Student loan rates to double if Congress doesn't act

WASHINGTON (CNN Money) - With federal student loan interest rates set to double July 1, the Senate will consider on Tuesday a bill to extend low 3.4% rates for another year.

In Washington, many lawmakers in both parties agree they'd like to extend the current 3.4% rates for another year. What they don't agree on is how to offset the $6 billion it would cost to do so -- a substantial hurdle.

House Republicans passed a measure that would pay for extending the lower student loan rate by cutting from a health care fund that promotes preventive care. President Obama vowed to veto that bill.

President Obama and Senate Democrats want to pay for the measure by eliminating some tax benefits for small business owners.

Senate aides told CNN they expect the Senate to take up the bill extending low rates. But they don't know whether the Senate will ultimately end debate on the bill and pass it later this week.

"Students in this country owe more than $870 billion in student loans - more than is owed to the credit card companies or on auto loans," said Ohio Sen. Sherrod Brown last week. "It makes no sense to do this to our young people trying to get an education."

If Congress doesn't act by July 1, more than 7 million undergraduates taking out federally subsidized loans to cover next year's tuition will have to dig deeper in their pockets to pay them off.

The average cost to students would be $1,000 in increased student loan debt, according to the White House.

While the issue has been brewing for months, President Obama turned it into a big political flashpoint, using the issue to stump for votes. His Republican rival Mitt Romney says he, too, believes Congress should step in.

With subsidized student loans, the federal government absorbs some of the interest rate for lower- and middle-income families based on financial need.

Most students, including graduates, pay 6.8% on so-called subsidized Stafford loans.

But in 2007, lawmakers temporarily cut the rate for undergraduates taking out those loans up to the 2011 school year. The lower rates were phased in, so students have really only enjoyed the lowest 3.4% rate on subsidized federal loans for one school year. The 2007 law allowed interest rates to revert back to 6.8% for the 2012-2013 school year starting July 1.

Students are paying close attention to the issue. With unemployment just below 24% for teenagers and 14% for those ages 20 to 24, more young people are going back to school or staying in school, according to recent data by Equifax.

Additionally, more students struggle to pay back these loans. Student loan delinquencies with payments more than three months late rose 14.6% in 2011 from the year before, according to Equifax.

One student financial loan expert, Jason Delisle of the left-leaning New America Foundation, points out that there are programs already in existence that ease the repayment burden for unemployed and under employed graduates. He thinks the federal government can help more students in other ways -- like sustaining funding for Pell Grants for lower income students.

Delisle points out that even the 6.8% interest rate is also a subsidized rate that's lower than what students will find on the private market.

But Rich Williams, of U.S. Public Interest Research Groups, said extending the lower rates is really a debate is over how the federal government raises revenue. (Extending the lower rates costs $6 billion, because the federal government would collect $6 billion less in interest payments from undergraduate students.)

"If the government wants to raise revenues there are plenty of ways to make that happen, but they certainly should not do it on the backs of students," Williams said.

-- CNN's Ted Barrett contributed to this report.