Here's the new way to significantly reduce the interest rate on your student loans

By Jillian Berman

Borrowers who enroll in autopay will receive the benefit starting July 1

The U.S. government is providing a bigger discount for student-loan borrowers who put their loans on autopay.

Setting and forgetting your student-loan payments could soon give you a big discount.

Starting on July 1, borrowers who allow their servicer to auto-debit their monthly student-loan payment will receive a 1% interest-rate reduction for the next two years, the Education Department announced Thursday. Already, borrowers who enroll in auto-debit receive a 0.25-percentage-point discount.

The enhanced benefit is aimed at encouraging borrowers to stay current on their loans and pay them on time, Education Undersecretary Nicholas Kent said to reporters in announcing the perk.

"We encourage borrowers to take advantage of this opportunity and enroll in autopay as soon as possible," Kent said. "This temporary incentive is designed to help borrowers pay down their balances more quickly."

It will also "strengthen the overall health of the federal student-loan portfolio," he added.

The announcement comes during an unprecedented period of change and challenges for the federal student-loan program. It also comes after years of criticism from Republicans of the Biden administration's approach to offering benefits to student-loan borrowers, including the COVID-era payment pause. The temporary interest-rate reduction is expected to cost the government about $6 billion, Kent said.

Right now, more than 9 million borrowers are in default on their loans and millions more are severely behind. At the same time, the government will begin to phase out some longstanding student-loan repayment plans and launch a new one starting in July. In addition, servicers and the government will be working to move borrowers off of SAVE, a Biden-era repayment plan that was knocked down by the courts earlier this year, and onto other plans during that period.

All of those changes have consumer advocates concerned that more borrowers could fall behind on their payments, amid confusion over which plans they're eligible for and which ones make the most sense for them financially.

Providing a greater incentive to enroll in autopay could help mitigate those challenges. Before the pandemic, roughly 80% of borrowers were enrolled in autopay, according to the Education Department. Now, 40% are enrolled. Still, for borrowers who are struggling to make their student-loan payments, the decision to sign up for autopay is complicated because it prioritizes student-loan payments over other bills, like food and housing, that may not be on auto-debit.

In addition to the interest-rate reduction, Kent said enrolling in autopay will help borrowers maximize the benefits of the government's new repayment plan launching in July, called the Repayment Assistance Plan, or RAP. Under the terms of RAP, borrowers need to make on-time monthly payments if they want them counted toward forgiveness or to get a principal-matching payment that some borrowers enrolled in RAP will be eligible for.

To qualify for the 1% interest-rate reduction, borrowers need to have federal direct loans that were originated after July 1, 2012, and they need to be enrolled in autopay. Borrowers who are already enrolled in autopay don't need to take any action to receive the benefit. Borrowers who aren't enrolled in autopay need to enroll by Sept. 30 of this year to recieve the discount.

To sign up for autopay, borrowers should log in to their account with their student-loan servicer and provide bank account information and payment details.

"There is a tremendous benefit for students to remain in active repayment" and making timely payments, Kent said. "Auto-debit helps to ensure that happens."

-Jillian Berman

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06-18-26 1318ET