This New Student Loan Discount Cuts Your Interest Rate by 1%

If you’ve got federal student loans, a recent move by the government could potentially shave hundreds of dollars off your outstanding debt.

The U.S. Department of Education, or ED, announced on Friday that borrowers with accounts in good standing can earn a 1% interest rate reduction by enrolling in autopay to make their monthly payments. Currently, autopay enrollees get a 0.25% discount, making this incentive a significant move on the government's part. The rate reduction is being offered through June 30, 2028.

The ED says a wide swath of borrowers with Federal Direct Loans that were originated after July 1, 2012, are eligible for the rate reduction, including borrowers who aren’t enrolled in autopay as well as borrowers transferring out of the now-discontinued income-based Saving on a Valuable Education, or SAVE, plan. (Borrowers currently enrolled in autopay get a 0.25% rate reduction; this new initiative will reduce their APR by another 0.75% for a total reduction of 1%.)

The One Big Beautiful Bill Act signed into law last year drastically overhauled the federal student loan marketplace, getting rid of multiple income-based repayment plans. The troubled Biden-era SAVE plan proved popular among borrowers because monthly payments could be as low as $0 and eligible borrowers' unpaid balances could be forgiven after 10 years. But SAVE was beset by legal challenges almost from its inception and was officially terminated in March.

The new discount could nudge some of the estimated 7 million borrowers who remain enrolled in the SAVE plan to switch to one of the ED’s new plans — which they'll need to do soon anyway. A deadline of July 1 starts a 90-day countdown by which time borrowers who don’t switch out of SAVE will be enrolled in the least flexible of the new federal student loan repayment options.

The government also said that borrowers currently in default will be eligible for the rate reduction if they bring their accounts back into good standing.

Discount comes as college costs, loan rates tick up

The average amount of debt held by federal loan borrowers is $39,547, according to the Education Data Initiative, a nonprofit resource for borrowers and researchers. The Department of Education announced last month that loan rates for undergraduate and graduate student loans, as well as parental PLUS loans, would rise incrementally for the 2026-2027 academic year.

For the average borrower with a balance of nearly $40,000, the new autopay discount amounts to a drop of roughly $20 a month. Although the rate reduction announced Friday extends only through the first half of 2028, even a reprieve could benefit borrowers, according to Sandy Baum, a nonresident senior fellow at the Urban Institute’s Center on Education Data and Policy.

In an email to Money, Baum says, “In the context of concerns over gas prices and food prices, and understanding how tight many people’s budgets are, it’s wrong to write this off as insignificant."

The Education Department noted that the percentage of borrowers using autopay plunged in the wake of the pandemic and never recovered, going from more than 80% to roughly 40% of borrowers.

Betsy Mayotte, president of the nonprofit Institute of Student Loan Advisors, says that the discount could give borrowers currently not making timely payments an incentive to get back in the habit. "Autopay is a great way to get borrowers in general back on track with making regular payments," she tells Money via email.

The government’s announcement comes on the heels of a recent analysis published by CNBC, which finds that a total of 16 colleges and universities in the U.S. now charge six figures for a single year’s worth of academic study.

The most expensive education 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 and Ivy League institutions like Duke University ($103,975), the University of Chicago ($103,821) and Georgetown University ($100,864).

Most students, especially at big-name schools with sizable donor bases and endowments, pay far less than the “sticker price.” Many institutions offer a free ride to students from low- and even middle-income families, and some waive tuition fees for families with incomes as high as $200,000.

Still, the $100,000 annual price tag is a psychologically significant benchmark, says Jeff Selingo, author of the college guide Dream School. “We have been moving toward this six-figure price tag for a long time, and now we are here — and for a lot of people that feels significant,” he told the financial news outlet.