The U.S. Department of Education announced a temporary 1 percentage point interest rate reduction for federal student loan borrowers enrolled in auto pay, taking effect July 1 nationwide. The measure applies to eligible Direct Loans and runs through June 30, 2028, aiming to boost on-time payments and reduce interest costs for millions of borrowers.
The move matters as the federal student loan portfolio nears $1.7 trillion and nearly 9 million borrowers remain in default. Officials are pairing the incentive with new repayment options to stabilize repayment performance and address a sharp drop in auto pay participation since before the pandemic. Last update: June 21, 2026.
Eligibility, timing and how the 1% cut is applied
The reduction is available to borrowers with federal Direct Loans disbursed after July 1, 2012 who are enrolled in automatic payments. Those already in auto pay, who typically receive a 0.25% interest discount, will see an additional 0.75% applied to reach the full 1% benefit. Borrowers not yet enrolled may sign up by September 30 to capture the incentive for the full scheduled period from July 1, 2026, through June 30, 2028.
The rate cut reduces interest accrual but may not change monthly payments for those on income-driven plans. For illustration, an undergraduate rate of 6.39% would temporarily drop to 5.39% while enrolled in auto pay during the incentive window. Borrowers in default must first regain good standing, typically by consolidating and selecting a new repayment plan, to qualify for the reduction.
New repayment plans starting July 1
Two new repayment options begin on July 1 as part of a broader overhaul that phases out several prior-era plans. The Repayment Assistance Plan (RAP) is an income-driven model that sets payments by income and household size and prevents unpaid interest from piling up when on-time payments are made. The Tiered Standard plan offers fixed payments on terms from 10 to 25 yearswith the term calibrated to the borrower’s outstanding balance.
As borrowers transition out of the discontinued SAVE plan, agencies have urged timely selection of the new options to avoid payment disruptions. Policy changes also include caps on graduate borrowing beginning July 1. Borrowers with older or ineligible loans may need to consolidate and reenter repayment to access the new benefits, including the auto pay rate incentive.
Rates, participation trends and who is excluded
For the current cycle, federal student loan rates were reset at 6.39% for undergraduate Direct Loans, 7.94% for graduate unsubsidized loans, and 8.94% for PLUS Loans to parents and graduate students. The temporary auto pay incentive overlays these rates for eligible borrowers, lowering the interest charged while the measure is in effect. Private student loans are not affected, as their rates are set by lenders and market conditions.
Auto pay participation fell from about 83% of borrowers in 2019 to roughly 40% by late 2026, a decline policymakers seek to reverse with the new incentive. Delinquent student debt reached an estimated $171.4 billion in the first quarter of 2026, with millions still in default, underscoring the urgency of stabilizing repayment. Officials stated the goal is to help borrowers pay down balances faster, align with new benefits, and keep pathways to discharge on track.
