The Student Loan Forgiveness of 2012

The Student Loan Forgiveness Act of 2012 was introduced in the House of Representatives by Representative Hansen Clarke (D-MI) on March 8, 2012 and referred to the Committees on Education and the Workforce , Foreign Affairs and Armed Services. Each of these committees will be holding public hearings and their contact information is available at the end of this post for those interested in obtaining more information directly from them.

The stated purpose of The Student Loan Forgiveness Act of 2012 is “to increase purchasing power, strengthen economic recovery, and restore fairness in financing higher education in the United States through student loan forgiveness, caps on interest rates on Federal student loans, and refinancing opportunities for private borrowers, and for other purposes.” There are several provisions of this act and below, we give an overview of those provisions along with examples of how they would work.

The 10/10 Loan Repayment Plan

This provision, which would be open to all eligible borrowers, creates a new income-sensitive repayment plan that sets annual payment limits at 10% of the amount by which a person’s income exceeds 150 percent of the poverty level. For example, using the federal poverty guidelines for the 48 contiguous states and the District of Columbia, the annual payment limit for a single person with adjusted gross income (AGI) of $35,000 would be calculated as follows:

$35,000 (AGI) – ($11,170 (the poverty level) x 150% (poverty level multiplier)) = $18,245 (the amount by which AGI exceeds 150% of the poverty level). That amount, $18,245, is then multiplied by 10% and divided by 12 to get to the monthly payment, which in this case would be $152.04.

To be eligible for this program, a borrower would have to be willing to allow the holder of the loan to review their income annually and agree to have payments automatically debited from a bank account.

Loan Forgiveness under the 10/10 and Other Repayment Plans

A second provision of The Student Loan Forgiveness Act of 2012 provides for three different forgiveness options, which we describe in more detail below by class of borrower.

Existing Borrowers

Existing borrowers who have already made 120 payments that meet the minimum requirements of the 10/10 Repayment Plan during the ten years prior to the enactment of The Student Loan Forgiveness Act of 2012 would have their entire remaining balance cancelled (this is similar to existing rules for federal employees—although that program lacks the retroactive portion).

Existing borrowers who have less than 120 payments credited to their account meeting the minimum requirements of the 10/10 Repayment Plan would have their outstanding loan balance forgiven once those 120 payments are made.

New Borrowers

For new borrowers, which the Act defines as those who take a new Federal Direct Loan after the enactment of The Student Loan Forgiveness Act of 2012, the 10/10 Repayment Plan will be available; however, the amount of forgiveness cannot exceed $45,520. Although there is a cap on forgiveness for new borrowers, interest rates on these loans are also capped at 3.4%.

Other Provisions

The existing repayment time for public service employees (mentioned above) is reduced to 60 months from the current 120 months, and public service employees are granted the same retroactive rights as other borrowers under The Student Loan Forgiveness Act of 2012. That means that existing public service employees who have made 60 payments that comply with the 10/10 repayment plan will have their outstanding loan balances forgiven.

Additionally, borrowers with private education loans would be able to refinance many of those loans as new Federal Direct Loans and thus be eligible to participate in the provisions of The Student Loan Forgiveness Act of 2012 as “new borrowers.”

In a previous post, we discussed the two sides of this debate and, while we do not usually come down on one side or the other, we do think that Representative Clarke has constructed a bill that will accomplish the goals it sets out to meet while addressing critics of outright forgiveness like Justin Wolfers. The Student Loan Forgiveness Act of 2012 requires borrowers to make the same number of payments required since the inception of the Student Loan program: 120 payments over ten years. Thus, there is a level of responsibility for the borrower. Under this plan, some people, such as those with low debt, high income, or a combination of the two, will easily pay off their entire loan in those ten years. Others with higher debt or lower incomes will not. However, no matter what the case may be, either immediately for those who have already paid or within ten years of graduation for others, they will know that their student loans will be paid in full and the money previously dedicated to those payments can be used as the act states to “start businesses, invest, or buy homes.”

The Committee on Education and the Workforce

Phone: 202-225-4527 Fax: 202-225-9571

The Committee on Foreign Affairs

Phone: 202-225-5021 Fax: 202-226-7629

The Committee on Armed Services

Phone: 202-225-4151 Fax: 202-225-0858