A new proposal from economist Preston Cooper aims to combat widespread student loan delinquency by offering borrowers a $500 incentive for making three consecutive on-time payments.
The plan comes amid escalating concerns about loan defaults, with more than 9 million Americans behind on their payments following the pandemic-era freeze.
Why It Matters
The Biden administration’s pandemic-era pause on federal student loans expired in late 2024 after multiple extensions. Since then, borrowers have struggled to resume payments.
The Federal Reserve Bank of New York estimates that 9.7 million people are past due on their loans, and delinquent debt has ballooned to over $250 billion.
What To Know
Cooper, a senior fellow at the American Enterprise Institute, argues that modest upfront payments could reignite engagement among borrowers who have become disillusioned or confused by fluctuating federal policy.
“Congress could authorize a repayment incentive: borrowers who make three on-time payments would get a $500 credit applied to their loan balances,” Cooper wrote in an op-ed for The Hill.
In his op-ed, Cooper called the payment pause “one of the worst mistakes in the history of higher education policy,” noting its unintended consequence of disengaging borrowers from their repayment obligations.
The proposal would require congressional approval and funding, but he said it could ultimately save money by encouraging long-term repayment compliance and reducing default rates.
The $500 proposal functions as a performance-based rebate. Rather than blanket forgiveness, it seeks to reward borrowers who demonstrate a willingness to repay.
According to Forbes, Cooper’s plan could be integrated into the existing student loan servicing infrastructure without the need for major technological changes.
Borrowers would receive the bonus only after successfully completing three consecutive monthly payments. The goal, according to Cooper, is not just financial relief, but behavioral reinforcement.
However, it could be costly. Forbes estimated that if 35 million eligible borrowers earned the credit, it would cost about $18 billion.
This might not match with the current administration’s goals, as Trump’s Department of Government Efficiency has been working to make major cuts to federal government programs.
As part of this, Trump issued an executive order to dismantle the Department of Education and announced that Kelly Loeffler at the Small Business Administration would take over federal student loans from the DOE.
What People Are Saying
Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek: “While it’s difficult to imagine any type of financial incentive or student loan forgiveness being introduced in our current environment, this $500 payment is not really meant to provide debt relief as much as it is to get borrowers back into the habit of making monthly payments.”
Since the period of forbearance during the pandemic, we’ve seen reports that a sizable number of borrowers have yet to start making payments again. This could turn into a disaster, not just for the borrower’s credit score, but also for the government and other loan providers who depend on that revenue coming in. Offering an incentive to get borrowers back in the right mindset could go a long way.”
Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek: “The $500 bonus after 3 payments is a clever psychological nudge, not a solution. I’ve seen how early wins create payment momentum for borrowers. Similar to how that first 5-pound weight loss motivates me to keep going.”
Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek: “Honestly, it feels like a reach. The idea of incentivizing people to start making student loan payments again with a $500 credit? It borders on ridiculous. If someone isn’t paying their loans, it’s likely because they either can’t afford to, or they don’t care to. A small carrot like $500 isn’t going to move the needle much in either case.”
What Happens Next
With borrowers expected to face increasing consequences from missed payments—like tax refund seizures and credit score hits—policymakers may find renewed urgency in proposals like Cooper’s that emphasize incentives over penalties.
“For young professionals juggling rent and emergency funds, $500 is meaningful breathing room,” Ryan said. “What’s most promising isn’t the one-time cash but the behavioral pattern it establishes. During my nearly 30 years advising clients, I consistently observed that habits formed in the first 90 days of repayment often predict the entire loan lifecycle.”
The viability of such a policy in today’s political climate could be limited however, Ryan said.
“My issue is this approach addresses symptoms, not causes,” Ryan said. “For borrowers genuinely struggling with affordability issues, a one-time $500 won’t change the fundamental math of their situation.”
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