The Education Department has announced a temporary reduction in federal student loan interest rates by 1% to help borrowers manage payments amidst rising default rates. However, this reduction applies only to borrowers with Direct Loans issued after July 1, 2012, who are enrolled in automatic payments. The initiative aims to reinstate financial stability for borrowers, as there are nearly 9 million in default. The interest rate cut will be effective from July 1, 2026, until June 30, 2028. Current auto pay users will see a smaller impact due to an existing discount, while others must take active steps to qualify.

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Personal Finance student loans and debt

Trump’s student loan rate cut excludes most of the 9 million borrowers in default

By Alia Wong Alia Wong, Collin Binkley Collin Binkley, and The Associated Press The Associated Press

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By Alia Wong Alia Wong, Collin Binkley Collin Binkley, and The Associated Press The Associated Press

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June 20, 2026, 1:27 PM ET

President Donald Trump arrives for a working session on promoting economic growth with G7 leaders and G7 outreach partners as German Chancellor Friedrich Merz looks on, during the G7 Summit on June 17, 2026 in Evian-les-Bains, France. Anna Moneymaker/Getty Images

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The Education Department on Thursday announced a reduction in interest rates for federal student loans, describing it as part of a plan to make higher education more affordable.

Which borrowers are eligible for the rate reduction?

WHAT THE DEPARTMENT SAID: The headline on the news release said: “U.S. Department of Education Announces Student Loan Interest Rate Reduction.”

THE BACKSTORY: The change will only affect a subset of borrowers — those with federal Direct Loans issued after July 1, 2012, who are already enrolled in automatic payments or sign up for them.

Many borrowers won’t see any immediate benefit. To qualify, they have to first take a set of actions including signing up for auto pay and, in some cases, consolidating their loans.

Currently, just 40% of borrowers are enrolled in auto pay — a figure the department is hoping to increase with the new incentive of the interest rate reduction.

Nearly 9 million student loan borrowers are in default, meaning they’ve missed nine months of payments. For them to become eligible for the rate reduction, they must get back in good standing, typically by consolidating their loans and then applying for a new repayment plan.

How much of an interest rate reduction will borrowers see?

WHAT THE DEPARTMENT SAID: Officials said those enrolled in auto pay will be eligible for a 1% rate reduction beginning July 1.

THE BACKSTORY: For borrowers already enrolled in auto pay, the savings will be smaller. Borrowers who currently use auto pay already receive an interest-rate discount of 0.25%, so the new reduction takes off just 0.75%.

For all borrowers, the rate reduction will be temporary, lasting through June 30, 2028.

The federal student loan portfolio has ballooned to almost $1.7 trillion, with millions of borrowers struggling to keep up.

The rate reduction aims to help get more Americans back on track with student loans as the Trump administration struggles to rein in rising rates of delinquency and defaults on student loans.

As it phases out Biden-era options for loan repayment, the Education Department is offering its own plans for repayment, including an income-driven option. Officials said enrollment in auto pay also can help borrowers maintain their eligibility for those plans by helping them avoid missed payments.

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The Associated Press’ education coverage receives financial support from multiple private foundations. AP is solely responsible for all content. Find AP’s standards for working with philanthropies, a list of supporters and funded coverage areas at AP.org.

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By Alia Wong

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By Collin Binkley

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By The Associated Press

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