed interest rate framework set by the Treasury formula. Borrowers should approach July 1, 2026, understanding what has actually changed—repayment terms and government assistance—and what has not—interest rates themselves. That distinction will be crucial for anyone making decisions about student loan enrollment, repayment plans, and long-term financial planning.