Student loan rates will double to 6.8 percent on July 1 after Congress failed to strike a deal on subsidized Stafford loans. More than 7 million students from poor families finance their education through the program, according to James Rowley of Bloomberg. Senators are now gone for a one week break without reaching an agreement about the automatic increase. The current student loan rate cap will expire on Monday.

Student Loans

The key difference between Republicans and Democrats was the nature of the caps. The GOP wants it to be tied to 10-year Treasuries (currently about 2.5 percent) plus 2.5 percent, but Democrats are vying for an absolute cap. Senators agreed on at least one thing. They scheduled July 10 vote on S. 1238 bill that proposes to keep current student loan rate in place until 2014.

Rhode Island Democrat Jack Reed told reporters that the most appropriate option for students is to extend the 3.4 percent rate for one more year. Subsidized Stafford is the most popular student loan type. Students from poor families, and the ones who are no longer dependent on their parents, can borrow at 3.4 percent interest rate. If Congress doesn’t act by July 1, the rate will shoot up to 6.8 percent, which is the unsubsidized Stafford loan rate available to any student, irrespective of income.

A Student Loan Crisis?

According to the New York Fed, the percentage of 25-year old Americans with a student loan has increased from 25 percent in 2003 to 43 percent in 2012. The average debt balance has increased 91 percent in the same period from $10,649 to $20,326. According to the Consumer Financial Protection Bureau data, the total student loan balance stands at about $1.2 trillion. Economists have warned that the growing student debt can hinder U.S. economic growth. A large portion of young workers’ income is going toward student loan payments, leaving them with little cash for other purposes.

The worse thing is that college graduates who are unemployed or have a low paying job remain under the burden of student loans. And there is a large population of students who raise loans to fund their education but don’t graduate at all. The National Student Clearinghouse Research Center says that over 40 percent of students who enroll into a four-year program fail to graduate within six years. And they still have a student loan to pay.

Congress Has To Act

Morgan Stanley analyst Suzanne E. Stein said in a research report that the increased Stafford loan rates would weigh on for-profit institutions, especially in terms of new starts. However, Stein says that increasing rates on student loans would prove politically unpopular. It impacts a large segment of the U.S. population, so it will draw greater reaction from the public. That’s why Morgan Stanley expects Congress to reverse the rates.