Parents pay for budget deficit

US students are paying the price for a government budget deficit fuelled by the Iraq War, natural disasters and tax cuts.

Interest rates on student loans will rise from 5.3 per cent to 7.14 per cent, a hike of more than one third. Interest on a popular government-backed loan for parents will climb from 6.1 per cent to nearly 8 per cent, partly as a result of deficit-reduction legislation.

The changes will add $5,123 (£2,717) to a typical loan of $20,000, according to Sallie Mae, the principal lender.

The reasons behind the hike are complex. The deficit-reduction Bill passed last month by Congress significantly reduced government subsidies to lenders to help offset the budget deficit. Lenders then passed the interest on to parents.

The government-backed loans, taken out by some 10 million Americans each year, are tied to the rate paid by Treasury bills, which rose significantly last month, triggering an increase in interest charged.

Universities urged students to consolidate their loans before July 1, locking in existing rates. But they worry that students will delay, especially with universities now closed for the summer.

The soaring costs coincide with a survey that found that graduates feel student loans have as much of an affect on their lives as education. A survey by AllianceBernstein Investments found that some seven out of ten were repaying loans averaging $29,000. Some 40 per cent of 1,508 respondents expected to take more than ten years to clear their loans. The debt stopped 44 per cent buying a house, while about a quarter put off dental or medical treatment.