Washington, June 21, 2026, 10:03 (EDT)
- Eligible federal Direct Loan borrowers who use auto pay will receive a temporary one-percentage-point interest-rate reduction through June 30, 2028.
- More than 7 million SAVE borrowers will receive notices giving them about 90 days to choose another repayment plan or face automatic reassignment.
- Borrowers taking out new federal loans from July 1 will generally be limited to two repayment plans, while graduate students and parents face tighter borrowing caps.
The U.S. Education Department will begin the biggest reshaping of federal student lending in years on July 1, pairing two new repayment plans with a temporary interest-rate cut for borrowers who allow their loan servicer to deduct payments automatically. The reduction is one percentage point, not a blanket cut for every federal borrower.
The shift comes with the federal loan portfolio near $1.7 trillion and almost 9 million borrowers in default, meaning they have missed at least nine months of payments. The administration is using the discount to pull more people back into regular repayment as it closes Biden-era options and narrows the system for future borrowers.
The discount applies to qualifying federal Direct Loans originated after July 1, 2012. Borrowers not already using auto pay must enroll by September 30; those currently enrolled will automatically receive an additional 0.75-point reduction on top of the existing 0.25-point benefit. Borrowers must remain in auto pay to keep the lower rate.
Auto-pay participation has fallen sharply since the pandemic payment pause. Education Undersecretary Nicholas Kent said about 83% of borrowers used it in 2019, compared with roughly 40% by late 2025. The incentive was “designed to help borrowers pay down their balances more quickly,” he said. A loan carrying the current 6.39% undergraduate rate would temporarily fall to 5.39%. KGOU
The new income-driven Repayment Assistance Plan, or RAP, will base monthly bills on income and the number of dependents. Payments will generally range from 1% to 10% of income and fall by $50 a month for each dependent. Unpaid monthly interest will be waived after a full, on-time payment, while the government may contribute as much as $50 a month toward principal when the borrower’s own payment reduces it by less than that amount. Any balance still standing after 360 monthly payments can be discharged.
The department will also begin contacting borrowers enrolled in the discontinued Saving on a Valuable Education, or SAVE, plan. Servicers will give them an individual 90-day deadline to select a legal alternative. Those who do nothing will be moved into the existing Standard plan or the new Tiered Standard plan, both of which use fixed payments rather than adjusting bills to income.
The Tiered Standard plan assigns repayment periods according to total debt: 10 years for balances below $25,000, 15 years for $25,000 to $49,999, 20 years for $50,000 to $99,999 and 25 years for $100,000 or more. Anyone who takes out or consolidates a federal loan on or after July 1 will generally lose access to older plans across all of their loans, leaving RAP and the tiered plan as the main choices. Parent PLUS loans cannot use RAP.
Borrowing rules are tightening at the same time. The Grad PLUS program, which allowed borrowing up to the full cost of attendance, will close to new borrowing. Most graduate students will be capped at $20,500 a year and $100,000 in total, while designated professional students may borrow $50,000 annually and $200,000 overall. Parent PLUS loans will be limited to $20,000 per dependent each year and $65,000 per child.
Those limits could push some families toward private credit, where protections are often weaker. Betsy Mayotte, president of the nonprofit Institute of Student Loan Advisors, urged families to assess the full cost before enrolling: “You need to plan for that whole degree program to make sure you don’t run out of federal funding.” She said RAP could lower bills for some borrowers but raise them for others, depending on income and debt. WJLA
But the interest break may be outweighed by higher required payments or fewer repayment choices. SAVE borrowers must first leave that plan, while people in default must restore their loans to good standing before becoming eligible. RAP prevents unpaid interest from increasing balances, yet some borrowers could see monthly bills rise by hundreds of dollars compared with SAVE.
The practical trade is straightforward. Borrowers who can sustain automatic payments receive a modest, two-year price break; in return, the new system puts more weight on consistent payment and offers less room to change course after new borrowing. The July 1 date matters especially for consolidation, which creates a new loan and can permanently restrict access to older income-driven options.
