A principal forgiveness loan is one in which some (or all) of the principal is forgiven, that is, it does not have to be repaid. It is essentially a grant.
When was the first principal forgiveness loan?
The principal forgiveness feature first appeared in the Safe Drinking Water Act (SDWA) when Congress created the drinking water state revolving fund, allowing a discretional subsidy program for disadvantaged communities. Under this provision, states could provide qualifying communities an additional subsidy of up to 30 percent of the annual capitalization grant in the form of negative interest rates, principal forgiveness or loan extension. Ohio was one of only 19 states that used this capability prior to 2009. In 2009, the American Recovery and Reinvestment Act (ARRA) introduced new requirements to both the Clean Water State Revolving Fund and Drinking Water State Revolving Fund programs. Of the $6 billion appropriated nationwide by the federal government, not less than 50 percent of a state’s ARRA allotment had to be provided in the form of grants, principal forgiveness, or negative interest rate loans.
Since ARRA, the amounts and terms of principal forgiveness have been included in Congress’ appropriations language every year. Unless provided with an exception from Congress, principal forgiveness funds in both programs are to be directed to economically disadvantaged communities. Beyond that, the state has some latitude as to the types of projects that it sees as the highest priority. As with regular loan funds, all projects must be scored and ranked with an approved ranking system. For Ohio’s Water Supply Revolving Loan Account (WSRLA), Ohio EPA’s priorities are projects that involve regionalization of public water systems and eliminating public health threats caused by contaminated residential wells. For the Water Pollution Control Loan Fund (WPCLF), Ohio EPA’s priorities include projects designed to correct failing home sewage treatment systems and other wastewater projects in distressed communities (communities that meet Ohio EPA’s affordability criteria). Ohio EPA has also reserved small amounts of principal forgiveness funds for special purposes (such as back-up power at water or wastewater plant).
How are the principal forgiveness amounts established?
The amount of principal forgiveness that the state can administer is a function of the federal laws, the amount of the annual capitalization grant, and the specific appropriations language used by Congress.. For the WSRLA, this amount has been in the range of $7 million per year, and for the WPCLF, it has been in the range of $22 million per year.
There is generally a large gap between the amount of available principal forgiveness dollars and the number of projects nominated by disadvantaged communities. It is not unusual for the WSRLA and WPCLF to receive project nominations five times the amount of principal forgiveness funds available. Project nominations are due one time per year, during the regular nomination period. This is January-February for the WSRLA, and August for the WPCLF. Communities within the fundable range for principal forgiveness must be able to act quickly and receive their loan award within the first nine months of the program year. Generally, principal forgiveness funds are not grandfathered for projects that do not proceed in a timely fashion. Ohio EPA works closely with the principal forgiveness communities to provide guidance during the year, so that they can successfully get their projects funded. If you have more questions about principal forgiveness, please contact Kevin Spurbeck or Jon Bernstein of DEFA’s Office of Financial Assistance (OFA) at (614) 644-2798.
Ohio’s Water Pollution Control Loan Fund and Water Supply Revolving Loan Account are state revolving fund loan programs, originating from the federal Clean Water Act and Safe Drinking Water Act. They provide one of the primary sources of environmental infrastructure financing in Ohio. Below-market interest rates, often as low as zero percent, save Ohio communities millions of dollars every year.