More than 7 million students will see interest rates on their student loans double from 3.4 to 6.8 percent on Monday, after the failure of Congress to pass legislation to prevent the automatic rate hike that they successfully deferred for a year last summer.
Despite the introduction of several bills to serve as a solution, lawmakers will leave for the week-long July 4 recess without implementing any of them, letting the July 1 deadline pass. Any students taking or renewing federal subsidized Stafford loans after that deadline can expect to pay, for example, an additional $3,000 on a $23,000 loan paid off over 10 years.
Without a deal, the measures known as the “fiscal cliff” will take effect in January.
Bernanke also said Congress must raise the federal debt limit to prevent the government from defaulting on Treasury securities. Failure to do so would impose heavy costs on the economy, he said. Bernanke said Congress also needs to reduce the federal debt over the long run to ensure economic growth and stability.
Uncertainty about all these issues is likely holding back spending and investment and troubling investors, the Fed chairman said in a speech to the Economic Club of New York.
Resolving the fiscal crisis would prevent a sudden and severe shock to the economy, help reduce unemployment and strengthen growth, he said.
“A stronger economy will, in turn, reduce the deficit and contribute to achieving long-term fiscal sustainability,” Bernanke told the group.