Student loan interest rates are set to double July 1, from 3.4 percent to 6.8 percent but a gridlocked Congress has yet to act to prevent the hike from taking effect.
The interest rate increase on Stafford loans would bring subsidized loans up to the same rate as unsubsidized ones for any new undergraduates seeking assistance financing college. In 2007, both types of loans had an equal interest rate of 6.8 percent, but a bill in Congress gradually reduced the subsidized rate, reaching 3.4 percent in 2011. Its aim was to make college more affordable and was to last until 2013, but the reduced rates were ended for budgetary reasons and the law's expiration was moved to 2012. Last June, it was extended one year in a compromise after President Barack Obama encouraged Congress to keep the lower rates.
The July 1 rate hike would not affect those who have graduated but are still paying back their loans.
There are differing proposals in Congress to deal with the issue. House Republicans want to allow student interest loan rates to vary year to year, pegged to the U.S. treasury rate. It passed a bill that would match student rates to the treasury rate, plus 2.5 percentage points, but it has not been taken up in the Senate and Obama said he would veto it.
Republican Rep. John Kline of Minnesota, chairman of the House Education and Workforce Committee and author of the House bill, accused Senate Democrats of obstructing a solution to the issue by refusing to take up the bill, and said the "11th-hour scrambling" demonstrates why politics shouldn't be a part of the debate:
Our students deserve better. We're in this predicament because politicians put themselves in charge of setting interest rates, guaranteeing exactly this type of down-to-the-wire uncertainty for students and their families. What we need is a long-term solution that gets Washington out of the business of setting rates altogether.
Obama's plan to keep interest rates low would also peg them to the treasury, but add .93 percentage points. Senate Democrats don't like either the House plan nor Obama's, and have proposed several different plans. With a lengthy debate on immigration legislation just having ended, the Senate is unlikely to pass any plan before the July 1 deadline.
Some say the business of student loans should be left to private companies, with the government staying out altogether. Writing for U.S. News, higher education writer Jay Schalin said lenders should give out loans based upon a student's likelihood of repayment:
Higher interest rates would cause some to reconsider signing away their futures before spending several years discovering that they don't like college, or before they find that their incomes after graduation don't let them live independently while repaying. Better options exist for young people who are not academically inclined.
The 3.4 percent and 6.8 percent loan rates are essentially arbitrary numbers that say nothing about the potential lack of returns to a college education. The Republicans' plans are only slightly better: they may be tied to a market rate, but one that is based on political decisions and overall confidence in the economy, not on students' chances for collegiate and post-collegiate success.
Student debt in the United States currently totals more than $1 trillion. College costs have soared, increasing 7.45 percent per year from 1978 to 2011 – a rate that exceeds both inflation and family income growth. The high level of debt and rate of default damages the economy by limiting other types of borrowing and delaying marriage and homebuying.