1. Useful degrees from good universities will be easy and cheap for good students to fund.
2. Everything else will get harder/more expensive to fund, in proportion to its statistical returns.
That's all you really need to fix the system.
But if you move the risk of default onto the "market" via private lenders, then, the theory goes, the rates a student can expect will be swamped by other factors than the value of their prospective education, notably whether they have a sufficiently credit-worthy parent to cosign.
Maybe the best bet is to have market rates that are "cushioned" by the Feds in a need-based scheme.
If you're a responsible lender, you sure as hell should look at the risk profile of the borrower. If the borrower is asking $200,000 to go to a private college for a liberal arts degree, you may want to assign a higher risk to him, then if he was going to Med school. In other words, you may want to go through the same exercise you go through to approve small business or real-estate loans. The problem is that you don't need to be a responsible student loan lender since the federal government will just guarantee you the loan anyway.
High-tier school with a degree that has great employment potential? Throw a loan at that kid, that is a good investment.
High-tier school with a degree that has great employment potential... but the program has a 99% dropout rate? Think twice about throwing a loan at that kid, if he is in that 99% then you will have a hard time getting your money.
Shit school with a vanity degree? Tell that kid to get lost. If he wants a vanity degree, he can pay for it himself.
But the schools are profiting immensely from the difference between the perceived value of a degree and the actual value. They'll never get into the loan business without being forced.
But I agree they should have some skin in the game. My favorite idea on that end is students should be able to partially default on loans, and the schools should be required to share the loss with taxpayers.
A couple of points:
First I don't think such a school would remain the best very long. There was a time when CCNY and the CUNY system in general had a fantastic reputation largely because it served an immigrant population that the Harvards of the world refused to take on as students or faculty. CCNY's fortunes turned around for many reasons, but one of them was that the traditional top schools dropped their racial/ethnic quota systems and introduced aggressive need based scholarships.
Second, I think we a society need to move away from the idea that 18-22+ year olds are still members of their parents' economic unit. In Sweden college tuition is free, yet the percentage of students taking out loans is higher than the US because there is no expectation that parents will pay living costs. Perhaps banning co-signers for such student loans is going too far, but perhaps not.
I don't think the choice is "lend the kids a whole bunch of money to let them in" vs "don't let them in at all."
It's "lend the kids a whole bunch of money" vs "don't lend them a bunch of money, and still let them in."
It's possible I'm wrong about this, but we've definitely went too far in the other direction.
But for the many excellent schools without massive endowments, the risk of letting in more qualified "Caa3" applicants over "Aaa" applicants could make a substantial difference on the margins.
Surely this isn't that difficult a problem to solve. President Obama thinks his administration could start to address it:
http://www.insidehighered.com/news/2013/02/13/obama-calls-mo...
Libertarians tend to like the idea. But short of that, it's difficult to vote for reform that lands between perpetuate-the-problem and screw-an-entire-generation.
We can fix the problem of paying for education, but that solution isn't going to be found anywhere near the student loan debate.