The Department of Education said Thursday that it would temporarily reduce interest rates on federal student loans by up to 1 percentage point starting July 1. The reduction will last two years.
In a phone call with reporters, Nicholas Kent, deputy secretary of education, said just over a third of federal student loan borrowers were current on their loans. At the end of last year, only 40.1 percent of people had signed up for automatic payments. At the end of 2019, the figure was more than double.
To get the interest rate reduction, borrowers will need to enroll in automatic payments. People who are already enrolled will get a 0.75 percentage point reduction on their interest rate, since enrolling in automatic payment already results in a 0.25 percentage point rate deduction. They won’t need to register to get that extra 0.75 percent.
The benefit is limited to people with loans that were disbursed on or after July 1, 2012.
“If we want a sustainable federal student loan system for future generations, we must improve its performance,” Kent said.
Kent described the rate reduction as a “benefit that has been proven effective in helping borrowers stay current.”
The change comes less than two weeks before millions of federal borrowers will be notified that they will have to choose a new repayment plan as part of a sweeping overhaul of the student loan system. The Biden-era payment plan known as SAVE (short for Saving for a Valuable Education) is officially being dismantled, and its seven million enrollees will have to choose their next best option. Their payments have been suspended for almost two years.
