Education Department cuts student loan rates for auto pay borrowers

Federal student loan borrowers who stay in auto pay will get a sharper break on interest starting July 1: a temporary 1 percentage point cut that saves about $8.33 a month for every $10,000 in principal. The Education Department said borrowers who enroll by September 30, 2026, or are already enrolled, will keep the lower rate through June 30, 2028.

The biggest gains will go to borrowers with larger balances and those already set up for automatic payments. A borrower with a 6.39 percent undergraduate loan rate, for example, will see that rate fall to 5.39 percent under the incentive. On a $20,000 balance, that translates to roughly $16.67 a month in interest savings; on $30,000, about $25. The new discount is four times the current auto pay break, which stands at 0.25 percentage points.

The department cast the move as a response to rising default risk and a drop in automatic payment participation. Before the COVID-19 pandemic, more than 80 percent of borrowers in active repayment were enrolled in auto pay. Today, the department says, that share is about 40 percent. NPR said enrollment fell from roughly 83 percent in 2019 to about 40 percent by late 2025, as federal student debt climbed to $1.7 trillion after millions of borrowers opted out during the long repayment pause.

Under Secretary of Education Nicholas Kent said the goal is to help borrowers pay down balances faster, take advantage of new repayment benefits, stay on track for discharge opportunities, and strengthen the federal student loan portfolio. The cut arrives alongside two new repayment plans taking effect July 1: the income-driven Repayment Assistance Plan, or RAP, and the Tiered Standard repayment plan. Borrowers in RAP can receive a match on on-time payments so interest does not accrue and balances decline each month, while making on-time payments remains important for Public Service Loan Forgiveness.

The policy is likely to provide immediate relief, but its reach is temporary. Federal student loan rates are set annually by a formula tied to the 10-year Treasury yield, and the last decline for new loans came for the 2020-21 school year. That leaves the Education Department trying to use a short-term interest cut to influence repayment behavior in a market still shaped by elevated defaults and a $1.7 trillion debt load.