What is the Student Loan Forgiveness Act of 2012?

Student with megaphone
The Student Loan Forgiveness Act of 2012 is the handiwork of Democratic Congressman Hansen Clarke from Michigan.

If implemented the Act, otherwise known as HR 4170, would create a 10/10 Loan Repayment Plan that has forgiveness provisions. It would cap interest rates for all federal student loans and improve Public Service Loan Forgiveness. Surprisingly, it would also convert some borrowers’ private loans to federal loans.

The 10/10 Loan Repayment Plan would cap all students’ monthly payments at 10 percent of their discretionary income. It also would provide complete student loan forgiveness after 10 years—which is 120 consistent payments.

Furthermore, if a borrower is employed in the public service sector—which includes teachers, police officers, military personnel, government workers, and many more professions—the Student Loan Forgiveness Act would completely forgive college loans after just five years (60 consistent payments).

Since payments made prior to the passing of this act would count, borrowers who already have been repaying loans for over 10 years would be immediately eligible for total forgiveness.

However, for most there would be a cap to the amount eligible for forgiveness.

New student loans borrowers would be limited to forgiveness of $45,520 in principal and fees, but for those who borrowed loans prior to enactment, there would be no cap.

In addition to student loan forgiveness, HR4170 would also cap the interest rates on all federal loans at 3.4 percent.

While students across the nation have expressed fervent support of HR4170, this proposed act has received criticism as well.

HR 4170 would require that borrowers agree to have all payments electronically transferred via bank account. This could penalize low-income borrowers who may not have bank accounts.

Additionally, this act would also allow eligible borrowers to discharge private student loans through use of a Federal Consolidation Loan.

While this would be helpful to indebted students—since private student loans make up the majority of outstanding college financing—some feel this unfairly hurts private lenders.

It remains to be seen what the implications of forgiving a trillion dollars in debt would be. Lenders unable to obtain revenue from loan payments could fall into bankruptcy. Bankrupt businesses would lead to more unemployed Americans who would have to tighten their belts leading to even less spending across the country, sinking the nation deeper into a recession with no end in sight.