Student loan borrowers have until Dec. 31 to lock in a 1 percentage point interest rate discount
Millions of federal student loan borrowers now have more time to cut their interest rate by 1 percentage point; a discount that is four times larger than the standard autopay reduction.
The Trump administration has extended the deadline to enroll in automatic payments and qualify for the temporary interest rate reduction. Borrowers now have until Dec. 31, 2026, instead of the previous deadline at the end of Wednesday, to sign up.
Once enrolled, eligible borrowers can keep the reduced interest rate through June 30, 2028.
The U.S. Department of Education announced Tuesday that it was extending the enrollment period for the temporary interest rate reduction.
The 1 percentage point discount could translate into meaningful savings for borrowers who still have substantial student loan balances. For example, a borrower with $200,000 in outstanding debt would initially accrue about $2000 less in annual interest from a 1 percentage point reduction, although the actual savings will change as the loan balance declines.
The benefit is also significantly larger than the discount borrowers have traditionally received for using autopay. That standard reduction has typically been 0.25 percentage points.
Nearly 2 million federal student loan borrowers have already signed up for autopay since the new discount became available over the summer, according to the Education Department.
According to the Education Department, the incentive is available to borrowers who took out eligible federal student loans on or after July 2012, a group that represents the vast majority of federal student loan borrowers.
Officials estimate the temporary program will cost approximately $6 billion over its two-year duration.
Federal student loan interest rates remain elevated
Federal student loan rates for the 2026-2027 academic year remain well above levels seen during the low-rate environment.
Current rates are:
6.52% for undergraduate loans
8.07% for graduate student loans
9.07% for Parent PLUS loans
Because interest accrues daily, borrowers with higher balances can see their debt grow rapidly if they miss payments or fail to consistently reduce principal balances.
Education officials say the move is designed to encourage more borrowers to return to active repayment as sweeping changes to federal student loan programs took effect this summer.
The administration wants more borrowers back in repayment
The announcement comes as the Trump administration seeks to improve repayment participation across the federal student loan system.
According to the Education Department, only 37% of the nearly 43 million Americans with federal student loans are currently paying down their balances. While that figure is slightly higher than a year ago, millions of borrowers remain behind on their payments.
Officials report that roughly 9 million borrowers are currently in default, while another 3 million are delinquent on their loans.
Education leaders argue that the enhanced autopay discount will help borrowers stay current on their loans while also improving the financial health of the federal student loan program.
“This temporary incentive is designed to help borrowers pay down their balances more quickly, take full advantage of new repayment benefits, remain on track toward loan discharge opportunities, and to strengthen the overall health of the federal student loan portfolio,” Education Undersecretary Nicholas Kent told reporters when the program was initially launched.
In a separate statement, Kent added: “This interest rate reduction will help borrowers as they consider new, affordable repayment plans and work to repay their loans on time. We expect this temporary incentive to drive up repayment rates and significantly improve the overall health of the federal student loan portfolio.”
Borrowers in default must take additional steps
Not every borrower will immediately qualify for the new benefit.
The Education Department said borrowers who are currently in default must first return their loans to good standing before becoming eligible for the interest-rate reduction.
Officials said borrowers in default can consolidate their loans and enroll in a new repayment plan before signing up for autopay.
With more than 42 million Americans carrying student loans and total outstanding student debt exceeding $1.7 trillion, even a relatively small change in interest rates can affect borrowers’ repayment costs.
Most federal Direct Loans qualify
The discount is available for loans in the federal Direct Loan program, Kantrowitz said. That includes Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans.
Parent PLUS borrowers can also qualify if their loans are part of the Direct Loan program.
There are several important eligibility requirements. Loans must have been disbursed on or after July 1, 2012, and must be in good standing.
Borrowers can check their loan disbursement dates through StudentAid.gov or by contacting their loan servicer.
Federal Family Education Loans, or FFEL, are not eligible for the temporary rate reduction. Private student loans also do not qualify because the federal government is providing the discount.
Signing up for autopay can take only a few minutes
Eligible borrowers can enroll in automatic payments through the website of their federal student loan servicer, according to student loan advocates.
Borrowers should look for a section labeled “manage payments” or something similar.
Borrowers will generally need to provide their bank account number and other information to establish automatic payments. The process is quick and should take less than a minute.
Borrowers who do not know which company services their federal loans can find their servicer and its contact information through StudentAid.gov.
The SAVE plan is being phased out
The new incentive arrives as the administration continues winding down the Saving on a Valuable Education (SAVE) plan, a Biden-era income-driven repayment program.
Nearly 7 million borrowers remain enrolled in SAVE, according to Education Department estimates. However, officials said approximately 400,000 borrowers have already transitioned into other repayment options.
The administration hopes that the combination of new repayment plans and the temporary interest-rate discount will encourage additional borrowers to leave the suspended program and resume repayment.
Beginning July 1, borrowers were able to enroll in the new Repayment Assistance Plan (RAP), one of the most significant changes included in the administration’s student loan overhaul.
Under RAP, monthly payments will be tied to income, ranging from 1% to 10% depending on a borrower’s earnings. The plan also waives unpaid monthly interest, preventing balances from growing due to unpaid interest charges.
However, some borrowers are expected to see higher monthly payments than under previous repayment plans, with certain borrowers facing increases of hundreds of dollars per month.
New standard repayment options are also here
In addition to RAP, the administration introduced a revised standard repayment structure.
Rather than the traditional 10-year repayment timeline, borrowers will have repayment terms ranging from 10 to 25 years depending on the amount they owe. Larger balances will qualify for longer repayment periods, potentially lowering monthly payments while extending the repayment timeline.
The new structure is intended to provide additional flexibility for borrowers managing substantial student loan debt.
What borrowers should check before Dec. 31
Borrowers interested in the discount should first confirm that their loans meet the eligibility requirements. The key requirements include having a qualifying Direct Loan, a disbursement date on or after July 1, 2012, and an account in good standing.
They should then check with their loan servicer to enroll in autopay before the Dec. 31 deadline.
For borrowers who qualify, the temporary 1 percentage point reduction could lower interest costs through June 30, 2028. The amount saved will depend on the borrower’s balance, interest rate and how quickly the loan is repaid.
With new repayment plans launched and major changes to the federal student loan system underway, the administration is betting that a larger interest-rate discount will encourage more borrowers to return to repayment and reduce the growing burden of student debt.
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John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
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