Student Loan Borrowers Face Sept. 30 Deadline for 1% Rate Cut

Federal student loan borrowers have until Sept. 30 to enroll in auto pay and qualify for a temporary 1-percentage-point interest rate cut through June 30, 2028. Those already enrolled will receive it automatically.

The temporary benefit applies to Federal Direct Loans originated after July 1, 2012, including eligible loans held by students and parents.

Borrowers already enrolled in auto pay typically receive a 0.25-percentage-point reduction and will receive the larger discount automatically. Their student loan servicer will increase the reduction by another 0.75 percentage points, bringing the total reduction to 1 percentage point, according to the U.S. Department of Education.

Borrowers who are not currently using auto pay can enroll by logging in to their student loan servicer account, selecting “auto pay” from the navigation menu, providing their bank account information and confirming the payment amount.

Borrowers who enroll by Sept. 30 can receive the full reduction through June 30, 2028, as long as they remain enrolled in auto pay.

Borrowers in default must take additional steps before they can receive the discount.

They must log in to StudentAid.gov, consolidate their eligible loans and apply for a repayment plan before enrolling in auto pay. Borrowers enrolled in the now-defunct SAVE plan must also select an available repayment plan before signing up for auto pay.

The size of the savings will depend on the borrower’s balance, interest rate, repayment plan and remaining term.

For perspective, reducing the rate by 1 percentage point on a constant $30,000 balance would cut the interest accruing over one year by approximately $300. Actual savings would change as the balance declines.

The Education Department hopes the larger discount will encourage more borrowers to enroll in auto pay.

Before the COVID-19 pandemic, more than 80% of federal student loan borrowers in active repayment used auto pay. That share has since fallen to 40%, according to the Education Department.

Under Secretary of Education Nicholas Kent urged borrowers to take advantage of the temporary rate reduction rather than waiting to enroll.

“We expect this temporary incentive to drive up repayment rates and significantly improve the overall health of the federal student loan portfolio,” Kent said.

The discount can reduce the interest borrowers pay, but their monthly bills will also depend on which repayment plans are available to them.

The Education Department introduced two repayment plans on July 1, although a borrower’s options depend on when the Direct Loans were obtained or consolidated.

Borrowers who take out new Direct Loans, including certain consolidation loans, on or after July 1, 2026, generally have two choices: the Repayment Assistance Plan and the Tiered Standard repayment plan.

Certain borrowers with loans made before July 1, 2026, may remain in phased-out repayment plans until July 1, 2028. Depending on their eligibility, they may ultimately choose among RAP, the Tiered Standard plan and Income-Based Repayment.

The Repayment Assistance Plan, or RAP, is a new income-driven repayment plan. Under RAP, a borrower’s monthly payment is based on income and the number of dependents.

But many borrowers may pay more under RAP than they would under older income-driven plans. Those payments may also become relatively higher over time because the plan’s income brackets and dependent deduction are not indexed for inflation, according to the National Consumer Law Center.

RAP also contains protections designed to keep balances from growing. When borrowers make their full monthly payments on time, the government will waive any remaining unpaid interest. If a payment reduces the principal by less than $50, the government will also contribute up to $50 toward the principal.

RAP offers forgiveness of any remaining balance after 30 years of qualifying payments, substantially longer than the 20- to 25-year forgiveness periods available through older income-driven plans.

The new Tiered Standard repayment plan offers fixed repayment terms based on a borrower’s total Direct Loan balance. The available terms are 10, 15, 20 or 25 years.

Borrowers with higher balances receive longer repayment periods, potentially lowering their monthly payments while increasing their total interest costs.