Rising Rates Add to Burden of Student Loan Repayment : Debt: On July 1, borrowers began paying 7.43% on variable-rate loans, up from 6.22%.

Leonard Adler, three months out of Georgetown University’s law school and $100,000 in debt, learned the hard way just how rising interest rates affect adjustable-rate loans.

On July 1, Adler and thousands of students in the government’s $76-billion student loan program began paying 7.43% on their variable-rate student loans, up from 6.22%.

The increase follows the 1.75% rise in short-term interest rates this year. Before October, 1992, when variable-rate loans first came into use, students paid a staggered loan-rate of 8% for the first four years and 10% for the balance, which couldn’t exceed six years on loans of $7,500 or less.

“It’s probably better that I went to school during a time of low interest rates,” said Adler, 25, who earns about $25,000 a year as director of a homeless outreach program in Washington.

The government has been in the student loan business since 1966, when the annual volume of loans was $73 million and the average loan was $828. By last year, loans reached $17.8 billion a year and averaged $3,105, according to the U.S. Department of Education.

And, higher rates or no, the Student Loan Marketing Assn., widely known as Sallie Mae, expects a near doubling in annual loan volume to $31.4 billion in four years.

Federal student loans offer lower rates than most other ways to borrow money. The prime rate, for instance, a benchmark for bank borrowing costs, is now 7.75%, up from 6% in early 1994 but well below the 10.5% rate of January, 1990. In contrast, variable rate Stafford loans can’t rise above 8.25%. The loans are named for former Vermont Sen. Robert Stafford, who helped craft the 1965 law that created the government’s student loan program.

Besides lower rates, student loans have another big advantage over conventional loans: In many cases, the government picks up the tab for interest until a student graduates. And, though students today are experiencing the other side of the equation, floating-rate loans can float down as well as up.

That’s little consolation to those suddenly finding themselves stuck with higher payments.

Mary Olive Smith, a second-year graduate student in international affairs at Columbia University, would prefer to have rates “frozen” on the $35,000 she owes on her student loans. After all, as she said, “we’re students.”

Smith has lots of company among those suddenly paying more for their education. “I keep getting letters saying (the rate) is changing,” said Michael O’Neil, 32, a 1994 graduate of Cleveland-Marshall Law School who’s paying off $50,000 in loans, including $20,000 affected by floating interest rates. “I’m not happy about it.”

It all adds up. This summer’s increase on O’Neil’s adjustable-rate loans means he’ll repay an extra $1,500 on his loan; he figures his monthly loan repayments at more than $600.

The central bank has raised the rate it charges on overnight bank loans five times this year, to 4.75% from 3%, in an attempt to keep inflation under control. The most recent increase, on Aug. 16, bumped up short-term rates by a half percentage point.

All it will take is “one more rate increase of similar magnitude and we’ll hit the 8.25% cap” above which student loans can’t rise, said Dana Callihan, a spokesman for the California Student Aid Commission.

California gets $3.5 billion a year from the federal government to fund its student aid programs, the largest of any state in the nation. California students account for between 9% and 11% of all government funds distributed for student loans.

With tuition bills soaring, about one-third of college and graduate students have borrowed money from the government. Without big loans from the government, “I didn’t have an option,” said Stephanie Pitcher, 26, a third-year law student at Boston University. She owes more than $93,000 for college and graduate school. “Maybe that’s stupid. But it was either do it this way or don’t do it at all,” she said.

One consolation for students: the higher rates suggest an expanding economy, and more jobs than a few years ago.

“Even though rates are rising, I think the economy is picking up,” O’Neil said. “It’s a trade-off.”