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Us - Student-Loan Rates Set To Double Unless Congress Acts

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Unless Congress acts, the interest rate for the most popular government student loans, subsidize Stafford loans, will increase to 6.8 percent from 3.4 percent. Photographer: Seth McConnell/The Denver Post via Getty Images

With just two working days left before the U.S. government doubles a student-loan interest rate, lawmakers are haggling over what to do about it.

The argument isn’t over whether to allow the rate on the most popular type of federal loan to rise above 3.4 percent, the level set by law until July 1. It’s about how much borrowing costs will increase.

“The likelihood of students keeping the interest rate they had for the last two years is diminishing by the hour,” said Terry Hartle, senior vice president at the American Council of Education, the largest lobbying group for colleges and universities. “The outcome will be students will pay more than 3.4 percent in the short term,” he said in a telephone interview.

Unless Congress acts, the interest rate for subsidized Stafford loans, available to undergraduates from low-income families, will increase to 6.8 percent from 3.4 percent. More than 7 million students use that direct-from-Washington loan program.

Instead of passing legislation to extend that rate or set a new flat rate, lawmakers have been negotiating ways to let the rate float by linking it to the yield on the 10-year Treasury note.

Getting an informal agreement on the concept of flexible rates was the easy part. The more challenging part of the negotiations, according to those involved, has been figuring out how much flexibility to build in, and how much profit the government should extract.

Government Profit

Senate Majority Leader Harry Reid contends that there should be no profit at all.

“The issue is this: Republicans want deficit reduction,” the Nevada Democrat said June 25. “We don’t think there should be deficit reduction based on the backs of these young men and women who are trying to go to college.”

Complicating the talks is the more than 50 percent increase in the yield of 10-year Treasury notes, to 2.5 percent, since May 1.

Under a House-passed plan, that would have meant a student loan rate of 4.3 percent, rising to as much as 8.5 percent.

“It’s very clear students would be worse off under that proposal than simply allowing interest rates to double” because rates “would be lower initially but rise as interest rates rise,” said Pauline Abernathy, vice president of the Institute for College Access & Success, a nonprofit research and advocacy group in Oakland, California.

Exploding Debt

Over the past decade, there has been an explosion of student loan debt. It now totals almost $1.2 trillion, with 85 percent consisting of government-backed loans taken out by students and their parents. The rest are made by private lenders like banks or Sallie Mae (SLM), the largest U.S. education-finance company.

The share of 25-year-old Americans with student debt increased to 43 percent last year from 25 percent in 2003, according to the Federal Reserve Bank of New York. During that nine-year period, the average education-loan balance of people in that age group increased 91 percent, to $20,326 from $10,649, according to the New York Fed.

With so much outstanding student debt, borrowers are having trouble contributing to the U.S. economy in other ways.

Excellent so after the sub-prime debacle which was created by teaser rates to get people hooked they are now going to the same with student loans.... I mean what could possible go wrong this time?

Still I'm sure it won't result in debt drag.

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