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Student Loan Forgiveness Act Aims to Eliminate Some of Your Debt

If you’re like many other Americans, you racked up some debt in order to afford your college education. Actually, you racked up a lot of it. According to a recent article in the U.S. News & World Report, total outstanding student loan debt in the United States surpassed total credit card debt in 2010. Perhaps even more shocking is that outstanding student loan debt is expected to exceed $1 trillion this year. That’s a lot of zeroes!

So given the poor job market and current economic conditions, you’re probably having a hard time paying off your student loans. You may be making regular payments, but you also likely foresee a future of never-ending payments – maybe to the point where you’ll still be paying off your own student loans by the time your own children consider college for themselves! Alternatively, if you haven’t started college yet, maybe the potential costs are so intimidating that you’re contemplating alternative paths for your future that don’t involve higher education.

Well, the good news is that U.S. Representative Hansen Clarke, a Democrat from Michigan, hopes to make education more affordable. Rep. Clarke introduced The Student Loan Forgiveness Act of 2012 (H.R. 4170) before the House of Representatives on March 8. If passed, the bill would mean borrowers are no longer obligated to repay any outstanding student loan debt if they previously made payments equal to at least 10% of their discretionary income for 10 years, totaling 120 payments. Those loans in the midst of repayment would eventually be forgiven, as well. These borrowers would be credited the amount paid to date. That amount would apply toward meeting the requirement for loan forgiveness.

Now we all probably have differing opinions when it comes to defining “discretionary income,” but the official calculation is any annual income exceeding 150% of the poverty line for an individual or family. The U.S. Census Bureau sets the annual poverty threshold amount. For 2011, the poverty threshold for a single person under the age of 65 is $11,702. If you calculate 150% of this threshold, you get $17,553. In this case, this individual’s discretionary income is anything earned above $17,553 in 2011. You can also see the poverty thresholds for other family sizes on the Census Bureau’s website.

In addition to granting federal loan forgiveness, Rep. Clarke’s bill offers several other benefits to make education more affordable. For example:

  • Graduates who enter public service professions (e.g., teachers, government workers, and first responders) receive loan forgiveness after five years instead of 10.
  • Interest rates on federal student loans would be capped at 3.4% rather than the current fixed 6.8% for unsubsidized loans. This decrease would help direct more repayment funds toward principal rather than costly interest.
  • Borrowers with private loans may also qualify for loan forgiveness if their average adjusted gross income equals or is less than their total loan debt.

Legislation Designed to Bolster the Economy

In addition to the above-listed benefits, Rep. Clarke hopes that his loan forgiveness bill would free up more money and increase Americans’ purchasing power. In turn, this change could help jumpstart the economy and enable more people to invest, start their own businesses or even purchase homes. Alternatively, student loan forgiveness could help people who face bankruptcy. Currently, student loans cannot be forgiven or excluded when someone files for bankruptcy. In other words, those obligations must be repaid at some point. Rep. Clarke’s proposed legislation, however, could make it somewhat easier for people facing bankruptcy to rebound.

At face value, that sense of hopefulness sounds like a good thing; however, critics contend that these forgiven funds will have to come from somewhere and that the government shouldn’t be called upon to continually bail others out of their financial messes like it did on Wall Street and with major auto manufacturers. Opponents argue that students shouldn’t expect a similar bailout. Rather, they say students should make more fiscally responsible decisions about how they approach higher education. For example, instead of attending expensive schools that will create huge debts for them upon graduation, critics argue that students should perhaps consider less-expensive schools, or attend community college or trade school.

To some extent, Rep. Clarke’s bill addresses such concerns and incents students to contain their education costs where feasible. For example, while current borrowers would be eligible for full loan forgiveness after 10 years if the bill is approved, future borrowers would be subject to a $45,520 cap on forgiveness. This amount is based on the average overall cost of a four-year degree at a public university.

Discussion Hardly Over

As the cost of a college education continues to soar amid a shaky economy and poor job market, student loan debt is an issue that’s likely here to stay. We’ll continue to keep an eye on this issue so you have the best information about any changes that could impact your ability to pay off your current or future student loans. In the meantime, you can read the full version of Rep. Clarke’s proposed bill here and get advice about education expenses, monthly budgets, and credit cards here

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