Previous guest blogger Anastasia Wilson has written a post on her own blog comparing the student loan racket (for-profit colleges help people take out lots of federally guaranteed student loans to pay for their tuition, then do a lousy job educating them, walking away with the money and leaving students to default) to the subprime loan racket. The flagbearer for this parallel is Steve Eisman, who has gone from shorting subprime mortgages to now shorting for-profit colleges.
In theory, for-profit colleges should not be able to do this. If too many of their former students go into default, the Department of Education is supposed to prevent their new students from taking out federally subsidized loans. (Since the government is ultimately underwriting these loans, it should have the power to make sure that the loans are being used to buy an education that will help borrowers pay back those loans.) But colleges have so far been able to get around the rules by pushing defaults outside the time period that matters for regulatory purposes, as described by the Chronicle of Higher Education.
Now, the traditional progressive solutions are (a) better regulation to crack down on colleges that don't provide a worthwhile education and (b) relief for borrowers, such as allowing them to write off their loans in bankruptcy. But I think it's worth asking: will that work? The latter won't change the behavior of the for-profit college industry any. The former sounds good, but it assumes a competent and well-intentioned regulator that cannot be pushed around by congressional committees (bought and paid for by industry).
In the abstract, I believe that society should be subsidizing higher education, both because it's an investment in human capital and because it helps equalize opportunity. But how do you weigh the people who benefit from subsidized loans against the people whose lives are being ruined by them?* Maybe we need another approach, like restricting subsidized loans to public institutions,** or restricting the amount so that it only covers public-school tuition, or switching from a lot of subsidized loans to a smaller volume of cash grants. It's possible that a few tweaks to the current system could be enough, but I wouldn't assume that at the beginning.
*"No one forced them to take out loans," I'm sure some of you are muttering to yourselves. Well, most cocaine addicts were never forced to use cocaine in the first place — but we still consider cocaine worth banning.