The Education Department said Thursday it would temporarily lower federal student loan interest rates by up to one percentage point starting July 1. The reduction will last for two years.
In a phone call with reporters, Nicholas Kent, the under secretary of education, said that just over a third of federal student loan borrowers were current on their loans. At the end of last year, just 40.1 percent of people had enrolled in automatic payments. At the end of 2019, the figure was more than twice that.
To get the interest rate reduction, borrowers will have to enroll in automatic payments. People who are already enrolled will get 0.75 percentage points shaved off their interest rate, since enrolling in auto payment already yields a 0.25 percentage point rate deduction. They will not need to register to get that additional 0.75 percent.
“If we want a sustainable federal student loan system for future generations, we must improve its performance,” Mr. Kent said.
Mr. Kent described the rate reduction as a “benefit that has proven effective in helping borrowers remain in good standing.”
The change comes less than two weeks before millions of federal borrowers will be notified that they will need to choose a new repayment plan as part of a broad overhaul of the student loan system. The Biden-era repayment plan known as SAVE — short for Saving for a Valuable Education — is being officially dismantled, and its seven million enrollees will need to choose their next best option. Their payments have been on hold for nearly two years.
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