Student Loan Forgiveness, Fact or Fantasy

21 Sep Student Loan Forgiveness, Fact or Fantasy

The College Cost Reduction & Access Act went into effect July 1, 2009. This legislation provides for forgiveness of federally-guaranteed student loans for individuals in certain public service occupations provided they meet certain conditions.

Eligible borrowers must consolidate the loans into an Income Contingent Repayment Plan (ICRP) or Income Based Repayment Plan (IBRP), make scheduled payments for ten years, and must be employed full-time in an eligible public service capacity for each of the 120 months in which a payment is made. If these requirements are satisfied, the remainder of the loan debt is forgiven.

In theory the College Cost Reduction & Access Act program sounds like an attractive option for many graduates with high loan balances, but there are many qualifications limiting the ability of this portion of the Act to benefit very many people. The following is not an exhaustive list.

  • Only Federally-guaranteed loans are eligible. Law students and others whose careers require advanced degrees often carry significant private debt as well. The terms of an ICRP or IBRP would typically not allow a person to make payments on private loans and maintain a minimal standard of living.
  • Employment qualification began October 1, 2007. People who already had many years in eligible public service positions had to start over and those within ten years of retirement have little hope of ever satisfying the requirement for ten years of full-time employment, especially during a recession when public agencies are laying off long term employees or pushing them into early retirement.
  • The definition of eligible public service employment is less than precise. One apparently authoritative site on the internet, IBR Info, maintained by the Institute for College Access and Success, maintains that any employee of local, State, or the Federal government is eligible, while FinAid, citing the same legislation and regulations, would limit eligibility to people whose job descriptions within government are public-service oriented.
  • In many public service fields, the number of people qualified for, and seeking long-term full-time employment at a living wage greatly exceeds the number of such positions available. Strapped agencies, public and nonprofit, rely heavily on temporary, part-time, and volunteer workers. Being able to put together ten years of full-time eligible employment in the current labor market may prove difficult.
  • Both ICRPs and IBRPs involve capitalized interest and escalating loan balances. A borrower who, through no fault of her own, cannot maintain a public service position, will end up locked into a negatively-amortizing 25-year contract.
  • The entire program interferes with labor markets by permitting certain employers to pay their employees less than the prevailing wage and penalizing those employees heavily if they switch to an ineligible employer. It takes youthful idealism and uses it to create a species of serfdom to government and to certain favored nonprofits.

While this change in the law may benefit some student loan borrowers, it fails to meet the need for reform of the student loan system that makes indenture slaves of some unfortunate students.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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