Economist Preston Cooper has proposed a plan to combat student loan delinquency by offering borrowers a $500 incentive for making three consecutive on-time payments. This initiative is seen as a response to concerns about the escalating number of Americans behind on their payments following the expiration of the pandemic-era freeze on federal student loans. The plan could encourage engagement among borrowers disillusioned or confused by fluctuating federal policy, with the aim to ultimately save money by reducing default rates.
The proposal from Cooper, a senior fellow at the American Enterprise Institute, suggests that Congress could authorize a repayment incentive where borrowers who make three on-time payments would receive a $500 credit applied to their loan balances. This approach seeks to reignite borrower engagement which was affected by the payment pause imposed during the pandemic. Cooper views the pause as one of the worst mistakes in the history of higher education policy, leading to disengagement from repayment obligations among borrowers. The $500 incentive would reward borrowers who demonstrate a willingness to repay, rather than blanket forgiveness.
Forbes estimates that integrating Cooper’s plan into the existing student loan servicing infrastructure could be achieved without major technological changes. Borrowers would only receive the $500 bonus after successfully completing three consecutive monthly payments, with the goal of not just providing financial relief, but also reinforcing positive repayment behavior. However, the cost of the proposed incentive could be significant, estimated to be around $18 billion if 35 million eligible borrowers earned the credit. This may conflict with the current administration’s agenda, as efforts have been made to reduce federal government programs related to student loans.
Financial experts have expressed mixed reactions to the $500 bonus proposal. While some view it as a clever psychological nudge that could help borrowers establish a repayment routine, others believe it may not be enough to address the root causes of student loan delinquency. As borrowers face increasing consequences for missed payments, such as tax refund seizures and credit score hits, policymakers may find renewed urgency in proposals like Cooper’s that emphasize incentives over penalties. However, the viability of implementing such a policy in the current political climate remains uncertain.
In conclusion, Preston Cooper’s proposal for a $500 incentive for borrowers making three consecutive on-time payments aims to address the issue of student loan delinquency by encouraging engagement and positive repayment behavior. While the plan could potentially save money in the long run by reducing default rates, its implementation may face challenges due to the significant cost and political climate. Financial experts have differing opinions on the effectiveness of the proposed incentive, with some viewing it as a useful tool in establishing repayment habits, while others believe it may not address the underlying issues causing delinquency. Policymakers may need to consider innovative approaches like Cooper’s to address the growing problem of student loan defaults effectively.
