Student loan borrowers who enroll in automatic payments will get a much bigger discount on interest starting July 1, the U.S. Department of Education says.

Auto pay has long offered a modest discount off borrowers’ interest rate — .25 percentage points — but after millions of borrowers opted out during the long COVID repayment pause, with some making no payments for years, the nation’s student debt portfolio swelled to $1.7 trillion.

On Thursday, the department said it will temporarily increase its auto pay interest rate discount to one full percentage point. Practically, that means an undergraduate borrower with a loan at the current 6.39% would see their interest rate drop temporarily to 5.39%.

The rate cut will last for two years, from July 1, 2026 through June 30, 2028.

Borrowers already enrolled in auto pay do not need to act. They will automatically receive the rate cut.

In a call with reporters on Thursday, Undersecretary Nicholas Kent said that, back in 2019, roughly 83% of borrowers were enrolled in auto pay but that by late 2025, that participation rate had dropped considerably, to just 40% of borrowers.

“This temporary incentive is designed to help borrowers pay down their balances more quickly,” Kent told reporters, “take full advantage of new repayment benefits, remain on track for loan discharge opportunities and to strengthen the overall health of the federal student loan portfolio."

The department says borrowers will have until Sept. 30 to sign up for auto pay and qualify for the two-year interest discount.

July 1 ushers in a host of big new changes to the federal student aid world, including the introduction of two new repayment plans and controversial new caps on graduate student loans.

Edited by: Nirvi Shah

News Source : https://www.opb.org/article/2026/06/18/auto-pay-will-mean-bigger-interest-rate-cut-on-student-loans/