People with federal student loans may be eligible for a break on their monthly payments — if they act before an upcoming deadline. 

Student loan borrowers can earn a stepped-up interest rate discount of 1%, compared to the usual 0.25%, if they enroll in the U.S. Department of Education’s automatic payment feature before Sept. 30. 

“This interest rate reduction will help borrowers as they consider new, affordable repayment plans and work to repay their loans on time,” Under Secretary of Education Nicholas Kent said in a statement when the enhanced discount was adopted last month. “We expect this temporary incentive to drive up repayment rates and significantly improve the overall health of the federal student loan portfolio.” 

Here’s what to know. 

What is auto pay?

When enrolled in the optional feature, student loan borrowers’ payments are automatically deducted from their checking or savings account every month. Enrolling in the service is free of charge.

Currently, only about 40% of student loan borrowers are registered for automatic repayments. The Education Department would like to double that to roughly 80%, the figure before the pandemic. 

Who is eligible?

Borrowers with government loans issued after July 1, 2012, are eligible for the interest rate discount. 

People who are already enrolled in automatic student loan payments, as well as borrowers who sign up before the September deadline, are eligible for the discount. That rate relief, which is available only to borrowers enrolled in autopay before the Sept. 30 deadline, is scheduled to remain in effect until June 30, 2028. 

The autopay discount means an undergraduate borrower with a loan charging, for example, 6.39% interest would see that reduced to 5.39% until mid-2028.

How do I enroll?

Borrowers can sign up for free on their loan servicer’s website and will need to provide their bank account information to enable automatic monthly payments. 

People should sign in to their loan servicer account, select “auto pay” from the navigation menu, enter their banking details and confirm the payment amounts, according to guidance from the Education Department. 

Are there any drawbacks?

People who enroll in automatic loan payments could face overdraft fees if they exceed their account balance. 

“Automatic payments can help you avoid late fees on your bills. But if you forget to track your account balance and it’s too low when a payment is due, you might have to pay overdraft or nonsufficient funds fees,” the Consumer Financial Protection Bureau (CFPB) warns. 

The Urban Institute also notes that the financial benefits of an interest-rate cut on student loans may be minor. For instance, over 10 years, a 1 percentage point interest rate reduction for a borrower with $5,000 in loans at a 6.39% rate would save only $2 per month on their payment, according to the nonpartisan think tank. 

The savings could be significantly higher for larger loan amounts, however. The average federal student loan borrower owes roughly $40,000, according to research firm Education Data Initiative.

Roughly 9.5 million Americans, or 1 in 5 federal student loan borrowers, are in default, meaning they are more than nine months behind on their payments.