Education Department cuts student loan rates for auto pay borrowers

Federal student loan borrowers in auto pay will get a 1 percentage-point interest-rate cut beginning July 1, a temporary break that can last through June 30, 2028 for borrowers who enroll by September 30, 2026 or are already signed up. The Education Department announced the move Wednesday in Washington, saying the discount is aimed at making repayment easier and slowing the rise in defaults that has followed the end of the pandemic-era pause.

The savings are concrete. A borrower with an undergraduate loan carrying a 6.39% rate would temporarily drop to 5.39%, and borrowers already in auto pay would see the new reduction layered on top of the existing 0.25 percentage-point discount. For those borrowers, the policy effectively adds another 0.75 percentage points off the rate. The department said the change will apply only to a subset of borrowers with federal Direct Loans issued after July 1, 2012, and some borrowers will need to enroll in auto pay or consolidate loans to qualify.

The Trump administration is framing the cut as a response to worsening repayment stress. Nearly 9 million student loan borrowers are in default, meaning they have missed nine months of payments, and the federal student loan portfolio has swollen to about $1.7 trillion. Nicholas Kent, the Education Department’s undersecretary, said the department expects the move to lift repayment rates and strengthen the portfolio. Officials also said the incentive is meant to help borrowers stay on track for loan benefits.

The timing matters because the repayment system is changing again on July 1, when two new plans take effect: the income-driven Repayment Assistance Plan, known as RAP, and the Tiered Standard repayment plan. Under RAP, on-time payments can be matched so interest does not accrue and balances decline every month, while qualifying payments can also count toward Public Service Loan Forgiveness, which cancels certain federal loans after 120 payments.

The department has spent much of this year warning colleges about the consequences of missed payments. In February, it urged schools to strengthen default-prevention plans and said institutions with too many borrowers in trouble could lose eligibility for federal student aid programs. More than 1,800 institutions now have nonpayment rates at or above 25%, a sign the department says could foreshadow even higher cohort default rates. Before the pandemic, more than 80% of borrowers in active repayment used auto pay; by late 2025, that share had fallen to 40%. The temporary rate cut is meant to pull more borrowers back into the system, but it also underscores a bigger problem: a short-term discount can ease monthly bills, yet it does not by itself solve the affordability crisis driving defaults.