Education Department cuts interest rates on some federal student loans

The Education Department unveiled a temporary reduction in interest rates for federal student loans Thursday, saying it aims to make higher education more affordable. The change is part of a broader effort to address increasing borrower defaults, which have reached nearly 9 million, according to department officials.

Under the plan, borrowers with federal Direct Loans issued after July 1, 2012, who are enrolled in automatic payments or sign up for them, will qualify for a 1% interest rate reduction starting July 1. Borrowers already enrolled in auto pay currently receive a 0.25% discount, so the new reduction will lower their rate by an additional 0.75%. The interest rate cut will last through June 30, 2028.

Borrowers must meet specific criteria to qualify, including consolidating defaulted loans and applying for a new repayment plan to regain eligibility. Nearly 9 million borrowers in default will need to return to good standing before benefiting from the reduction.

Education Undersecretary Nicholas Kent said the move is designed to make student loan repayment easier and improve the health of the federal loan portfolio. Officials also hope the incentive will increase auto pay enrollment, which currently stands at 40%, and help borrowers avoid missed payments.

The interest rate reduction is part of the Trump administration’s efforts to counter rising delinquency and default rates amid a ballooning federal student loan debt nearing $1.7 trillion. The department also is offering new repayment options, including income-driven plans, as it phases out Biden-era policies.

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