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Lawmakers plan retroactive fix on student loan interest rates

By Elvina Nawaguna

WASHINGTON (Reuters) - U.S. lawmakers are aiming to pass a retroactive fix this week after congressional inaction caused interest rates on millions of new federal student loans to double on July 1.

Rates on Stafford Loans spiked to 6.8 percent after a gridlocked Congress failed to compromise on competing plans to avert the automatic increase.

The Senate plans on Wednesday to vote on whether or not to move forward with a Democrat-sponsored bill to return the interest rates to 3.4 percent for another year.

"There is still time to turn it back before the academic year begins," Democratic Senator Jack Reed of Rhode Island said in an interview on Monday.

"We've spoken to the Department of Education and we believe if we move quickly enough in the next few days they can adjust their lending program," Reed said.

Democrats backing that bill say rates should be frozen at the lower level as Congress continues to debate the wider issue of college affordability. A previous Democrat-backed measure pushing for a two-year extension failed in the Senate last month.

It was unclear how the Republicans would vote on a one-year extension.

The bill would ensure that future federal student loans would come with the 3.4 percent rate and would prevent students who took out loans since July 1 from paying the higher rates.

Outstanding student loan debt in the U.S. now exceeds $1 trillion, and lawmakers and economists worry it is stifling young borrowers and the rest of the economy.

Republicans and Democrats agree that student loan interest rates should be kept low but disagree on how to do that.

MARKET-BASED PLAN

Passage of a bill to keep the rates at 3.4 percent in the Republican-controlled House of Representatives is uncertain, even though Democrats and Republicans appear to recognize the need to quickly reverse last week's increase.

The House passed a market-based plan in May. But that bill did not make it to the Senate, and Republicans in the House continue to push for their own market-based solution.

In the meantime, other lawmakers are pushing what they are calling a bipartisan market-based bill.

The proposal by Democratic Senator Joe Manchin of West Virginia and Republican Senator Richard Burr of North Carolina would set interest rates every academic year to the 10-year Treasury borrowing rate, plus 1.85 percent for undergraduate Stafford loans and 3.4 percent for graduate Stafford loans.

The interest rate would be fixed for the life of the loan. It also caps the rates at 8.25 percent. That plan would reduce the federal deficit by $1 billion over 10 years, Republicans say, citing estimates from the Congressional Budget Office.

"We're working to educate senators about the merits of this bipartisan bill and build consensus around a strategy that protects students and taxpayers equally," a Republican aide told Reuters. "There's no reason the Manchin-Burr proposal couldn't be signed by the president by the end of the week."

But Senate Majority Leader Harry Reid has said he would not allow any bill that would peg student loan interest rates to the markets or use student loans to fund the deficit.

"If you can explain to me why these proposals the Republicans have are better than having the rates double, please explain this to me," Reid said on Tuesday. "We all know that interest rates are going to go up."

Reid also is opposed to a similar market-based plan in President Barack Obama's 2014 budget proposal.

Both sides know there is a likelihood of a filibuster and continue to point fingers at each other for inaction.

The Democrat-led Senate already killed two other bills addressing student loan interest rates.

"The House has done its job and the fact is that it's students who are going to pay the price when they see their interest rates double," House Speaker John Boehner told journalists on Tuesday.

(Reporting by Elvina Nawaguna; Editing by Karey Van Hall and Xavier Briand)

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