diff --git a/packages/kestrel_core/src/kestrel/config.py b/packages/kestrel_core/src/kestrel/config.py
index 9955c4f3..9bc10275 100644
--- a/packages/kestrel_core/src/kestrel/config.py
+++ b/packages/kestrel_core/src/kestrel/config.py
@@ -16,7 +16,7 @@
 def load_default_config():
     _logger.debug(f"Loading default config file...")
     default_config = load_data_file("kestrel", "config.yaml")
-    return yaml.safe_load(default_config)
+    return yaml.safe_load(os.path.expandvars(default_config))
 
 
 def load_user_config(config_path_env_var, config_path_default):
@@ -27,7 +27,7 @@ def load_user_config(config_path_env_var, config_path_default):
         try:
             with open(config_path, "r") as fp:
                 _logger.debug(f"User configuration file found: {config_path}")
-                config = yaml.safe_load(fp)
+                config = yaml.safe_load(os.path.expandvars(fp.read()))
         except FileNotFoundError:
             _logger.debug(f"User configuration file not exist.")
     return config
diff --git a/packages/kestrel_core/tests/test_config.py b/packages/kestrel_core/tests/test_config.py
new file mode 100644
index 00000000..d3ee2830
--- /dev/null
+++ b/packages/kestrel_core/tests/test_config.py
@@ -0,0 +1,60 @@
+import kestrel.config.utils as cfg
+import os
+
+
+def test_env_vars_in_config():
+
+    test_config = """---
+credentials:
+  username: $TEST_USER
+  password: $TEST_PASSWORD
+    """
+    os.environ["TEST_USER"] = "test-user"
+    os.environ["TEST_PASSWORD"] = "test-password"
+    os.environ["KESTREL_CONFIG"] = os.path.join(os.sep, "tmp", "config.yaml")
+
+    with open(os.getenv("KESTREL_CONFIG"), "w") as fp:
+        fp.write(test_config)
+    config = cfg.load_config()
+    assert config["credentials"]["username"] == "test-user"
+    assert config["credentials"]["password"] == "test-password"
+
+
+def test_env_vars_in_config_overwrite():
+
+    test_config = """---
+credentials:
+  username: ${TEST_USER}
+  password: ${TEST_PASSWORD}
+debug:
+  cache_directory_prefix: $KESTREL_CACHE_DIRECTORY_PREFIX
+    """
+    os.environ["TEST_USER"] = "test-user"
+    os.environ["TEST_PASSWORD"] = "test-password"
+    os.environ["KESTREL_CONFIG"] = os.path.join(os.sep, "tmp", "config.yaml")
+    os.environ["KESTREL_CACHE_DIRECTORY_PREFIX"] = "Kestrel2.0-"
+    with open(os.getenv("KESTREL_CONFIG"), "w") as fp:
+        fp.write(test_config)
+    config = cfg.load_config()
+    assert config["credentials"]["username"] == "test-user"
+    assert config["credentials"]["password"] == "test-password"
+    assert config["debug"]["cache_directory_prefix"] == "Kestrel2.0-"
+
+def test_empty_env_var_in_config():
+    test_config = """---
+credentials:
+  username: ${TEST_USER}
+  password: ${TEST_PASSWORD}
+debug:
+  cache_directory_prefix: $I_DONT_EXIST
+    """
+    os.environ["TEST_USER"] = "test-user"
+    os.environ["TEST_PASSWORD"] = "test-password"
+    os.environ["KESTREL_CONFIG"] = os.path.join(os.sep, "tmp", "config.yaml")
+    os.environ["KESTREL_CACHE_DIRECTORY_PREFIX"] = "Kestrel2.0-"
+    with open(os.getenv("KESTREL_CONFIG"), "w") as fp:
+        fp.write(test_config)
+    config = cfg.load_config()
+    assert config["credentials"]["username"] == "test-user"
+    assert config["credentials"]["password"] == "test-password"
+    assert config["debug"]["cache_directory_prefix"] == "$I_DONT_EXIST"