Interest rates on federal student loans will double, if President Obama and Congress cannot agree on an alternative in the coming weeks.
However, a House Republican plan could make it even more costly for future graduates to repay money borrowed to finance their education.
Rates for millions of students taking out Stafford loans for the next academic year will double from 3.4 percent to their pre-recession level of 6.8 percent.
Legislation in 2007 gradually reduced the rates over the next three years. They were scheduled to return to the original rate last year, but that was a presidential and congressional election year leading President Obama and Congress to extend the lower rates another year. Now there is pressure to find a solution that will end the year-to-year uncertainty.
Legislation drafted by House Republicans would initially give students a break on interest rates, but students could end up paying more than if rates were restored to the 6.8 percent level, according to Congressional Budget Office calculations.
The GOP plan would reset rates on student loans every year based on 10-year Treasury notes with another 2.5 percentage points added on and future rates being capped as sought by Democrats.
The proposal would reduce rates immediately, but they would rise in coming years. The CBO estimates that students who borrow the maximum in subsidized and unsubsidized student loans would pay $12,374 in interest compared to $7,033 under current rates and $10,867 if Congress did nothing and rates doubled on July 1.
Changes in rates would affect new loans, not those currently held. In the 2010-11 academic year, nearly 7.5 million undergraduates funded their education with a subsidized Stafford loan with 36 million students borrowing through all federal programs.
The costs would add to steadily mounting debt held by college graduates, two-thirds of whom finish college owing more than $25,000 in student loans. One in 10 owe more than $54,000. Outstanding student loan debt of $1.1 trillion exceeds credit card and auto loan debts. Graduates struggling with a heavy debt load have less money available to buy a car or make a down payment on a house. The GOP plan could cause students to delay those purchases even longer.
However, more flexible approach is needed, such as one that links interest rates to another benchmark like the Federal Reserve discount rate as some have suggested. It also has to include caps to keep rates from rising beyond levels affordable for low- and middle-income students.
A long-term plan would also remove the politics from future loan rates.