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Student loan rate doubling: Lesser of two evils?

Kelly Dilworth

Once again, Congress is running out of time. Interest rates on federally subsidized Stafford loans are poised to double on Monday, July 1.

Unless U.S. lawmakers come to a last-minute agreement before then — which is unlikely since most are taking next week off for the July 4 holiday — interest rates on new federally subsidized loans will jump from 3.4 percent to 6.8 percent.

That means, beginning this fall, students who borrow the maximum amount allowed by the federal program — which is aimed exclusively at students who demonstrate real financial need — will owe an extra $4,500 in interest over the life of the loan, according to a June 2013 report issued by Congress’s Joint Economic Committee. Rates on student loans are about to double

It’s possible that a newly rejuvenated Congress will come up with a belated solution once it returns from its weeklong vacation. If so, students who sign their loan agreements in August may not have to pay the higher rate.

However, like most Congressional debates these days, the likelihood that U.S. lawmakers will suddenly smooth over their differences and work out a post-deadline compromise seems slim.

On Wednesday, June 27, for example, a sort-of-bipartisan committee made up of three very conservative Republican senators, a conservative Democrat and an Independent who caucuses with the Democrats pitched a bill that ties interest rates on all federal student loans, including subsidized Stafford loans, to the U.S. Treasury 10-year borrowing rate. (The total amount of interest the federal government would charge on a student’s loan would also include a small percentage, ranging from 1.85 percent for subsidized and unsubsidized Stafford loans to 4.4 percent for PLUS loans, in order to make up for the costs of financing the loan.)

The bill — dubbed the “Bipartisan Student Loan Certainty Act” — would mean lower rates, for now. Market-based rates, such as the U.S. Treasury 10-year borrowing rate, are currently ultra-low thanks to the Federal Reserve’s rock-bottom interest rate policy. So students who would borrow under the Student Loan Certainty Act now would pay far less than they otherwise would if rates on subsidized Stafford loans are allowed to hit 6.8 percent.

“This bill allows borrowers to take advantage of today’s low rates while protecting taxpayers from subsidizing artificial rates,” said Sen. Tom Coburn in a statement. Once those market-based interest rates begin to rise (as they are wont to do in normal economic environments), the amount that students pay could significantly exceed 6.8 percent.

That possibility — along with conservatives’ refusal to cap to the amount students have to pay, unless the loans are consolidated — has made some Democrats say that lawmakers’ recent bipartisan-ish proposal is already dead in the water.

“Any proposal that lacks a cap is a nonstarter and indicates that its proponents are putting their ideology above students and their families,” said Allison Preiss, a spokeswoman for Sen. Tom Harkin of Iowa, in an interview with ABC News.

Talking with the New York Times, Sen. Dick Durbin sounded even more pessimistic: “I don’t know,” said Durbin. “Student groups said: ‘Let it double. We’d rather see it double to 6.8 than the alternatives we’ve heard.'”

In the meantime, while Congress continues to quarrel, borrowers who have already signed up for the loans that are available now are fretting over the possibility that they may never be able to repay their student debt.

The same day that Senators Coburn, Burr, Manchin, Alexander and King announced the “Bipartisan Student Loan Certainty Act,” the Urban Institute released a report showing that 57 percent of respondents to a recent survey said they were worried they may never be able to repay their student loans.

That includes people with relatively high incomes. Thirty-six percent of respondents with household incomes over $100,000, for example, told researchers that being able to pay back their student loans is a significant concern for them. And 72 percent of households with incomes below $25,000 also said they’re worried about their ability to repay.

That’s an awful lot of people who say they’re seriously entertaining the possibility that they may one day default on their student loans. If that many people are insecure about their ability to repay the debt they’ve got, then Congress has one more looming problem to bicker about.

After all, if most people today aren’t sure they’ll be able to pay back what they owe, how many of those borrowers will one day leave lenders, such as the federal government, on the hook for unpaid student debt?

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