A policy proposal suggests giving $500 for making 3 on-time student loan payments to combat student … More
A Renewed Student Loan Reckoning
After a three-year pandemic pause, the student loan system is at a critical inflection point. As payments resume, borrowers face a looming student loan reckoning, with delinquencies surging and credit scores plunging. The White House ended the student loan payment pause in October 2024, marking the first time that millions of Americans were required to repay their federal loans in four-and-a-half years. Early data shows fewer than half of borrowers are making payments. Over 9 million borrowers are delinquent and counting.
Against this backdrop, one policy expert has proposed a novel solution: Credit borrowers $500 to jump-start their loan repayments and run a media blitz to ensure borrowers know that loan payments have resumed. The idea, championed by Preston Cooper, a senior fellow at the American Enterprise Institute, is straightforward: offer a $500 carrot to encourage borrowers to get back on track by making three loan payments. In an interview, Cooper discussed how his plan addresses two core challenges simultaneously — motivating borrowers financially and improving communication around loan obligations.
$500 Incentive For On-Time Student Loan Payments
Cooper’s proposal is built on two pillars: messaging and incentives. First, ramp up messaging to ensure every borrower knows payments have resumed. Second, bolster servicing resources to manage the transition. Third, offer a $500 incentive as a catalyst for re-engaging borrowers.
A one-time incentive acts as a nudge, aiming to break inertia and rebuild the repayment habit after years of forbearance. It’s a tangible reward for responsible behavior and would facilitate messaging: “The federal government is offering you $500 to start repaying your loans again,” as Cooper articulated. He believes this headline-worthy offer would grab borrowers’ attention and entice them to reconnect with their loan servicers. Once borrowers complete the first three payments, they’re more likely to keep paying thereafter, easing them out of the delinquency trap and reducing long-term default risks.
This proposal isn’t about long-term subsidies; it would be a short-term jolt to restart a dormant repayment engine. Importantly, borrowers must engage with their loan servicer to claim the credit, ensuring they update contact info, select a repayment plan, or consider income-driven options. It’s a strategic marriage of financial incentive and behavioral economics: prompt action now to foster a lasting repayment habit.
Media Blitz To End The Confusion About Student Loan Payments
Cooper’s plan also calls for an all-out media blitz to eliminate confusion over the status of student loans. The return to repayment has been chaotic — marked by multiple false starts and mixed messages. Borrowers heard payments might resume, only to see last-minute extensions. Then came the on-again, off-again loan forgiveness announcements, culminating in a Supreme Court ruling that struck down broad debt cancellation. According to Cooper, by late 2024, many were genuinely unaware that payments had resumed.
Cooper urges a coordinated outreach campaign to counter this confusion: prime-time announcements from the White House press briefing room, mass email and text campaigns by loan servicers, and enlistment of colleges and universities to notify their alums. Cooper argues that this unified front is critical because, without it, even the best incentive could falter if borrowers don’t know they need to act.
Such outreach is not just prudent — it’s urgent. Servicers report many borrowers have moved or changed emails during the pause, breaking the usual lines of communication. Cooper notes that colleges can be valuable partners in this effort. Schools often maintain updated contact info for alums and must educate borrowers on loan terms when they leave campus. Tapping into these networks can extend the government’s reach, ensuring no borrower is unaware. By leveraging familiar voices and repetition, the campaign aims to cut through the noise of daily life and lingering confusion.
Why Now? The Post-Pandemic Student Loan Reality Check
The urgency behind Cooper’s plan stems from stark post-pause realities. During the long reprieve, borrowers fell out of the repayment habit, and some grew to expect loan forgiveness that hasn’t materialized. With payments back on, consequences are returning: missed payments are reported to credit bureaus, causing credit scores to plummet by 100 points or more for some.
Cooper points out a troubling trend: It’s not only struggling borrowers who are falling behind but also those who previously had good credit. These individuals likely can afford their payments, but “poor messaging and lack of awareness” about the restart have tripped them up. In other words, confusion, not just financial hardship, fuels delinquencies. That new pattern raises alarms; if reliable middle-class borrowers default en masse, the ripple effects could hit the broader economy, from housing markets to small business lending. This is why clear communication and a compelling incentive go hand in hand — together, they tackle both the awareness and motivation gaps.
Crunching TThe Numbers Of A Student Loan Incentive
Of course, giving $500 credits to potentially millions of borrowers isn’t cheap. Cooper acknowledges that federal costs could run into billions of dollars. Rough modeling suggests if 35 million eligible borrowers earned the credit, it would cost about $18 billion. However, he believes not everyone will participate; actual costs would likely be lower.
Even at the high end, Cooper believes this one-time expense could save money in the long run because every month a borrower stays delinquent, the government risks losing money in unpaid interest and eventual defaults. Investing in a one-time $500 nudge might prevent considerable losses by keeping borrowers on track.
Cooper also notes an important nuance: the $500 is a credit, not cash in hand. Borrowers can’t spend it on other needs; it strictly reduces their debt. This design keeps the program focused on loan repayment while giving borrowers a psychological boost — their balance shrinks as a reward for doing the right thing. It’s a targeted approach, arguably more palatable to critics of outright debt cancellation.
There is also precedent for this approach. “Borrowers can receive a 0.25% interest rate reduction if they sign up for auto debit payments online,” as The Institute For College Access & Success notes.
Political And Practical Hurdles Of A Student Loan Incentive
Implementing the plan wouldn’t be without challenges, and any new spending on student debt initiatives could be contentious. Some lawmakers might balk at what they see as a handout for borrowers, especially soon after a costly pause. Cooper preempts this by framing it not as a giveaway but as an investment in rebooting repayment. The modest scale—$500 per person—is far less than proposals to cancel $10,000 or more per borrower, making it a more fiscally tempered idea.
Is $500 enough of an incentive? Behavioral economists might argue that any incentive can help, but will this amount truly move the needle for those deeply apathetic or financially strained? Cooper chose $500 as a starting point, emphasizing the concept over the exact number. The key is striking a balance: large enough to motivate action, small enough to be politically feasible.
The Upshot Of A Student Loan Incentive
Does a $500 incentive plan offer a creative spark plug as America’s student loan machine returns to life? Cooper’s proposal highlights a reality that after years of policy whiplash, many borrowers need more than a due date to resume payments—they need guidance, reminders, and a little encouragement. By pairing a financial carrot with a megaphone of clear messaging, Cooper’s proposal tries to do just that: jump-start repayment and keep borrowers engaged.
