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Student loans 101: The interest rate uproar

Lawmakers on both sides of the aisle agree: It would be a mistake to let interest rates on student loans double in July. Especially if they’re going to be blamed for it.

Student loans have become a political football. The rhetoric has created confusion - and perhaps unnecessary alarm.

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The debate centers on a type of federal loan for undergraduates, Stafford loans. The interest rate is set to jump to 6.8 percent on July 1, from 3.4 percent. Congress can’t agree on exactly how to fund a one-year extension of the current rate, which the government estimates would cost $6 billion.

The debate underscores the broader problem of student debt.

“Higher education is practically a necessity and it’s getting harder and harder to afford,’’ said Rich Williams, an advocate with US PIRG, which lobbies on student loan issues.

Not everyone who has a student loan would be affected. For those who would be, the impact might not be as dire as feared. Here’s what you need to know:

Who’s affected. Stafford loans are either subsidized or unsubsidized. With subsidized loans, the government pays the interest while the student is in school. Eligibility is based on need; about 70 percent who qualify for subsidized loans have a family income of less than $50,000. With unsubsidized loans, interest accrues right away.

The debate involves only subsidized Stafford loans.

Subsidized loans currently come with a fixed rate of 3.4 percent. Unsubsidized Stafford loans carry a fixed interest rate of 6.8 percent.

What it costs. The impact of a higher rate would depend on the size of the loan and the repayment period. But in general, the White House says, keeping the rate at 3.4 percent for another year would save borrowers $1,000 over the life of the loan. That’s assuming a 12-year repayment on a $4,200 loan.

How it came about. The 3.4 percent rate has been in place only for a year, the result of legislation passed in 2007. Rather than cut the rate in half right away, the legislation gradually lowered the rate to its current level over four years.

“Everyone’s surprised that the interest rate is going to double. But we knew when this was going to occur,’’ said Mark Kantrowitz of FinAid.org.

Still, it comes full circle back to the reason for the legislation in the first place - reducing ballooning college costs. That’s not a financial burden that has improved with time.

“We need to buy some time to determine what the rate should be going forward,’’ Williams said.

The House voted to keep the rate from doubling, but that was largely symbolic because the package is going nowhere in the Democrat-dominated Senate. The Senate plans a vote next week. The Senate version has a different funding plan; the sides will need to resolve differences.

Candice Choi writes for the Associated Press.
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