Learn What the Student Loan Forgiveness Act Could Mean for You

US News

On March 8, Congressman Hansen Clarke (D-Mich.) introduced H.R. 4170, the Student Loan Forgiveness Act of 2012.

Normally we don't go into the findings of particular pieces of legislation, but the Student Loan Ranger thinks findings like this are refreshing and show Rep. Clarke is living in the reality most of us inhabit, including:

Total outstanding student loan debt officially surpassed total credit card debt in the United States in 2010, and is on track to exceed $1,000,000,000,000 during 2012;

Excessive student loan debt is impeding economic growth in the United States. Faced with excessive repayment burdens, many individuals are unable to start businesses, invest, or buy homes;

Because of soaring tuition costs, students often have no choice but to amass significant debt to obtain an education that is widely considered a prerequisite for earning a living wage."

If you want to hear more from Rep. Clarke, you can watch him introduce the bill in the House. But right now we're going to do what the Student Loan Ranger does best: explore the details.

The act would create a new 10/10 Loan Repayment Plan (with new forgiveness provisions), cap interest rates for all federal loans, greatly improve Public Service Loan Forgiveness, and convert some borrowers' private loans to federal loans. That's a lot! Here's more information on four key parts:

1. 10/10 Loan Repayment Plan: Cleverly called 10/10, the plan caps payment amounts at 10 percent of a borrower's discretionary income (the same 10 percent cap as President Obama's Pay As You Earn proposal in terms of payments) and can provide forgiveness in 10 years.

The forgiveness provision kicks in after a borrower makes 120 payments, which must be either payments under the 10/10 plan; payments that were not less than they would have been under the 10/10 plan; or "payments" of $0 during a month the borrower was in deferment due to an economic hardship.

[Learn more about deferment.]

For borrowers on or after the date of enactment, forgiveness is limited to $45,520 in principal and fees plus the interest accrued on the principal and fees. That's a huge amount!

There is no forgiveness cap for borrowers who predate enactment. And because prior payments can count, many borrowers who have been repaying their loans for 10 years or more could be eligible for complete forgiveness right away.

One of the Student Loan Ranger's reservations about the plan is that it currently requires borrowers to agree to have their payments electronically debited from a bank account, which could penalize low-income borrowers who may not have bank accounts. We're also concerned that requiring borrowers who leave the plan to repay on a standard plan could put some into a catch-22 where they can't afford payments in 10/10 but also can't afford to leave.

Finally, we're hoping that the plan will be open to help all borrowers with federal loans, without having to meet a threshold like the "partial financial hardship" required for Income-Based Repayment.

2. Capping interest rates for all federal loans: The act would cap the interest rate on federal loans at 3.4 percent. This is great news for borrowers, since the interest rate is set to be 6.8 percent for all federal Stafford loans as of July 1, 2012.

[Find out more about changes to graduate Stafford loans.]

3. Improving Public Service Loan Forgiveness: The act would also provide for Public Service Loan Forgiveness after 60 monthly payments instead of 120. It is impossible for us to overstate how much this would help borrowers who have committed to careers at relatively low-paying public interest jobs, who could actually start saving for their kids' education and perhaps owning their own home half a decade earlier than they anticipated.

4. Refinancing private education loans: Certain eligible borrowers would be able to obtain a Federal Consolidation Loan to discharge private loans (which lack the protections of federal loans). While we have a few questions about the details, such as whether this would be open to borrowers who had to borrow private loans in addition to federal loans, overall, this would be an incredible help to borrowers struggling with private loans.

This is an act that really needs public support if it is going to move out of the House Education and the Workforce, House Armed Services, and House Foreign Affairs committees it has been referred to. If you agree with the plan, the Student Loan Ranger urges you to sign the SignOn.org petition and to personally call your Representative and Senators. And use the Twitter function on this post to tell all your friends about the act.

Of course, you can also keep in touch with us via Twitter (use #studentdebthelp) and Facebook. And register for one of our upcoming student debt relief webinars to get the details you need to know on existing student debt relief programs.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works' educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.

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