QE3 Student Loan Buy

I have been sending mental waves the way of Ben Bernanke regarding a QE3 program that would actually boost consumer demand by buying consumer debt rather than US debt. My "buy student loans" program would be a real boon to the economy in a way that giving banksters more money couldn't possibly be.

I do keep running into the same couple problems, however. The first is people like me, who would say "Thanks" and then put most of the extra into savings. It wouldn't all go there so it would still be a greater benefit than would be giving the money to banks, but not huge. This is largely solved by the somewhat complex scheme I outlined in the first post on this a while back. But I don't know if that would be a real possibility. Mostly that just isn't how the Fed does things. They just create money and buy stuff with it. They could probably buy all of Sallie Mae's outstanding student loans, but I doubt they could do the other part of the program that would ensure people like me do put extra into the economy.

I don't think that this is a terribly large problem, however. Student loans and payments on them have a larger effect on people just out of school. These are also generally people who could really use the extra money to buy things, and so for the most part this would still be a good deal, and would certainly a much, much better for the economy than would buying the equivalent of long term US bonds (and probably better than buying 10 times the amount of US bonds).

The other issue is how to argue against the "moral hazard" argument. The problem is that some student loan debt is accrued very badly. This could be someone picking up $100k in debt to get a fine arts degree that will lead to a $32k/year job. It could be someone taking on debt for 2-7 years of school, but who gets no degree to show for it. I think that the general argument against this is that 1. these are a very small fraction of the total student loans outstanding and 2. penalizing people for decades based on decisions made when they were 18-22 and really couldn't get the best information doesn't really send the best message. Also, I think that (state college) education should be free, so a one time forgive-all is still a good thing.

The other side of the "moral hazard" argument is that colleges and loan companies will use this as an excuse to step up costs and rates, and probably to be even looser with admission/approval. This is the harder side to deal with. If this really establishes some precedent then it could make the education situation worse. I'm not very concerned about this for a couple reasons. The main one is that this situation is not exactly normal and the Fed, if they were to do this, wouldn't be quick to repeat. The other reason is that there are so many problems currently--between high costs, predatory loan making and political gridlock--that I don't really see things getting much worse anyway.