Most defaulted borrowers miss student loan rate cut
A temporary federal student loan interest discount applies only to eligible Direct Loan borrowers who use automatic payments.
By Hana Yoshida · Markets Reporter
3 min read
The Education Department said Thursday it will cut interest rates for some federal student loan borrowers, but the benefit will not reach many people who are already farthest behind on their payments. The Associated Press reported that nearly 9 million borrowers are in default, a status that generally blocks them from receiving the discount unless they first restore their loans to good standing.
The Trump administration presented the change as part of its effort to make college costs and repayment easier to manage, according to the Education Department. Education Undersecretary Nicholas Kent said the policy is meant to ease repayment and improve the condition of the federal student loan portfolio.
The discount is narrower than the department’s broad announcement may suggest. According to the Education Department details reported by the AP, borrowers must have federal Direct Loans issued after July 1, 2012, and must either already use automatic payments or enroll in them.
Who can qualify
The department said borrowers enrolled in automatic payments will be eligible for a 1 percentage point interest-rate reduction starting July 1. The AP reported that the reduction is temporary and is scheduled to run through June 30, 2028.
Borrowers who already use auto pay will see a smaller new benefit because they already receive a 0.25 percentage point discount, according to the AP. For them, the added reduction amounts to 0.75 percentage point.
The Education Department said about 40% of borrowers are currently enrolled in automatic payments, according to the AP. Officials hope the larger interest incentive will encourage more borrowers to sign up.
Defaulted borrowers face more steps before they can qualify. The AP reported that borrowers in default have missed nine months of payments, and they generally must return their loans to good standing before they can receive the interest-rate cut.
For many defaulted borrowers, that process typically involves consolidating their loans and then applying for a new repayment plan, according to the AP. Until that happens, the auto-pay discount does not provide immediate relief.
Why the policy is being offered
The federal student loan portfolio has grown to almost $1.7 trillion, according to the AP, and millions of borrowers are struggling to keep up with repayment. The Trump administration is trying to address rising delinquency and default rates while changing repayment options created during the Biden administration, the AP reported.
The Education Department is offering its own repayment options, including an income-driven plan, according to officials cited by the AP. Department officials also said automatic payments can help borrowers keep eligibility for repayment programs by reducing missed payments.
The result is a limited break for borrowers who meet the department’s requirements, rather than a broad rate cut across the federal student loan system. Borrowers in default may be able to reach eligibility, but the AP reported that they must first complete the steps needed to bring their loans current.
This story draws on original reporting from Fortune.