Monday, July 09, 2012

Option B

In the post below I reference an older idea where the Fed would buy student loans.  People would keep paying them off, but however much was sent in for the loans would be returned on a cash card that they had one month to spend.  Basically it was a way to boost the economy that would also help deal with the "people will just save the extra" issue that can arise from most give people money schemes.

It made me think of other strategies to work this.  A clearinghouse strategy that people could opt into.  Basically the government (maybe the fed) will pay off your debt matched to your spending.  It would have a similar effect to that above, but would be more versatile.

It starts with a government owned/subsidized/controlled bank, let's call it "The Fed" which has effectively unlimited supply of money at its disposal.

Then every citizen of the US is issued an account with this bank, into which it can transfer certain debt.  Different limits would apply to different debt.  The transfer option would be open for 1 year.  The account would last for a [user defined?] period of 2-5 years.  No debt accrued after the opening of the accounts would be eligible (not the transfer, the opening).

This would function like any standard bank account.  Any amount of money could be transferred into the account up to the total debt initially placed in there, and that money would a) pay off the debt and b) be available for use through a debit card.  It cannot be transferred to savings or be used it to pay a mortgage or student loans (they don't go away...yet) but it could probably pay most bills.  Any savings, investment, along with the mortgage and student loan payments would have to be from funds not deposited to the account.

For example: someone with $4k take-home per month, $45k of student loans and a $225k mortgage on a $185k house transfers in $40k of student loan debt and $100k in housing debt for $140k total.  The timer is set to 5 years.  She sends half of her paycheck to her normal bank from which she pays mortgage, student loan (minimums), any bills that can't be charged, and maybe sets some aside for savings/emergency cash.  The other half goes to the debt bank, and with that card she pays for groceries, online purchases, clothing, bills, maybe some is saved up over time to be used for vacation, et cetera. At the end of 5 years $120k of debt is "paid off" and that total is dispersed to the relative accounts proportional to what went in (~$85.7k to the mortgage and ~$34.3k to the student loans).  If this is enough to pay off entirely either one of these then the excess goes to the other, and if both are paid off entirely is returned in cash to her.  If she added a bit more after year one and reached the $140k limit ahead of time, then that would end the program and everything would be paid out then.

Note that any funds put into the account but not spent would be "lost" (actually just the bonus money is lost, it still pays off debt).  To encourage faster spending setting a 3 month time period on the funds going in would help.

This type of mechanism is helpful for a few reasons.  One is that it helps with getting out from under debt in a meaningful way: if she can put $140k into that account over 5 years she can probably completely eliminate her student loan and get a huge fraction of her mortgage covered.  It is also no risk: she doesn't lose out on that money to paying off debt, it pays off debt and she gets to use it for normal spending.  She doesn't have to worry about a surprise repair bill preventing her from paying into this, because money paid in can be used to cover that surprise.  It is also a boost to demand: the money is only a bonus if people spend it on stuff, so it encourages more spending.

The biggest downside is that it is overly beneficial to people with decent jobs and lots of debt, but there are a couple fixes: one is the debt limits, and the other is some partial to complete payoff option.  The payoff option would be a benefit to lower income individuals: anyone who put at least [income/2k]% into the account could be forgiven up to [10k/income]% of the total (someone making $25k/year would need to put at least 12.5% into the account and could be forgiven up to 40% of the total).

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