A new student loan program emerges: no interest, no fees, ‘pay-it-forward’

Joshua Alferos was two semesters away from a bachelor’s degree in electrical engineering when he ran out of money. He was about to change his major or drop out.

Then he heard of a new, experimental program run by philanthropies and private businesses that would loan him what he needed to finish college — at zero interest and with no fees. The debt wouldn’t come due until he earned a minimum salary, and his employer would probably help him pay it off.

One of the best parts, to Alferos: The repayment goes into a pool to provide the same help for other young, low-income Hawaiians who come after him.

“It’s pretty empowering, because you can help future students,” said Alferos, who has continued his studies with the loan program.

This pay-it-forward approach to covering the cost of college multiplies the number of students who can benefit from a fixed supply of financial aid and can help fill shortages of workers in critical industries.

California will soon join the effort.

A San Diego county-run program will begin in the fall. And while a bill introduced in the California Assembly by Assemblywoman Pilar Schiavo (D-Chatsworth) to create a pay-it-forward fund for some students in the University of California and California State University systems did not advance this session, it will be heard again in January.

The San Diego program will target majors in behavioral health, including clinicians, practitioners and psychiatric nurses — professions with a collective 8,000-worker shortfall in San Diego. Those loans will be entirely forgiven for graduates who work in behavioral health for five years or more.

“What you need to be looking at is where there is enduring demand for particular credentials or degrees,” said Kirstin Hill, president and chief operating officer at Social Finance, a nonprofit that designed and helps to manage pay-it-forward funds around the country.

At a time when millions of people have defaulted on their student loans and face aggressive renewed enforcement measures by the federal government to collect payments, the pilot programs are intended to spur momentum, their backers say.

Alex Harris, vice president of programs at the Harold K.L. Castle Foundation, is pictured outside the foundation’s office on April 9 in Kailua, Hawaii.

(Mengshin Lin / Hechinger Report)

“It’s a new way of thinking about scholarship support that lets you extend your dollars” further than by simply giving away money, said Alex Harris, vice president at the Harold K.L. Castle Foundation, the lead donor of the Hawaiʻi Renewable Learning Fund. That’s because once it’s paid back, it can be loaned again.

This feature resonates in Hawaii, which has a tradition of mutual support called “kokua.”

“There is that long cultural history that when one person succeeds, everyone is raised up,” Harris said.

Under the pilot, Hawaiian engineering students from families with low incomes can borrow from a $2.5-million revolving fund underwritten by the Castle Foundation and other donors.

Repayments don’t start until the students graduate and earn $50,000 or more. Some of the state’s biggest engineering firms have agreed to help their new employees pay off the loans to boost recruitment. The university helps to promote the program.

The pilot in Hawaii began with engineering majors because the state is heavily dependent on engineers in its key defense, construction and tourism industries — but has a chronic shortage of them.

Students walk through the University of Hawaii at Manoa campus on April 9 in Honolulu.

(Mengshin Lin / Hechinger Report)

In addition to Hawaii and San Diego, pay-it-forward programs have been started or will launch in the fall in Colorado, Massachusetts, New Jersey, New York and Miami. Each is focused on a field with high demand but short supply — healthcare and information technology in Colorado and New Jersey and climate careers in Massachusetts.

In 24 states with shortages or projected shortages of registered nurses, a pay-it-forward fund has been set up to help residents study nursing at the national, online Western Governors University. Google is doing something similar for students pursuing certificates in data analytics, digital marketing and e-commerce, IT support, project management and other fields.

Massachusetts and New Jersey have put public money behind these efforts, but in collaboration with private sources.

Massachusetts and New Jersey have put public money behind these efforts in collaboration with private sources.

There are obstacles. At least 24 states have considered such programs, but high startup costs and other issues prevented the launch. In Illinois, for example, a proposal for a universal pay-it-forward loan fund got as far as a feasibility study. But researchers calculated that it would take billions of dollars in startup money and decades to pay for itself.

This isn’t the only problem, according to the study, done by the Illinois Student Assistance Commission. Giving students loans at zero interest might encourage colleges and universities to raise their prices, it speculated. Also, because the programs are so far focused on higher-paying jobs, students might be nudged away from important but less-well-compensated fields such as teaching and social work. And sorting details about taxes or what would happen in bankruptcy is complex.

But advocates argue that paying for college now is also complicated and expensive, and discourages many Americans from going. The interest rate for undergraduate federal-government-subsidized student loans is 6.53%, and Americans hold more than $1.7 trillion in student loan debt.

Another unexpected issue: Students are surprisingly suspicious of the programs. Many have experienced misleading promises of financial aid from universities and colleges, the changing rules for federal loans and slow and unresponsive loan servicers.

No students responded to an initial email he sent out announcing the fund, said Brennon Morioka, dean of the University of Hawai’i College of Engineering — and their program is small. Since it began in the fall, 17 engineering majors have signed up, according to Harris at the Castle Foundation, fewer takers than anticipated.

“I thought it was too good to be true, but I took a chance,” said one, Melanie Habon, whose immigrant parents from the Philippines encouraged her to become a structural engineer.

Habon said she worked on new graduate housing going up on campus, a project she joined as an intern for one of the firms that’s part of the program.

“I like that there’s a direct line from being a student to working in your industry,” she said. “And I like that I know where my money will be going.”

This article was written by the Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education.