Today, the outstanding loan debt balance in the United States has reached over $1 trillion. In fact, it has outpaced mortgage debts since more people are taking out this loan to pay for their college tuition and fees. This form of consumer debt continues to rise and worsen, and this results in a decline in the quality of life or economic status of most Americans. Borrowers are postponing their plans of investing in homes or cars or starting their own business, which are key components of a rich economy.
Proposed Solutions to Student Loan Debts
With the growing concern about the financial crisis that most students and parents experience, the government has formulated a solution to loan debts. According to legislators, there is a great need for an improvement in the repayment system for federal student loans. Such reform will alleviate and eventually eliminate the financial difficulties that student loans cause, so graduates can start building and achieving their lifelong dreams.
The goal is to establish a type of system that will not only minimize loan debts among students, but also create positive results to the country’s economy. Hence, more jobs will become available to the public while enhancing the quality and financial responsibility of institutions that offer higher education.
The Student Loan Forgiveness Act was introduced to legislators on March 21, 2013, and it was submitted to the U.S Education and Workforce Committee for further evaluation. Among the supporters of the bill were the US Student Association and the NAACP.
Highlights of the Student Loan Fairness Act
The Student Loan Fairness Act retains the 10-10 scheme for loan repayment. In this plan, the monthly payments made by borrowers are capped to 10 percent of the overall discretionary salary, and this limits the capitalization of interest by up to 10 percent of the principal amount of their loan. After incurring 120 monthly payments in compliance to the 10-10 scheme, borrowers may qualify for tax-free loan forgiveness.
On the other hand, new borrowers who have applied for loans on (or after) the date that the legislation as enacted may obtain loan forgiveness of at least $45,520 in their principal and additional fees including any accumulated interest. Since loan forgiveness has a cap and not indexed to inflation, this encourages individuals to set a limit to the amount they borrow, so they can control school fees and relevant expenses.
In Student Loan Forgiveness Act, those who have taken out their loans prior to the enactment date of the legislation may receive full forgiveness of their loan. However, this is only possible if they have not availed of the cost-control incentive from this proposed legislation. Additionally, the eligible monthly payments that were settled at least 10 years before the enactment date may be considered toward loan forgiveness. As a results, there are some borrowers who may qualify for immediate and full forgiveness upon the passing of the legislation.
Currently, the 10-10 repayment scheme and forgiveness only apply to federal loans. Fortunately, FEELs or Federal Family Education Loans, as well as Federal Direct loans are eligible, and this 10-10 plan serves as the “default” loan repayment plan. Hence, this makes the entire process of choosing the best repayment plan quite simple.
Benefits of the Student Loan Forgiveness Act
One of the key advantages that Student Loan Forgiveness Act offers is the opportunity for borrowers to change their private loans into Federal Direct loans. There are certain guidelines to be followed, though, before this is made possible. For instance, borrowers must qualify for the federal loan during the time they have decided to take out their private loans. Moreover, their gross income should be less than the overall education debt they have incurred.
Aside from this, there are levels of protection given to borrowers, and this can limit their interests on federal loans by up to 3.4 percent. This also gives unemployed borrowers a chance to defer their loan repayment while preventing the accumulation of interests on unsubsidized loans. Currently, though, only those who have Perkins and subsidized loans are granted this type of protection.
The 10-10 plan paves the way for tax free long-term forgiveness offered in various repayment plans such as the Income Based, Income-Contingent and Pay-As-You-Earn schemes in repaying your loans. In addition, those who are employed in public-service jobs are provided with loan forgiveness after at least five years, as compared to the current minimum of ten years.
Additional Details You Should Know
The Student Loan Fairness Act covers private student loans, as long as the adjusted annual income of the borrower is equivalent to or less than the total amount of the debt. There is also the “discretionary income” to consider, which refers to the adjusted gross salary of the borrower and the spouse, which must exceed 150 percent above the poverty line.
In case you are unemployed, you may still enroll in the program, as long as you meet certain requirements. For instance, those who have been unemployed for a maximum of three years, the interests would not add up on your direct unsubsidized, consolidation or FFEL unsubsidized loan you have applied during or after the enactment date of the Act.
However, the interest protection is only for those who have consolidation and direct subsidized loans with repaid Stafford student loans. There is also interest protection for three years (for unsubsidized and subsidized loans) when you enrolled in the IBR while unemployed.
The Student Loan Forgiveness Act helps in improving the economy while encouraging more people to become a part of the public service workforce in the country. Those who choose public service careers and serve in selected communities can benefit from the reduced loan forgiveness period.
Furthermore, the Student Loan Forgiveness Act provides assistance to borrowers who encounter financial difficulties and barely have enough resources to pay off their loans. This prevents more people from enduring the hardship that challenging times bring such as unemployment or illness.
With the interest-free loan deferments provided to unemployed individuals with existing unsubsidized federal loans, borrowers can avoid greater financial burdens in life. In fact, the bill introduces the 10-10 plan that replaces the existing 10-year repayment plan for the total loan balance, so there are more options in paying off debts.
With all these benefits and features of the Student Loan Forgiveness Act, more students will become more aware and prudent about taking out a loan to cover educational expenses while enabling universities to control the increase in tuition.
What do you think? I want to know your thoughts on how this Act can benefit or hurt borrowers. Leave a comment below.