If you have federal student loans, a recent move by the government could shave hundreds of dollars off your outstanding debt.
The US Department of Education, or ED, announced Friday that borrowers with accounts in good standing can get a 1% interest rate reduction by signing up for automatic payments to make their monthly payments. Currently, auto-pay subscribers get a 0.25% discount, making this incentive a significant step for the government. The rate reduction is offered until June 30, 2028.
The ED says many borrowers have Federal Direct Loans that were started after July 1, 2012., are eligible for a rate reduction, including borrowers not enrolled in autopay and borrowers who transfer out of an income-based Savings Bank, or LONGA, program. (Borrowers currently enrolled in automatic payments receive a 0.25% rate reduction; this new measure will lower the APR by another 0.75% for a total reduction of 1%.)
The One Big Beautiful Bill Act signed into law last year dramatically changed the student loan market, eliminating many income repayment programs. The troubled Biden-era SAVE program proved popular with borrowers because monthly payments can be as low as $0 and unpaid balances for eligible borrowers can be forgiven after 10 years. But SAVE has been dogged by legal challenges almost since its inception and was officially terminated in March.
The new discount could affect some of the estimated 7 million borrowers who remain enrolled in the SAVE program to switch to one of the new ED programs – which they will have to do soon. The July 1st deadline begins a 90-day countdown to when borrowers who default on SAVE will be enrolled in a gradual transition to new student loan repayment options.
The government also said that borrowers who are currently unemployed will be eligible for a rate reduction if they get their accounts back in good standing.
The discount comes as college costs, loan rates rise
The average amount of debt held by federal borrowers is $39,547, according to the Education Data Initiative, a nonprofit resource for borrowers and researchers. The Ministry of Education announced last month that the loan rates for undergraduate and graduate students, and PLUS loans for parents, will increase incrementally for the 2026-2027 academic year.
For the average borrower with a balance of about $40,000, the new auto-pay discount is about $20 a month lower. Although the rate cut announced Friday extends into the first quarter of 2028, even a delay could benefit borrowers, according to Sandy Baum, a non-resident fellow at the Urban Institute on Education Data and Policy.
In an email to Money, Baum says, “In terms of concerns about gas prices and food prices, and understanding how tight most people’s budgets are, it’s not fair to write them off as trivial.”
The Department of Education noted that the percentage of borrowers using autopay dropped due to the pandemic and never recovered, from over 80% to about 40% of borrowers.
Betsy Mayotte, president of the nonprofit Institute of Student Loan Advisors, says the discount could give borrowers who currently can’t make their payments on time an incentive to get back into the habit. “Automatic payments are a great way to get borrowers back on track by making regular payments,” Money told me via email.
The government’s announcement comes after a recent study published by CNBC, which found that 16 US colleges and universities are now charging six figures for a one-year course.
The most expensive tuition is at Harvey Mudd College in Claremont, California, where the annual tab is close to $105,000. Other members of the six-figure club include prestigious Ivy League institutions such as Duke University ($103,975), the University of Chicago ($103,821) and Georgetown University ($100,864).
Most students, especially at big-name schools with large donor bases and endowments, pay far less than the “sticker price.” Many institutions offer free rides to students from low-income and low-income families, as well as tuition waivers for families with incomes up to $200,000.
Still, the $100,000 annual price tag is an important psychological marker, says Jeff Selingo, author of the college guide. School of Dreams. “We’ve been looking at this six-figure price for a long time, and now we’re here – and a lot of people don’t feel important,” he told the financial press.
