NEW YORK (AP) — Student loan borrowers now have until the end of 2026 to enroll in auto pay and receive a 1% reduction in their interest rate. The U.S. Department of Education extended the original deadline of September 30 to provide borrowers additional time to enroll. This interest rate reduction will be effective until June 2028.
Currently, borrowers using auto pay receive a 0.25% interest-rate discount, meaning the new reduction effectively increases this discount to 1%. This temporary benefit aims to assist borrowers, particularly those returning to repayment, and to help them comply with the new Repayment Assistance Plan that requires timely payments, according to the Education Department.
Lesley J. Turner, an associate professor of public policy at the University of Chicago, noted that the interest reduction can significantly benefit borrowers with large balances on fixed payments. "For a limited time, borrowers are now able to get a full percentage point reduction in their interest rate if they sign up for auto debit," Turner stated. "So this is a quadrupling of the earlier benefit. It's a pretty big benefit, especially for borrowers who have large balances."
Since the announcement of the interest reduction this summer, nearly 2 million borrowers have enrolled in auto pay. As of June, approximately 9 million Americans are in default on their federal student loans, with many others at risk of defaulting this year.
To qualify for the 1% interest reduction, borrowers must enroll in auto pay by December 31. They can do this by logging into their student loan servicer account and selecting auto pay, where they will need to provide their bank information for automatic monthly withdrawals.
Even without the rate reduction, auto pay is recommended as a way to manage student loans effectively. Turner emphasized that automatic payments can help prevent missed payments, which could lead to delinquency.
Borrowers who were already enrolled in auto pay before the July announcement have had their interest rates automatically reduced by 1%, according to the Education Department. Those in default must log into studentaid.gov to consolidate eligible loans before signing up for auto pay.
Involuntary collections on federal student loans are currently on hold. The Trump administration announced earlier this year that it is delaying plans to withhold wages from borrowers who default on their payments, which occurs when payments are at least 270 days overdue.
The online application for loan consolidation is available at studentaid.gov/loan-consolidation. Borrowers can combine multiple federal loans into a single loan with a fixed interest rate and one monthly payment. The consolidation process typically takes about 60 days and can only be completed once.
Borrowers in default can also reach out to their loan holder to apply for a loan rehabilitation program, which allows them to enter a reduced payment plan. After making five successful payments, wage garnishment will cease. More information about loan rehabilitation can be found online.