Federal student loan borrowers who enroll in automatic payments will soon qualify for a significantly larger interest rate discount, as the U.S. Department of Education rolls out a temporary incentive aimed at encouraging on-time repayment.
The change comes as the federal student loan system undergoes one of its biggest overhauls in years.
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Beginning July 1, borrowers enrolled in autopay will receive a 1-percentage-point (100-basis-point) reduction in their federal student loan interest rate—up from the long-standing 25-basis-point discount. The enhanced benefit will be available through June 30, 2028, for borrowers who are already enrolled in autopay or who sign up by September 30.
The announcement comes nearly three years after federal student loan payments resumed following a pause during the COVID-19 pandemic. Interest on federal student loans began accruing again in September 2023, with required monthly payments restarting in October 2023 after more than three years of relief. Since then, repayment has been uneven, with millions of borrowers struggling to make repayments and to navigate changing federal program rules.
Liberty Street Economics estimates that approximately 1 million federal student loan borrowers defaulted in the fourth quarter 2025, with an additional 2.6 million borrowers defaulting during Q1 2026.
According to the DOE, participation in autopay has dropped dramatically since the COVID-19 pandemic. Prior to the payment pause, more than 80% of borrowers in active repayment were enrolled in automatic payments. Today, that figure is roughly 40%, according to the department.
A Broader Overhaul
The interest-rate incentive arrives alongside major changes to the federal student loan repayment system that take effect July 1.
President Donald Trump is replacing existing repayment options with two new programs established under the Working Families Tax Cuts Act: the income-driven Repayment Assistance Plan and a new Tiered Standard Repayment Plan. Borrowers enrolling in either plan can also take advantage of the temporary 100-basis-point autopay interest reduction.
“The Trump Administration is making student loan repayment easier than ever,” Under Secretary of Education Nicholas Kent said in a statement announcing the change, adding that federal officials expect the incentive to increase repayment rates and improve the health of the federal student loan portfolio.
The larger discount also represents a notable increase from the longstanding autopay incentive, which has reduced borrowers’ interest rates by 0.25 percentage points for years. Under the new policy, borrowers currently enrolled in autopay will automatically receive an additional 0.75 percentage-point reduction, bringing the total discount to 1 percentage point.
Who Qualifies
The temporary interest-rate reduction applies to borrowers with eligible federal direct loans originated after July 1, 2012, including both student and Parent PLUS borrowers. Those already using autopay do not need to take any action to receive the rate cut.
Borrowers who are currently in default can also qualify, but they must first return their loans to good standing by consolidating eligible loans and enrolling in a repayment plan before signing up for autopay.
Borrowers enrolled in the now-defunct SAVE repayment plan must first transition into another eligible repayment option before becoming eligible for the enhanced interest discount.
While a 1-percentage-point reduction may appear modest, it can produce meaningful savings over time.
A borrower with $30,000 in federal student loans at a 6.4% interest rate would see the rate fall to 5.4% under the temporary incentive. According to estimates cited by the department, that borrower would pay roughly $17 less per month under the new rate, while directing a larger share of each payment toward reducing the outstanding loan principal instead of interest charges, lowering total borrowing costs over the life of the loan.
