A Better Student Loan Debt Crisis Solution: Micro Loan Forgiveness for Micro Service Acts

It is no secret that the COVID-19 pandemic has many American families struggling financially right now, from making mortgage or rent payments to covering car payments and credit cards. But this time we can’t blame student loans; in March, Congress moved quickly to freeze payments.

Most agree it was the right move at the right time. But it can’t last forever; there’s a $1.3-trillion portfolio that must be repaid. Plus, if the Bernie Sanders and Elizabeth Warren-provoked debate around loan forgiveness reveals anything, it’s that many see it as an unfair windfall for the tens of millions of Americans with a college degree and the means to pay it back.

Is there a way for the government and borrowers to have their cake and eat it? Is there a middle ground where borrowers can obtain some level of forgiveness while still giving the public a return on its investment?

Congress has long used loan forgiveness to steer graduates into careers that serve a greater public purpose. Today the marquee initiative is Public Service Loan Forgiveness (PSLF), which wipes loan balances clean after 10 years for borrowers who have worked in public service. It’s also probably the worst program ever administered by the Department of Education. First, you had to complete your degree (almost a third of new college entrants haven’t done so 8 years after matriculating). Second, you had to be employed in a vaguely defined public service career. Third, you had to work for at least 10 years to even become eligible. And when the first cohorts of eligible PSLF borrowers began applying for forgiveness, more than 99 percent were rejected.

With program conditions like these, neither PSLF nor other loan forgiveness programs have generated much excitement for a simple reason: they do a poor job of incentivizing participation. Very few become public school teachers because they know they’re going to get their loans paid. As a result, the federal government’s loan forgiveness tool is producing much less public service than it could.

A Better Way Forward

In the same way we’re seeing the beginning of the unbundling of degree programs, it’s logical to ask, “why not unbundle public service loan forgiveness?” Rather than waiting 10 years, why not provide more financial relief more quickly by creating a program of micro-public loan forgiveness for micro-public service acts. That is, trade small amounts of federal student loan forgiveness for small amounts of public service that provide clear social value.

Here’s how it could work. State and local governments would create registries of public projects that borrowers could sign up for — think cleaning up a public park or watershed, or working a food bank or helping at polling stations during elections. In return, the federal government would provide a small, immediate, reduction in the participant’s next student loan payment. Borrowers could participate in as many or as few projects as they would like, without caps or limits, and different projects could pay different amounts.

Micro loan forgiveness eliminates all three of the barriers currently facing PSLF. Any borrower, regardless of degree attainment, academic program, career path, or — critically — employment status — can engage in public service and receive immediate compensation. So those most in need of loan forgiveness (think unemployed borrowers) can earn it via public service.

In fact, even current students could technically start pre-paying loans that are on in-school deferment. A borrower could might take on $25,000 in federal student loan debt but by the time repayment actually begins maybe only owe say $18,000.

Even more important, micro loan forgiveness would allow borrowers to factor public service into enrollment decisions. Some students could complete enough public service that they never end up having to make a monthly payment. Students wishing to pursue public careers but worried the program cost was too high for the eventual salary would still incentivize them in the same way old public service programs worked.

For government, micro loan forgiveness offers a fluid way to support activities that are either expensive to stand-up permanently, or hard to publicly finance. Pandemic notwithstanding, voting is a great example where cities would benefit from helping older and poorer citizens get to polling stations or help manage flow, without having to budget or guess resource needs a year or two out. Foodbanks and homeless shelters, where extreme temperatures and weather events demand short-run help, are other examples. Even cleaning up watersheds or abandoned lots can be completed in a more cost-efficient manner with a surge of labor that’s easy on municipal or state budgets.

The Fine Print

A program like this would require a good deal of government coordination. State and local governments would need to identify and cost projects that would then need to be “approved” by the federal government for micro loan forgiveness. A pricing system would also have to be put in place, as would a mechanism for verifying and reporting that volunteer work has been performed, along with audits to deter fraud. Then loan servicers would need to receive and factor in timely micro credits for public service.

Nevertheless, unbundling public service loan forgiveness allows for immediate loan relief, allows students to factor public service into enrollment and financing decisions, and probably increases the production of public service. With the student debt crisis expanding, and a pandemic adding unprecedented stress on families and unprecedented need for public service, taking a more tactical approach to loan forgiveness programs offers the federal government and millions of borrowers a unique opportunity to turn a student loan crisis into a next-generation public investment.