Penalize or Incentivize?

I thought it might be useful to look at how student loan borrowers are treated to gain some insight into why we languish and suffer so much. It has dawned on me that the system might be setup to make it so.

Commonly, student loan borrowers are punished when they experience trouble paying back their loans or default altogether. While punishing those that don't pay their debts is an acceptable concept within our society, it has its limitations and weaknesses and therefore may not be in everyone's best interests.

Merriam -Webster defines punishment as a penalty inflicted on an offender. In the United States the principle of using penalties is most commonly used within the criminal justice system. Our system of imprisonment is often called rehabilitation but for those imprisoned I would say it is a actually a form of punishment. Furthermore, the criminal justice system in the United States is far from perfect. The law often acts blindly and without compassion. As a result, mistakes are often made and we have a system that currently incarcerates millions.

So it might be fair to say that punishment is not always the best answer to a problem, especially if rehabilitation is the goal. Other methods of correction, such as positive reinforcement, often work more effectively when trying to show someone the right way to do something or to keep them on the right track.

Positive reinforcement involves providing some kind of positive stimulus to a subject so that they begin to attach strong, positive feelings with the desired outcome or behavior. This kind of system is used in business, in the form of bonuses. Bonuses are promised in expectation of profitable work. A bonus is therefore a type of incentive.

Merriam-Webster defines an incentive as something that incites or has a tendency to incite to determination or action.

Where student loans are concerned, or any loan for that matter, it would be ideal to incite student loan borrowers to courses of action such that they pay off their loans successfully and preferably in the short term. So if incentives work well then why does our financial system prefer to treat student loan borrowers like criminals and not like people who we want to do successful business with? That certainly is a question that I have yet to see answered by anyone in power, politically or financially, but its time it was asked.

Instead of creating a situation in which borrowers are strongly encouraged to make successful repayment, the current system makes threats and inflicts severe punishments in the case of nonpayment or default. The current system does little to incite heightened or lifted spirits for those struggling to repay. Instead it penalizes them with interest, penalty fees, and crushed credit scores if they experience trouble repaying in the expected amounts.

While it would be naive to think that a system that relied on positive reinforcement would be without problems and not have any defaults its not too outlandish to expect defaults to drop dramatically. Let me illustrate with an example.

If a student loan borrower, who we have every expectation of becoming successful and eventually a generous taxpayer, was given a ten year moratorium on any interest on their loans what might be the outcome?

For many people, that ten years would be an incentivized opportunity to get completely out of debt. Many would work harder, perhaps even more than one job for the hope of being free of the burden in the short term.

To further incentivize repayment we could add in some negative reinforcement, by adding in an undesirable stimulus such as interest after the first ten years, perhaps on a graduated scale for each year after the ten years was over.

My point with all of this is that obviously the penalty system is working for finance companies. It is however not so successful for borrowers or the government. So its time for new ideas. Its time to elevate the hopes of all students everywhere - that they can get an education and they can pay for it.

This is only one part of the bigger picture however. We must also begin to address the why of the current system and how we change that. As I have already alluded to, who benefits from the current system of loan punishment and why would they fight like hell to keep the status quo? That, my friends, will be the subject of future posts.