The U.S. Department of Education on Thursday announced a temporary interest rate reduction for federal student loan borrowers enrolled in auto pay, offering up to a 1% rate cut beginning July 1 as major repayment changes take effect.
Borrowers already enrolled in auto pay, or those who enroll by Sept. 30, 2026, will receive the reduced rate through June 30, 2028, according to the department.
Auto pay allows student loan servicers to automatically deduct monthly payments from a borrower’s bank account. Borrowers currently receive a 0.25% interest rate reduction for using auto pay. Under the new initiative, the department is adding another 0.75%, bringing the total benefit to 1%.
The department said the benefit will apply to borrowers with eligible Federal Direct Loans originated after July 1, 2012, including both student and parent borrowers.
Repayment Changes Begin In July
The incentive comes as the Trump administration rolls out major student loan repayment changes under President Donald Trump’s Working Families Tax Cuts Act, a new law that overhauls federal student loan repayment.
Starting July 1, two new repayment plans will become available: the Repayment Assistance Plan, or RAP, and the Tiered Standard repayment plan. RAP is a new income-driven repayment option that calculates monthly payments based on a borrower’s income and household size while preventing unpaid interest from snowballing for borrowers who make on-time payments.
The Tiered Standard plan offers repayment terms of 10, 15, 20 or 25 years depending on loan balances.
The Education Department said more than 80% of borrowers in active repayment were enrolled in auto pay before the COVID-19 pandemic, compared with just 40% today, highlighting a sharp decline in participation.
Under Secretary of Education Nicholas Kent said the move is designed to encourage timely repayment and improve loan performance.
“The Trump Administration is making student loan repayment easier than ever,” Kent said.
SAVE Borrowers Face Deadline Pressure
The announcement comes as millions of borrowers continue transitioning out of the now-defunct SAVE plan.
More than 300,000 borrowers have already exited the Biden-era Saving on a Valuable Education repayment program, but millions remain in transition. Borrowers still enrolled in SAVE are expected to begin receiving notices from loan servicers around July 1 and will generally have about 90 days to choose a new repayment plan.
Borrowers who fail to switch could face significantly higher monthly payments under standard repayment options.
Repayment pressure has already been building. According to the Federal Reserve Bank of New York, delinquent student debt climbed to a record $171.4 billion in the first quarter of 2026, while millions remain in default.
Meanwhile, Sen. Elizabeth Warren (D-Mass.) and more than 60 Democratic lawmakers have urged the administration to provide broader debt relief, warning that upcoming repayment changes could push more borrowers into financial distress.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.