Education Department cuts student loan interest rate

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The Education Department said Thursday it will reduce interest rates by 1 percent on student loans for borrowers enrolled in automatic payments starting on July 1.

The reduction will be in effect through June 30, 2028. In order to benefit, borrowers must enroll in auto pay by Sept. 30 of this year — if they are not enrolled already.

Borrowers who use auto pay already receive a 0.25-percentage-point reduction on their interest rates. The Education Department noted those borrowers do not have to take any action to receive the full-point decrease, as their servicer will automatically reduce their rate by an additional 0.75 percent.

The department noted that before the COVID-19 pandemic, more than 80 percent of student loan borrowers actively paying off their loans were enrolled in auto pay. But as of Thursday, 40 percent of those borrowers use that payment method.

Nicholas Kent, the under secretary of Education, said in a release that borrowers “should not wait to take advantage” of the temporary reduction.

“No matter your age or college credential, we want to make sure that borrowers can understand their options and choose a repayment option that works best for them,” Kent added. “This interest rate reduction will help borrowers as they consider new, affordable repayment plans and work to repay their loans on time.”

Kent noted the Education Department expects the reduction “to drive up repayment rates and significantly improve” the health of the federal student loan portfolio.

Borrowers who pay back their student loans through EdFinancial Services and do not use auto pay can navigate to the “Payments and Billing” section and select “Auto Pay” to switch to the method. Once there, they can add a bank account to pay off their loans automatically.

As of February, 42.8 million borrowers have federal student loan debt, with the outstanding balance surpassing $1.6 trillion, according to the Education Data Initiative. The initiative noted that 10 percent of federal student loan dollars were delinquent as of the final quarter of last year.

Also on July 1, two new repayment plans will be available to borrowers: the Repayment Assistance Plan (RAP) and the Tiered Standard Plan (TSP).

Under the former, borrowers’ monthly payment is based on their income and number of dependents. The latter, meanwhile, will offer borrowers fixed terms of 10, 15, 20 or 25 years based on their total outstanding loan balance.

The Education Department created those programs to comply with the One Big Beautiful Bill Act (OBBBA), which President Trump signed into law last July. On July 1, the department is also eliminating the Biden administration era Saving on a Valuable Education (SAVE) Plan, after a federal appeals court ordered it to do so in March.

The 7.5 million borrowers enrolled in the SAVE Plan will be able to enroll in either the RAP or TSP programs starting next month.

New caps on graduate and professional school loans are also set to go into effect on July 1, also in line with the OBBBA.

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