The Education Department will temporarily lower interest rates on outstanding federal student loans by up to one percentage point starting July 1, it said on Thursday. The reduction will end on June 30, 2028.
Just over a third of federal student loan borrowers are current on their loans, Nicholas Kent, the under secretary of education, said in a phone call with reporters. The department would like that to be higher — hence the incentive, which is tied to enrollment in automatic payments.
At the end of last year, just 40.1 percent of borrowers in active repayment had enrolled in auto pay. That figure has recovered somewhat after the pandemic-related payment pause drove it to zero. But the percentage was more than twice that before the pandemic.
To get the interest rate reduction, borrowers will have to enroll in automatic payments, which make it easier for people to pay on time and in full. Borrowers who are already enrolled in auto pay will automatically get another 0.75 percentage points shaved off their interest rate, since enrolling already yields a 0.25-percentage-point rate deduction.
The benefit is limited to people with loans that were disbursed after July 1, 2012. The temporary benefit will cost about $6 billion, according to the department.
“If we want a sustainable federal student loan system for future generations, we must improve its performance,” Mr. Kent said.
He described the rate reduction as a “benefit that has proven effective in helping borrowers remain in good standing.”
The Trump administration created the temporary benefit to encourage more people to sign up for repayment. Only 37 percent of borrowers — accounting for $533 billion of the $1.5 trillion in federal loans due — are in repayment, and a record number of borrowers have fallen behind on their monthly student loan obligations.
At the same time, major changes to the student loan repayment landscape are about to take effect on July 1. Several repayment plans will be eliminated, and new ones will be taking their place.
“This temporary incentive is designed to help borrowers pay down their balances more quickly,” Mr. Kent said, as well as “take full advantage of new repayment benefits, remain on track toward loan discharge opportunities and to strengthen the overall health of the federal student loan portfolio.”
For a borrower with $50,000 in debt who is repaying it over 10 years at an 8 percent interest rate, a 7 percent rate will reduce the monthly payment by about $26.
But borrowers enrolled in income-driven repayment plans don’t get the same benefit. Though a lower rate will help reduce the amount of interest paid over the life of a loan, it does nothing to lower their monthly payment — that is tied to their income level and household size.
“Unaffordable payments are what drive borrowers into delinquency and default, and this does nothing to turn an unaffordable payment into an affordable one,” said Michele Zampini, associate vice president for federal policy and advocacy at the Institute for College Access & Success, a research and advocacy group.
In less than two weeks, millions of federal borrowers will be notified that they will need to choose a new repayment plan as part of the broad overhaul of the student loan system.
The Biden-era repayment plan known as SAVE — short for Saving for a Valuable Education — is being officially dismantled, and its roughly seven million enrollees will need to choose their next best option. Their payments have been on hold for nearly two years, ever since Republican state attorneys general challenged the program, the most affordable option to date. Many borrowers are bracing for potentially higher monthly bills just as their other costs are rising, from gas and groceries to health care.
Borrowers can enroll in auto pay by logging into their student loan servicer’s account online and selecting the auto pay option; you’ll need to enter your bank account information and confirm the payment amounts. But those who have defaulted on their loans — and are not currently paying them back — will need to take a few extra steps. They must log into StudentAid.gov, consolidate their eligible loans and then apply for a new repayment plan before enrolling in auto pay, according to the Education Department.
“Regardless of the interest rate reduction, borrowers should sign up for auto pay, as they are less likely to be late with a payment,” said Mark Kantrowitz, an expert on student loans. “The interest rate reduction, whether 0.25 percent or 1 percent, is a nice sweetener.”
The on-time payments that automatic payments can facilitate are a requirement for new perks embedded in the Repayment Assistance Plan, or RAP, one of the new programs that will open on July 1.
