With the fracas in Washington over how to stop student loan interest rates from spiking, there’s more attention than ever on the student loan "bubble.”  To pinpoint apt solutions, it’s worth considering the college loan issue as a version of two already irksome public policy problems: the debt dynamics of the mortgage bubble and the third-party-payer problem of the health care system.

Echoes of the financial crisis

"The analogies between what we’re doing in higher ed finance and what was going on in mortgage financing are really quite eerie,” says Barmak Nassirian, an education finance expert at the American Association of State Colleges and Universities.

Colleges, for instance, are investing in Sallie Mae, which makes loans to students and sells them as student-loan backed securities. In doing so, they profit from high interest rates on loans given to students who pay their high tuition—and they’re the ones setting the tuition. It’s roughly analogous to banks profiting from mortgage-backed securities while the risk is carried by the investors who bought them and the borrowers who handle the debt.

And, just as ratings agencies and assessors let standards slide for mortgage loans, Nassirian says the accreditation agencies that govern college standards are allowing just about any institution or business to become eligible to sponsor student loans for attendees, driving the business of for-profit colleges with high student loan default rates.

Pay attention to who’s paying

There are many reasons why student loans have ballooned, but a major cause is massive increases in tuition cost, despite the fact that the advantages of a college degree have stagnated in recent decades. Just as with the health care system, another notable area of cost inflation, a big issue is the separation between the people paying for the service and the people consuming it.

Controlling costs requires that borrowers understand what they’re paying for, but measuring the benefits of a college education is hard—especially if you’re 18 years old and some combination of your parents, your government and your school are paying for it. Students saddled with loans also don’t know when they sign on the dotted line if they’re getting a good deal. And it’s easy to say yes when you’re 18 and won’t have to start paying back until after you graduate.

As a result, colleges have resorted to attracting students with massive investments in amenities that go far beyond core education. And yet all the buildings, extra staff, deans and sports may not improve the quality of education.

As default rates rise, there is growing concern about whether students are getting their money’s worth; Unlike credit card debt or auto loans, it’s very hard to get rid of student loan debt, even in bankruptcy. In response, some policymakers have suggested incentivizing schools to control costs and provide better education. "As we learned from the mortgage debacle, insulate someone from all inverse consequences, the downside doesn’t touch them,” Nassirian says.

-Tim Fernholz - TheAtlanticWire.com