I finished college and graduate school a few years ago. I accumulated some student debt in graduate school. Since it affects me, I have been researching the topic. Much of it looks scary, even dangerous. On the one hand, it seems as though the situation is out of control because of the lack of regulation and skyrocketing tuition. On the other hand, I honestly think that a lot of people who take out large amounts of student debt do so unnecessarily and somewhat irrationally. I also am beginning to think that the strain of the student loan system could go the way of the subprime mortgage system. Ultimately, these loans are dragging down an entire generation with debts they will never be able to repay.
The more human side of me says that the system has gotten the way it has because of greedy companies, amoral republicans and the dismantling of the student loan regulatory structure. This argument is very compelling. Even after adjusting for inflation, college tuition is 3 times as high as it was 30 years ago. The cause is partly because of a debt-infested federal government, unable to give as much money to the states. This leads to state governments (most of whom are required by law to balance their budgets) deciding to cut spending, and thus they turn to their public colleges. The fact that the government-run student loan organizations have become privatized, and an entire private student loan industry has emerged, only make this worse.
Another side of me says that while all of the above arguments are true, the mess we are in is not purely the result of an out of control industry and rising tuition rates. I really believe that many students take out unnecessary loans. Some of this can even be described as irrational. One good example of this would be someone getting into 50k in extra debt so that they can go to a private college that they didn't have to, rather than a state school that they have easy access to. Another would be students staying in school too long due to indecisiveness (either taking a very long time to decide what to major in, or going back and getting degree after degree). These aren't universally the result of being irrational, however irrationalism often does play a major role. Many students just don't realize how big of a burden they are taking on. They don't realize how hard any debt is to pay back. They eventually realize this, however, after it is too late.
The student loan industry has the potential to go the way of the subprime mortgage industry. Like mortgages, many student loans are securitized into massive bonds, and sold to investors. Pieces of these bonds are everywhere. They are in funds held by insurance companies, pension funds, mutual funds, and many (maybe even most) 401ks. Students are accumulating so much debt that if there are widespread defaults, these bonds could collapse in value, triggering waves of losses. Just like subprime mortgages, student loans are often given to people without a genuine ability to repay the loan.
But I also see a very personal side to this. These loans are threatening the very future of much of my generation. Many people have 100k or even 200k of loans. Since low-interest government loans are limited (only about 18k per year under the best of circumstances), people who have large amounts of debt often have large amounts of private debt. Private student loans can involve interest rates as high as credit cards (20% interest is not uncommon). But thanks to the 2004 bankruptcy bill (and unlike credit cards), these private student loans cannot be cleared in bankruptcy. So if you simply can't afford to pay a 200k loan with a 20% interest rate, while working in your entry level job, there is little you can do. The interest and fees just accumulate, causing the balance to increase. I have heard many stories of people committing suicide because loans like these became unmanageable.
I really don't know what the answer is. The best thing I can think of would be an approach that addresses several of the problems. First, tuition at state schools should be lowered (which could probably only happen if the federal government paid states more). Pell grants ultimately don't reach many people. The people that they do reach typically are the ones making the top grades. Having a B- average shouldn't be a reason why some people are denied an education. Second, the "wild west" private student loan industry must be regulated. Third, the annual limit of government-subsidized loans should be increased. And finally, all private student loans should be dischargeable in bankruptcy. In many ways, private student loans are not that different from other types of private loans. The ability to discharge the loan in bankruptcy is the major difference.