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(Corrects Stam's university in seventh paragraph to Georgetown University, not George Washington)
By Elvina Nawaguna
WASHINGTON, Sept 6 (Reuters) - Before leaving for its August recess, Congress hammered out a deal that moved federal loan interest rates for undergraduates and graduate students to a market-based system from a fixed rate.
But advocates for graduate students want lawmakers to alter that legislation because, they say, it sets the stage for a spike in student loan interest rates.
While the new system meant an immediate drop for graduate students - to 5.4 percent from 6.8 percent - it also meant rates could rise to a cap of 9.5 percent, as the economy improves.
Graduate students fear rates could quickly hit the cap as the economy improves, saddling them with more debt.
This concern is reinforced by the recent jump in Treasury yields as the Federal Reserve prepares to taper its bond-buying program, which has kept borrowing costs low.
The government issues 93 percent of U.S. student loans, and millions of graduate students rely on federal Stafford loans.
Cristina Stam, a first-year graduate student at Georgetown University's law school, said the thought of interest rates spiking while she is enrolled weighs on her.
Stam, 25, borrowed $30,000 this year and said she could wind up with $90,000 in debt when she graduates three years from now. Higher rates could add thousands more.
"I would hate for that to happen. I'm married. I can't ask my parents for money," Stam said.
Graduate students are crying foul, especially because undergraduates got a lower cap of 8.25 percent.
"There has been a large focus on undergraduate education - which we support - but it definitely feels like there has been a marginalizing of graduate students in terms of student loans. Over the long term, it's going to be a disaster," said Meredith Niles, director of legislative affairs at the National Association of Graduate-Professional Students (NAGPS).
Students want their grievances to be part of the discussions as lawmakers debate the reauthorization of the Higher Education Act, which lays out guidelines for distributing federal student aid.
The NAGPS will lead a delegation of its members to Capitol Hill on Sept. 16-17 to directly address legislators. The Council of Graduate Students (CGS) has also submitted recommendations to Congress and plans to coordinate hearings with other student groups and lawmakers in coming weeks.
According to the College Board, graduate students in the 2011-2012 academic year received $34.5 billion in federal student loans, accounting for 67 percent of aid disbursed to the nation's 3.9 million graduate students that year.
Graduate student groups want legislators to cap interest rates at 6.8 percent, and revive a subsidized loan program that allowed graduate students to complete school before starting repayment.
It is unclear whether they will make much headway.
Lawmakers behind the bipartisan-backed law said it was a matter of choosing where to place limited subsidies to encourage at least an undergraduate degree.
A senior Republican aide on the Senate Committee on Health Education, Labor and Pensions told Reuters that the caps had to be higher on graduate students so the government did not have to subsidize those rates.
"This was a result of a compromise, a negotiation," the aide said. "There are winners and losers."
Student debt and college affordability have become a larger part of a national conversation as outstanding student debt has reached $1.2 trillion in the United States and as default rates steadily rise. More than 10 percent of outstanding student loans are considered delinquent.
Graduate students say their financial burden should not be higher than undergraduates, explaining that they often are non-traditional students - many are married, have children or other financial obligations such as undergraduate loans or mortgages.
"Unlike undergraduates, we're no longer dependent on our parents," said Niles, a PhD candidate at University of California-Davis. "When we see these higher rates, it's not just students it affects. It affects families."
Graduate students leave school with student debt load ranging from $30,000 to $120,000, according to FinAid.org. Undergraduates have an average of $27,000.
Graduate students also argue that higher-level education is becoming more of a necessity and a driver of economic growth.
The U.S. Department of Labor forecasts a 22 percent rise in jobs requiring at least a master's degree between 2010 and 2020, and a 20 percent rise for jobs requiring doctorates.
"There's an undeniable payoff in economic growth and innovation that comes from graduate education," said CGS President Debra Stewart. "We need undergraduate education and graduate education, and we need to be supporting both." (Editing by Karey Van Hall and Douglas Royalty)