The Department of Education has announced a reduction in interest rates for federal student loans, describing it as part of a plan to make higher education more affordable.
With growing numbers of borrowers in default, the Trump administration pitched the temporary, 1% reduction in student loan interest rates as a salve for those struggling with repayment.
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Education Undersecretary Nicholas Kent said Thursday that the change is a way of “making student loan repayment easier than ever” and of improving “the overall health of the federal student loan portfolio.”
But the change does not apply to all borrowers, and those pursuing the reduction will need to meet eligibility criteria.
The DOE says two new repayment plans will become available on July 1: the income-driven Repayment Assistance Plan (RAP) and the Tiered Standard repayment plan.
RAP
Prior to the COVID-19 pandemic, more than 80 percent of student loan borrowers in active repayment were enrolled in auto pay, which ensures that borrowers make monthly, on-time payments. Today, only 40 percent are enrolled.
Auto pay is the easiest way for borrowers to ensure they maintain access to key benefits, including features of RAP, which will also be available beginning July 1.
For example, borrowers in RAP can receive a match on their on-time payments to ensure interest does not accrue and balances decline every month.
Eligible borrowers making on-time, monthly payments can also qualify for Public Service Loan Forgiveness (PSLF), which discharges certain loans after 120 payments. Auto pay helps ensure borrowers never miss a monthly payment, which is a prerequisite for accessing these repayment and discharge benefits.
How to Enroll in ‘Auto Pay’
Auto pay is an optional feature where a borrower’s student loan servicer can automatically deduct their monthly student loan payment directly from their checking or savings account. Currently, if a borrower enrolls in auto pay, servicers reduce a borrower’s interest rate by 0.25 percent.
Enrolling in auto pay is quick and easy.
- Borrowers who are not currently enrolled in auto pay must log-in to their student loan servicer account and select “auto pay” from the navigation menu. Borrowers must enter their bank account information and confirm specific payment amounts.
- Borrowers who are currently enrolled in auto pay do not have to take any action – their servicer will automatically reduce their interest rate by an additional 0.75 percent, bringing the total reduction on their federal student loans to 1 percent.
- Borrowers who are in default – and thus are not currently in repayment – must log-in to StudentAid.gov, consolidate their eligible loans, and then apply for a new repayment plan before enrolling in auto pay.
- Borrowers will need to remain in auto pay to continue to benefit from the interest rate reduction.
The additional interest rate reduction will benefit all borrowers whose Federal Direct Loans originated after July 1, 2012, including student and parent borrowers who are currently enrolled in auto pay; borrowers who are not yet enrolled in auto pay, and borrowers who are enrolled in the now-defunct SAVE [Saving on a Valuable Education] Plan who must first choose a legal repayment plan starting on July 1. This benefit will also be available for borrowers who are in default once they bring their loans back into good standing.
How to Apply for an Income-Driven Repayment Plan
Applying for an income-driven repayment (IDR) plan is easy and efficient when borrowers provide consent for the Department to obtain their federal tax information (FTI) directly from the Internal Revenue Service (IRS). This allows the Department to process a borrower’s IDR application faster and eliminates the need for a borrower to manually upload their income information.
Upcoming Changes to Student Loan Repayment
The Department is working to implement the student loan repayment provisions included in the Working Families Tax Cuts Act. This once-in-a-generation reform created a new IDR plan, the Repayment Assistance Plan (RAP) and a new Tiered Standard repayment plan, both of which will be available to borrowers on July 1, 2026.
Under RAP, a borrower’s monthly payment is based on that borrower’s income and number of dependents. This provides borrowers with affordable monthly payments to ensure they can meet their repayment obligations. Unlike existing IDR plans, RAP ensures that borrowers who make full, on-time monthly payments will be shielded from runaway interest and will make regular progress toward reducing the principal balance on their loan.
The new Tiered Standard repayment plan will offer fixed terms of 10, 15, 20, or 25 years based on a borrower’s total outstanding loan balance, giving borrowers with higher debt lower monthly payments and more time to repay.
For more information on the new repayment plans, please see the Department’s fact sheet here.