How the Student Loan Fairness Act Could Benefit Borrowers

Borrowers could get up to $45,520 in student loan principal and fees forgiven under new legislation.

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If passed, the Student Loan Forgiveness Act would cap borrowers’ monthly payments to 10 percent of their discretionary income.
If passed, the Student Loan Forgiveness Act would cap borrowers’ monthly payments to 10 percent of their discretionary income.

The Student Loan Ranger's original post about the Student Loan Forgiveness Act garnered almost 300 comments, which we tried to sum up in a follow-up post that also answered some common questions and gave an overview of some relief options that currently exist.

One commenter accurately captured the conversational zeitgeist, writing: "I think people are getting too caught up on the term 'forgiveness.' A more accurate term to describe this proposal would be fairness."

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The Student Loan Ranger finds it appropriate that when Rep. Karen Bass, D-Calif., introduced legislation on March 21 that combined the Student Loan Forgiveness Act and her own 2012 legislation, the Graduate Success Act, she titled it the Student Loan Fairness Act.

So how would the Student Loan Fairness Act help you deal with your student debt?

The core of the Student Loan Fairness Act remains the 10-10 Loan Repayment Plan. The plan would cap borrowers' monthly payments to 10 percent of their discretionary income and limit interest capitalization to 10 percent of the original principal amount.

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After 120 eligible monthly payments – those payments made 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 – the act provides for tax-free forgiveness.

For new borrowers, who took out their loans on or after the date of the legislation's enactment, that forgiveness could total as much as $45,520 in principal and fees plus any interest that has accrued. And because that forgiveness is capped (and not currently indexed to inflation), it encourages borrowers to limit their borrowing as much as possible and institutions of higher education to control tuition and other educational costs.

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Under the proposed legislation, borrowers who took out loans before the date of enactment and who did not benefit from this cost control incentive can earn full loan forgiveness. Eligible payments made as far back as 10 years prior to the date of enactment can be counted toward forgiveness, so some borrowers will be eligible for full and immediate forgiveness when the act passes.

The 10-10 loan repayment plan and forgiveness are limited to federal loans. The good news is that all Federal Family Education loans, known as FFEL, and Federal Direct loans would be eligible and the bill makes the 10-10 plan the default repayment plan for borrowers. This would greatly simplify for borrowers what is now a complicated and cumbersome process for selecting a repayment plan.

The even better news is that the legislation would allow borrowers a year in which to convert private loans into a Federal Direct loan. To be eligible for this conversion, borrowers must have been eligible for a federal loan at the time they took out their private loans and have a gross income less than their total educational debt.

The plan contains a number of other important protections for borrowers. It would limit the interest rate on all federal loans to 3.4 percent and allow unemployed borrowers to defer repayment without accruing interest on their unsubsidized loans – currently only borrowers of subsidized and Perkins loans have this protection.

The plan would also makes the long-term forgiveness in the Income-Contingent RepaymentIncome-Based Repayment and Pay As You Earn repayment plans tax free and improve Public Service Loan Forgiveness by providing for forgiveness after five years for those committed to public service careers, instead of the current 10-year minimum.

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All of these great provisions will only become the law of the land once the Student Loan Fairness Act is passed. So what can you do to help?

You can find out more about the bill and become a "citizen co-sponsor." Robert Applebaum of StudentDebtCrisis.org got over a million petition signatures supporting the Student Loan Forgiveness Act and it didn't get out of committee; the Student Loan Ranger suggests helping him get 2 million by signing the petition in support of the Student Loan Fairness Act and passing it on to everyone you know.

One of the most effective things you can do is to call or email your representative and senators personally and urge them to co-sponsor HR 1330, the Student Loan Fairness Act. And while you're doing that, the Student Loan Ranger suggests you call or email Bass and thank her for sponsoring the bill.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's 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.

Corrected on : Corrected 4/4/13: A previous version of this post misstated the bill number of the Student Loan Fairness Act.