The Student Loan Crisis: Rate Hike Looms on July 1

If the looming student loan crisis were a movie, the title might be something like "Fiscal Cliff, part II: Summer Break Edition." As a recap, here's the basic story: On July 1, interest rates on federally subsidized Stafford student loans are set to double, going from 3.4 percent to 6.8 percent. This rate change would impact an estimated 7 million college students, making college educations more expensive at a time when student loan debt is already crippling the finances of millions of workers.

Much like the fiscal cliff crisis, this year's march toward higher student loan interest rates has been slow and inexorable, a churning machine of bureaucratic incompetence that millions of Americans are dreading but feel powerless to stop. And, like the earlier fiscal cliff crisis, the justifications and soft-pedaling have already commenced. Sen. Tom Harkin (D-Iowa), chairman of the Senate House, Education, Labor and Pensions committee, one group that could conceivably head off this crisis, has suggested that we will probably go off the student loan cliff, noting that legislators "probably can't get anything done this week." Meanwhile, Tennessee Senator Lamar Alexander (R) has volunteered that it would be "pretty easy" to reset student loan interest rates after they go up.

Of course, as sequestration demonstrated, undoing an economic crisis is easier said than done.

It's not as if there aren't any plans on the table: Congress and the president have both proposed linking student loan interest rates to the interest rates on 10-year Treasury notes. Congress' plan would place caps on rates, so that subsidized loans couldn't go above 8.5 percent and unsubsidized loans couldn't go above 10.5 percent. Unfortunately, the congressional plan would also allow rates to fluctuate, which means that a student's interest payments would rise or fall, depending on the Treasury rate.

President Obama's proposal offered fixed rates but did not propose caps, which means that students would always pay the same rate, but that rate might be really high. On the other hand, the president's plan would limit loan debt repayments to 10 percent of a borrower's income, and would retire student loan debt after a borrower has made payments for 20 years.

While the crisis is coming to a head right now, its impacts have been building for years -- and extend far beyond the four years of college. As The New York Times reported earlier this year, student loan debt slows economic growth as college graduates struggling to pay off their loans are often unable to buy cars, buy homes, or otherwise engage the economy.

And then, of course, there's the anxiety that comes with owing lots of money in a sluggish economy. According to a recent study by the Urban Institute, 20 percent of all adults aged 20 and older carry some form of student loan debt, and 57 percent of them are worried about how they're going to pay it off. Put another way, over 10 percent of all adults are worried about their student loan debt.

This problem is especially hard on low earners: 72 percent of people making less than $25,000 per year say that they are worried about their ability to repay. By comparison, only 36 percent of those bringing home more than $100,000 report having the same worries. In context, it's hardly surprising that American Student Assistance, a nonprofit that helps students with their loans, recently made a horror film about the looming loan terror.

As I've written in the past, there are numerous ways to keep your student loan debt down, but if you're facing serious debt now, the big question is how to pay. With that in mind, here's a round-up of some of our favorite ways to cut your student loan payments.

Escape Your Student Loan Debt
%Gallery-157530%


Bruce Watson is DailyFinance's Savings Editor. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.