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Federal student loan borrowers who sign up for automatic payments by Dec. 31 can cut their interest rate by a full percentage point. The cut covers Direct Loans paid out on or after July 1, 2012.
The discount for automatic payments, known as auto pay, used to be a quarter of a percentage point. It rose to a full point on July 1, according to the Higher Education Loan Authority of the State of Missouri, known as MOHELA, which manages federal student loans for the U.S. Department of Education.
In practice, a loan with a 6% interest rate drops to 5% with auto pay, instead of 5.75% under the old discount. The larger cut is temporary and runs through June 30, 2028.
Borrowers who aren’t signed up yet have until 11:59 p.m. EST on Dec. 31 to enroll through their loan servicer, the company that collects their payments. Those already on auto pay with eligible loans get the bigger discount automatically.
Which federal student loans can get their interest rate cut by 1 percentage point?
Only Direct Loans paid out on or after July 1, 2012, get the full percentage point. These are the main type of federal student loan, made by the Education Department itself.
Some older federal loans don’t get the extra cut, including:
- Federal Family Education Loan (FFEL) loans
- Federal Perkins Loans
- Health Education Assistance Loan (HEAL) loans
Private student loans from banks and other lenders aren’t covered, because the discount is part of the federal program.
Borrowers who aren’t sure what kind of loans they have can log in to StudentAid.gov, where their loan details are listed.
How does federal student loan auto pay work?
Once enrolled, the servicer takes the monthly payment straight from a bank account the borrower chooses. That means no mailing checks and no logging in each month to pay by hand.
Signing up is free. MOHELA sends a reminder at least 21 days before each due date, so the withdrawal doesn’t catch anyone off guard.
Borrowers who need to skip a month can ask their servicer to pause the withdrawal and set a different amount for that month.
Auto pay takes only the regular monthly amount. Borrowers who want to pay extra automatically have to change that setting in their online account, MOHELA says.
Can you lose the federal student loan interest rate cut?
Yes. The lower rate lasts only while auto pay stays on and the borrower keeps making payments.
If payments are put on hold through an approved break, called deferment or forbearance, auto pay stops and so does the discount. Both start again on their own when the break ends, according to MOHELA.
Bounced payments are a different story. If three payments in a row fail because the bank account doesn’t have enough money, the borrower is removed from auto pay and loses the lower rate.
How do you sign up for federal student loan auto pay before Dec. 31?
Enrollment happens on the loan servicer’s website. MOHELA borrowers can apply from their online account, where they can also read the auto pay agreement with the full terms.
Borrowers who don’t know which company handles their loans can find their servicer on StudentAid.gov.
Servicers can also help by email or online chat, which the Education Department recommends trying before picking up the phone.