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Student loan interest rates set to double July 1

By Philip Elliott

Associated Press

Published: Thursday, March 28 2013 2:04 p.m. MDT

Congressmen walk down the steps of the House of Representatives at the Capitol,Wednesday, Dec. 5, 2012.

J. Scott Applewhite, Associated Press

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WASHINGTON — Incoming college freshmen could end up paying $5,000 more for the same student loans their older siblings have if Congress doesn't stop interest rates from doubling.

Sound familiar? The same warnings came last year. But now the presidential election is over and mandatory budget cuts are taking place, making a deal to avert a doubling of interest rates much more elusive before a July 1 deadline.

"What is definitely clear, this time around, there doesn't seem to be as much outcry," said Justin Draeger, president of the National Association of Student Financial Aid Administrators. "We're advising our members to tell students that the interest rates are going to double on new student loans, to 6.8 percent."

That rate hike only hits students taking out new subsidized loans. Students with outstanding subsidized loans are not expected to see their loan rates increase unless they take out a new subsidized Stafford loan. Students' non-subsidized loans are not expected to change, nor are loans taken from commercial lenders.

The difference between 3.4 percent and 6.8 percent interest rates is a $6 billion tab for taxpayers — set against a backdrop of budget negotiations that have pitted the two parties in a standoff. President Barack Obama is expected to release his budget proposal in the coming weeks, adding another perspective to the debate.

Last year, with the presidential and congressional elections looming, students got a one-year reprieve on the doubling of interest rates. That expires July 1.

Neither party's budget proposal in Congress has money specifically set aside to keep student loans at their current rate. House Republicans' budget would double the interest rates on newly issued subsidized loans to help balance the federal budget in a decade. Senate Democrats say they want to keep the interest rates at their current levels but the budget they passed last week does not set aside money to keep the rates low.

In any event, neither side is likely to get what it wants. And that could lead to confusion for students as they receive their college admission letters and financial aid packages.

"Two ideas ... have been introduced so far — neither of which is likely to go very far," said Terry Hartle, the top lobbyist for colleges at the American Council on Education.

House Republicans, led by Budget Committee Chairman Paul Ryan, have outlined a spending plan that would shift the interest rates back to their pre-2008 levels. Congress in 2007 lowered the rate to 6 percent for new loans started during the 2008 academic year, then down to 5.6 percent in 2009, down to 4.5 percent in 2010 and then to the current 3.4 percent a year later.

Some two-thirds of students are graduating with loans exceeding $25,000; one in 10 borrowers owes more than $54,000 in loans. And student loan debt now tops $1 trillion. For those students, the rates make significant differences in how much they have to pay back each month.

For some, the rates seem arbitrary and have little to do with interest rates available for other purchases such as homes or cars.

"Burdening students with 6.8 percent loans when interest rates in the economy are at historic lows makes no sense," said Lauren Asher, president of the Institute for College Access and Success, a nonprofit organization.

Both House Education Committee Chairman John Kline of Minnesota and his Democratic counterpart, Rep. George Miller of California, prefer to keep rates at their current levels but have not outlined how they might accomplish that goal.

Rep. Karen Bass, a California Democrat, last week introduced a proposal that would permanently cap the interest rate at 3.4 percent.

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