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A guide to student loans

This photo combo shows President Barack Obama in Chapel Hill, N.C. on April 24, 2012, and Republican presidential candidate, former Massachusetts Gov. Mitt Romney on April 18, 2012 in Charlotte, N.C. Obama and his likely GOP opponent, Romney, agree on an issue of importance to college students: Keeping the interest rate low on a popular federally subsidized student loan issued to low-and middle-income students. This photo combo shows President Barack Obama in Chapel Hill, N.C. on April 24, 2012, and Republican presidential candidate, former Massachusetts Gov. Mitt Romney on April 18, 2012 in Charlotte, N.C. Obama and his likely GOP opponent, Romney, agree on an issue of importance to college students: Keeping the interest rate low on a popular federally subsidized student loan issued to low-and middle-income students. (AP Photo)
By Kimberly Hefling
AP Education Writer / April 24, 2012
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WASHINGTON—President Barack Obama and his likely GOP opponent, Mitt Romney, agree on an issue of importance to college students: Keeping the interest rate low on a popular federally subsidized student loan issued to low-and middle-income students.

The interest rate is scheduled to double on July 1 from 3.4 percent to 6.8 percent on subsidized Stafford loans unless Congress acts. About 7 million undergraduates would be affected, raising costs by an average of $1,000 each, according to the White House.

Obama embarked on Tuesday on a tour through college campuses in North Carolina, Colorado and Iowa to discuss the rate increase. Before he left, however, Romney stole a little wind from his sails by saying he, too, agreed with the need to stop the rate from doubling.

Some questions and answers about student loan debt and the scheduled interest rate hike:

Q: How big of a problem is student loan debt?

A: U.S. student loan debt has surpassed credit card and auto-loan debt, with some estimates putting it at $1 trillion. This debt jeopardizes the fragile recovery and increases the burden on taxpayers. About two-thirds of student loan debt is held by people under 30, according to the New York Fed. Borrowers owe a median $12,800, an amount even advocates for student borrowers acknowledge is usually manageable and more than worthwhile factoring in the economic benefits of a college degree. However, not all borrowers complete a degree -- and the average balance is considerably higher than the median: about $23,000. That reflects a relatively small number of borrowers with very large balances.

Q: Are there signs of improvement?

A: Unlike other forms of consumer debt, student loan debt is growing. The most recent figures show new college graduates with loans owed more than $25,000 when they left school, up 5 percent from the year before. Mark Kantrowitz of the website Finaid.org estimates that 85 percent of student loan debt is owed to the federal government, and those loans typically carry lower rates and borrower protections such as income-based repayment maximums.

However, the number of borrowers defaulting on federal loans has jumped sharply recently. Of 3.6 million borrowers who entered repayment in fiscal 2009, nearly 9 percent defaulted with two years, up from 7 percent for the previous year's cohort. Meanwhile, the College Board said last fall that the average in-state tuition and fees at four-year public colleges rose an additional $631, or about 8 percent, compared with a year ago. The cost of a full credit load has passed $8,000 -- an all-time high.

Q: Why is the interest rate on subsidized Stafford loans expected to double?

A: Acting on a Democratic campaign promise in 2006, Democrats in 2007 crafted the law to progressively lower the interest rate from 6.8 percent to the 3.4 percent rate -- where it is this school year -- and then return to the original 6.8 percent in 2012. Republican President George W. Bush signed the deal into law after it was approved by bipartisan but Democratic-heavy majorities in both chambers. Congress wrote the law this way for one simple reason, says Jason Delisle, director of the federal education budget project at the New America Foundation: cost. It would cost an additional $6 billion annually to keep the interest rate at 3.4 percent.

Q: Are there people who aren't affected by the rate increase?

A: Students issued loans before July 1 won't be hit with the higher rate. It also doesn't affect the interest rates on unsubsidized Stafford loans (now at 6.8 percent) and PLUS loans for parents (now at 7.9 percent). Unlike subsidized Stafford loans, unsubsidized Stafford loans are not based on financial need.

Q: What is the reaction from Congress?

A: Rep. John Kline, R-Minn., chairman of the House Education and the Workforce Committee, has said he and his Republican colleagues are exploring options "in hopes of finding a responsible solution that serves borrowers and taxpayers equally well." He said lofty campaign promises put them in an "untenable situation" and they now must choose between allowing interest rates to rise or "piling billions of dollars on the backs of taxpayers." In the Senate, Sen. Tom Harkin, D-Iowa, chairman of the Senate Committee on Health, Education, Labor and Pensions, said this week he intends to introduce legislation that would extend the interest rate for another year. Then, next year, Harkin said when the Higher Education Act is up for reauthorization, a longer term fix could be reached. He said they are looking at funding options.

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AP Education Writer Justin Pope contributed to this report.

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