A startling directive came out this week from Education Secretary Miguel Cardona. Any consumer who has defaulted on a federally-backed, privately serviced student loan will have their education loan interest rate drop to 0%, and there will not be any collection or repayment requests by lenders.
On the other side, those consumers who are current on their federally-backed, privately serviced student loans, are still being charged their normal interest rates and are being required to continue to make payments.
Isn’t this backwards many say? Are we promoting bad financial behaviors by offering better incentives to default on loans than those paying their loans?
A driver is penalize when he goes over the speed limit with a speeding ticket. That incentives a driver to conform to the driving laws. What if there was no consequence for speeding? There would be a lot more reckless behavior out on the roads. If there is a better incentive to not follow the traffic rules, what consumer would follow them? It is the same principle here.
When the government gets involved, there are winners and losers. The winners are consumers defaulting on student loans, and those losing are consumers making their student loan payments on-time. Why cannot there be a better reward for those making payments on-time?
If the government keeps going down this path of rewarding "Bad behavior", then many less consumers will want to make on-time loan payments? If less and less consumers make on-time payments, investors will pull back, loan guidelines will tighten such as higher credit scores and interest rates and fees will increase.
Think about it - who will want to lend money to a person who will not make their payments back in a timely manner? Lenders lend money to be repaid. As a possible result of this directive, many consumers may not be able to get access to loans to pursue opportunities given to them.
The U.S. Government is playing with a combustible fire that could potentially negatively impact future borrowing opportunities. Someone in government has to think about that. Who will end up losing – many more consumers – when they are denied future opportunities to take out a loan.
This is backwards. There will be a Big unintended consequence for this type of directive.