The US Department of Education’s (ED’s) Federal Student Aid office recently announced an expansion of automatic payment (autopay) benefits for student loan holders with the aim to increase the number of borrowers making on-time payments. The time-limited expansion offers Direct loan holders who enroll in autopay a 1 percentage point reduction on interest rates, up from 0.25 percentage points, between July 1, 2026, and June 30, 2028.
This initiative, the only type of repayment incentive ED can offer, may help some borrowers stay current, but it’s unlikely to substantially affect repayment outcomes for borrowers most at risk of delinquency. Other policies, such as supporting borrowers in accessing income-driven repayment (IDR) plans and transitioning out of default, are more likely to help struggling student loan borrowers, given delinquency trends in the wake of the COVID-19 pandemic.
To better support student loan borrowers, policymakers should consider allowing ED the flexibility to provide other repayment incentives and strengthen IDR systems.
Why autopay incentives are unlikely to affect at-risk borrowers’ repayment outcomes
There are several reasons why offering an interest rate reduction to borrowers enrolling in autopay is unlikely to move the needle on severe delinquency and default.
1. Risk of borrower overdraft
Research has shown that being nudged into autopay can increase the likelihood of making current payments on credit cards, and because most student loan borrowers have bank accounts, they’d be able to enroll. But autopay also puts borrowers at risk of overdraft fees if their balance doesn’t cover the payment.
In a national survey of student loan borrowers in 2023–24, 63 percent reported difficulty making their student loan payments at any point, and 37 percent reported missing payments. For borrowers who may not be able to fully cover their student loan payment each month, autopay could carry a greater risk of overdraft fees than manual payments.
2. Administrative burden of autopay signup
In 2023, researchers worked with ED to develop a behaviorally informed email campaign for nearly 13 million student loan borrowers who missed at least one student loan payment after the federal loan repayment pause ended. These emails promoted the benefits of enrolling in IDR plans and in autopay. Broadly, the experiment boosted IDR enrollment by about 1.1 percentage points relative to a control group, but it had little effect on autopay enrollment.
Borrowers may not have opted for autopay, given the additional steps needed for enrollment. Though borrowers can enroll in IDR through a universal form on ED’s website, autopay enrollment requires logging into a servicer website to set up. Further, if student loans are transferred between servicers, IDR information is retained, but borrowers typically need to reconfigure autopay with their new servicer.
3. Small benefits for borrowers
In practice, an additional 0.75 percentage point reduction will change the typical borrower’s monthly payments by only a few dollars, or not at all. For example, the payments for borrowers on IDR are unlikely to change, as these payments are determined by income and household size. And borrowers who need to use deferment or forbearance won’t receive the benefits of the interest rate reduction when they’re not in active repayment.
Even the borrowers who could see a benefit—those on a standard or graduated repayment plan—would only realize small monthly savings. The largest savings will go to borrowers with larger balances and higher interest rates: typically those who used loans for graduate school.
Assuming the 1 percentage point reduction was applied across 10 years of repayment, instead of 2 years, an undergraduate borrower with $5,000 in Direct Subsidized loans (6.39 percent interest rate) would save just $2 a month (from $56 to $54). In contrast, a graduate borrower with $188,500 in loans ($138,500 in Direct Unsubsidized loans at 7.94 percent interest and $50,000 in PLUS Graduate loans at 8.94 percent) would save $74 a month (from $2,283 to $2,209).
Pushing against a wave of delayed defaults
Before the pandemic, roughly a million federal Direct loan borrowers defaulted each year. The pause in student loan repayment stopped the flow of borrowers into default, but when payments resumed, there was a large increase in delinquency. Eventually, some of these loans moved toward default after the one-year “on-ramp” period ended in October 2024.
As millions of borrowers move out of administrative forbearance because of the overturning of the SAVE IDR plan, it’s likely another wave of delinquencies and defaults will happen over the next year. ED will need to support these borrowers’ transition to repayment, and the autopay discount likely won’t reach borrowers who most need support.
Policymakers looking to do more for borrowers should consider embracing robust strategies that engage and support at-risk borrowers, such as full implementation of automatic enrollment in IDR and changes to the default system.
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