Education Department offers student loan borrowers 1 percent auto pay cut

Only a slice of federal student loan borrowers will see the headline 1 percent auto-pay break, and the clock to lock it in runs through Sept. 30, 2026. The U.S. Department of Education said the temporary reduction begins July 1 and lasts through June 30, 2028, but it applies only to federal Direct Loans issued after July 1, 2012. Borrowers already in automatic payments currently get a 0.25 percentage point discount, so the new policy raises that total incentive to 1 percentage point under the department’s plan.

That makes the benefit real, but narrow. Borrowers who are not in auto pay must sign up by Sept. 30 to qualify, and some defaulted borrowers will first have to consolidate and return to good standing before they can take part. Older loans and borrowers outside the Direct Loan system are excluded, even as the federal student loan portfolio carries about $1.7 trillion in debt and more than 42 million Americans hold federal student loans.

The department said the move is meant to make repayment easier, improve repayment rates and strengthen the health of the federal student loan portfolio. The timing reflects a system under strain: student loan delinquencies hit 10.3 percent in the first quarter of 2026, the highest level in six years, and nearly 9 million borrowers are in default, according to Federal Reserve Bank of New York data.

The administration is also trying to reverse a drop in auto pay participation. Before the pandemic, more than 80 percent of borrowers in active repayment were enrolled in automatic payments; today, only 40 percent are, the department said. The new discount arrives alongside two repayment plans set to begin July 1, the income-driven Repayment Assistance Plan, known as RAP, and the Tiered Standard repayment plan, both of which can be paired with auto pay.

Under RAP, borrowers can receive a match on on-time payments so interest does not accrue and balances fall each month. Eligible borrowers who make on-time monthly payments may also qualify for Public Service Loan Forgiveness after 120 payments. The policy offers a modest break for borrowers who can keep up with monthly debits, but it does little for the millions already behind or locked out of the Direct Loan cutoff.