The U.S. Department of Education announced on Thursday that it will temporarily reduce interest rates on certain federal student loans by up to one percentage point, beginning July 1, 2024, through June 30, 2028. This measure aims to improve repayment rates in the face of increasing borrower defaults and changing repayment structures.

The rate reduction applies exclusively to loans disbursed after July 1, 2012, and is contingent upon borrowers enrolling in automatic payment plans. Borrowers who are newly enrolling in auto-pay will receive a full one percentage point interest rate reduction, while those already enrolled will see an additional 0.75 percentage point cut on top of the existing 0.25 percentage point benefit tied to auto-pay participation. The department estimates the temporary concession will cost approximately $6 billion.

Nicholas Kent, under secretary of education, emphasized the department’s goal of boosting the share of borrowers current on their loans, which currently stands at just over one-third. According to Kent, automatic payments promote timely repayment and better loan portfolio health. At the end of 2023, only 40.1 percent of borrowers in active repayment were enrolled in auto-pay—down from pre-pandemic levels, though rebounding after a payment pause during the COVID-19 crisis temporarily halted collections.

The initiative comes amid a broader overhaul of federal student loan repayment plans scheduled to take effect on July 1. Several existing plans will be eliminated and replaced by new options, including the phase-out of the Biden administration’s SAVE plan, which currently serves about seven million borrowers whose payments have been paused for nearly two years due to legal challenges by Republican state attorneys general.

While the interest rate reduction may lower overall interest costs, it will not affect monthly payments for borrowers enrolled in income-driven repayment plans, where payments are calculated based on income and household size. Michele Zampini, associate vice president for federal policy at the Institute for College Access & Success, noted that unaffordable monthly payments remain a primary cause of delinquency and default, a problem not addressed by the rate cut.

Borrowers can enroll in automatic payments by accessing their loan servicers’ online portals and providing bank information. Those in default will face additional steps, including loan consolidation and plan application via StudentAid.gov, before qualifying for the rate discount.

Student loan expert Mark Kantrowitz advised all borrowers to enroll in auto-pay regardless of the rate cut, highlighting the reduced likelihood of missed payments and describing the interest rate reduction as an added incentive.

The automatic payment requirement ties into new features of the forthcoming Repayment Assistance Plan, designed to incentivize on-time payments and facilitate faster loan payoff, further emphasizing the Education Department’s focus on sustainability and borrower performance improvement in federal student loan programs.