What Falling Fed Rates Mean for Student Loan Refinancing in 2025

Borrowers with student loans could soon find new opportunities to refinance at lower rates amid the Federal Reserve’s continued shift toward a looser monetary policy that could make borrowing cheaper across the economy.

At their October meeting, policymakers voted to reduce the federal funds rate by a quarter point to a range of 3.75% to 4%. It was the second cut in 2025 and the fifth since September 2024, when the Fed began the first series of rate reductions in roughly four years. 

“In light of the balance of risks to employment and inflation, today the Federal Open Market Committee decided to lower our policy interest rate by a quarter percentage point,” Federal Reserve Chair Jerome Powell said during the October press conference. 

When the Fed cuts rates, consumer borrowing costs across the economy also tend to fall. For borrowers with student debt, this may create an opportunity to refinance at a lower rate.

Current student loan refinance rates

However, the decision to refinance student loans isn’t always straightforward. Timing matters, and factors like your credit score, income, debt-to-income ratio, and loan type all play a role in whether refinancing makes sense right now.

“Whether a borrower should refinance after a Fed rate cut really depends on their individual circumstances,” says Becca Craig, a certified student loan professional (CSLP) and wealth adviser at Focus Partners Wealth. 

“While lower rates can be tempting, it’s essential to weigh all the potential tradeoffs and ensure the decision supports your broader financial plan, not just a short-term rate advantage,” advises Craig. 

What does the Federal Reserve do with interest rates?

The Federal Reserve controls the federal funds rate, the rate at which banks charge each other to borrow overnight. 

While this rate isn’t directly tied to what consumers pay to borrow money, it does influence borrowing costs for things like private student loans, mortgages, personal loans, and credit cards. 

The Fed adjusts the federal funds rate to help keep the economy balanced. When inflation rises too quickly or the economy grows faster than expected, the Fed raises rates to discourage borrowing and cool things down. When growth slows or unemployment rises, Fed policymakers may cut rates to lower borrowing costs and encourage consumer spending. 

Federal funds rate changes since September 2024

How do Fed rate changes affect student loans?

The Federal Reserve doesn’t set student loan interest rates directly, but its decisions still affect them. 

“While the Fed’s rate doesn’t directly change what borrowers pay on a private student loan, it does influence what it costs private lenders to borrow money themselves,” explains Craig. “When the Fed cuts rates, private loan interest rates may slowly follow suit.”

Most private student loan lenders base their rates on benchmark rates like the Secured Overnight Financing Rate (SOFR), and the SOFR generally moves higher or lower in tandem with Fed rate changes. 

“For those with variable interest rate loans, which are more directly impacted, a Fed rate cut could mean a slightly lower monthly payment over time,” explains Craig. “Most private student loans use the one-month or three-month SOFR index, and when rates drop, the three-month version phases in that change gradually over roughly three months.”

So when the Fed lowers rates, other interest rates also tend to drop gradually. That can translate to lower borrowing costs for new private student loans and refinancing. 

Should I refinance now that the Fed cut rates? 

If you took out a fixed-rate private student loan when rates were higher, a Fed rate cut could create an opportunity to refinance into a lower-cost loan. Whether you’ll actually qualify for a better rate, however, depends more on your personal financial profile.

“It’s important to remember that private lenders incorporate a mix of factors when offering an interest rate to refinancers, including market trends, competition, and an individual's credit profile,” explains Craig. 

When you refinance, lenders look at factors such as your credit score, income, and debt-to-income ratio to determine your new rate. Borrowers with excellent credit, high income, and low existing debt tend to qualify for a lender's lowest rates. 

Learn more: Should I Refinance My Student Loans?

It's also important to consider the type of student loan you're looking to refinance.

“For those with federal loans, it’s especially important to proceed with caution,” Craig advises. “Refinancing into a private loan would permanently forfeit certain benefits such as income-driven repayment plan options and Public Service Loan Forgiveness (PSLF).”

When is the best time to refinance student loans?

The right time to refinance depends largely on your individual financial circumstances. There are some scenarios that can make refinancing more worthwhile. 

You may want to consider refinancing student loans if:

• Interest rates have dropped: After a Fed rate cut, consumer interest rates often fall as well, which can lead to lower refinancing offers from private lenders. Depending on your loan balance and length of repayment term, even a small rate drop can lead to significant savings. If you took out a student loan when rates were higher, this could be a good time to check your options.
• Your credit has improved: If your credit score has increased since taking out your loan, there's a good chance you'll qualify for a lower interest rate than what you're currently paying. 
• Your income has increased: Earning more money can improve your debt-to-income ratio and show lenders that you can comfortably manage repayment.
• You don’t rely on federal benefits: If you have federal loans, only refinance if you’re confident you won’t need protections like income-driven repayment, access to forgiveness programs, or federal forbearance and deferment options in the future.

See also: Estimate Savings With a Student Loan Refinance Calculator