What is the Student Loan Forgiveness Act?


Quick Answer

The Student Loan Forgiveness Act of 2012 applies to federal loans and requires that people pay 10 percent of their income for 20 years before the remaining balance is forgiven, according to U.S. News & World Report. It applies retroactively and provides a cap on how much can be forgiven.

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Full Answer

In 2014, President Barack Obama expanded the Student Loan Forgiveness Act to a wider number of borrowers, though the act is still restricted to federal loans only, reports U.S. News & World Report. Federal loan borrowers also became eligible for income-based repayment, or IBR plans, which caps at 15 percent of disposable income. When the loan passed, it was set for implementation in December 2015.

However, Obama's Pay As You Earn program is not free of criticism, with The New York Times pointing out that the primary beneficiaries of this expansion are those with high debt and low income. The act also does not address the issue of what happens when the remaining balance of a loan is forgiven and categorized as income, at which point it is taxed accordingly.

The Pay As You Earn program does help recent college graduates who are job hunting and have unsteady incomes, notes The New York Times. Its primary benefit is its limited flexibility, which can accommodate graduates that struggle to earn enough for rent and to pay back their loans.

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