WASHINGTON — The U.S. Department of Education will temporarily reduce interest rates for federal student loan borrowers enrolled in auto pay starting July 1, the agency announced Thursday.
Borrowers who enroll in auto pay — the optional feature that allows a borrower to have their monthly loan payment automatically deducted from their checking or savings account — will see a reduction in their interest rate by one full percentage point from July 1, 2026, through June 30, 2028.
The change means a 6% interest rate would drop to 5%, for instance.
Federal student loan borrowers currently enrolled in auto pay already receive an interest rate reduction of 0.25 percentage points from their servicer. Those borrowers do not need to take any additional action and will automatically receive an extra interest rate reduction of 0.75 percentage points, the department said.
“This temporary incentive is designed to help borrowers pay down their balances more quickly, take full advantage of new repayment benefits, remain on track toward loan discharge opportunities and to strengthen the overall health of the federal student loan portfolio,” Under Secretary of Education Nicholas Kent said during a Thursday call with reporters.
Kent said the benefit is estimated to cost the agency $6 billion.
Changes coming
The announcement came ahead of major changes for the federal student loan system — with many provisions slated to also begin July 1 — stemming from congressional Republicans’ mega tax and spending cut bill that President Donald Trump signed last year.
The overhaul includes new loan limits for graduate and professional students, a restructured repayment system that gives new borrowers only two plans to choose from and the elimination of a key loan program for graduate and professional students that allowed for unlimited borrowing.
Meanwhile, millions of borrowers under the now defunct Saving on a Valuable Education, or SAVE, plan will receive notices from their federal loan servicers starting July 1 that instruct them to enter into a legal repayment plan within 90 days.
Auto pay enrollment halved
The federal student loan portfolio stands at a “staggering $1.7 trillion,” with about 37% of borrowers currently in repayment, according to Kent.
The under secretary noted that at the end of 2019, nearly 83% of borrowers were enrolled in auto pay but that the figure stood at just 40% by the end of 2025.
There are also 9.16 million borrowers in default as of April, per the latest available department data.
Borrowers have until Sept. 30, 2026, to opt in to auto pay to be eligible for the two-year benefit.
The benefit is open to borrowers whose federal student loans originated after July 1, 2012, the department said.
Kent encouraged borrowers to “take advantage of this opportunity and enroll in auto debit as soon as possible.”
Borrowers can enroll by logging in to their loan servicer account and selecting “auto pay” from a navigation bar, he said.
The department clarified that borrowers will need to stay in auto pay to continue receiving the reduced interest rate.
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