Unless Congress fulfills a pledge to restore lower rates when it returns after the July 4 holiday, students receiving new loans for college starting in the fall term will see interest rates twice what they were in the spring.
Subsidized Stafford loans, which account for roughly a quarter of all direct federal borrowing, went from 3.4% interest to 6.8% interest on Monday. Congress' Joint Economic Committee estimated the cost passed to students would be about $2,600. Students only borrow money for one year at a time. Loans secured before Monday are not affected by the increase.
Lawmakers knew for the past 12 months that the July 1 deadline was looming but were unable to strike a deal to avoid the hike. Both parties during last year's presidential race pledged to extend the 3.4% interest rates for another year to avoid angering young voters.
Both parties have since tried to blame the other for the hike and student groups complained the increase would add to student loan debt that already surpasses credit card debt in the U.S.
The Democratic-led Senate has pledged to revisit the issue as soon as July 10 and retroactively restore the rates for another year - into 2014, when a third of Senate seats and all House seats are up for election. The expected increase had lacked urgency as Congress last week left town for the holiday without an agreement.
Obama's budget proposal included a measure that would have linked student loan interest rates with the financial markets. Fellow Democrats did not like that because there were no guarantees interest rates would not skyrocket if the economy improves. The Republican-led House had co-opted the president's proposal and passed a bill in May that linked interest rates to the financial markets but with a cap on how high rates could climb. The Democratic-led Senate, meanwhile, tried for a two-year extension that failed to overcome a procedural hurdle. A Republican measure, similarly, came up short.
Finally, an attempt at a bipartisan agreement fizzled last week when the Democratic chairman of the Senate education panel, Sen. Tom Harkin of Iowa, declared it a non-starter and urged lawmakers to extend the rates for one more year - when they return next week.