The discussion of formulas for pricing risk and forecasting methods is a great (if unintended) example of the problem with student loans: any government subsidy

The discussion of formulas for pricing risk and forecasting methods is a great (if unintended) example of the problem with student loans: any government subsidy will distort price signals in unintended ways. Even if government tries to price in risk (which is a good idea), the signals will only be as good as the regression analysis, will still be subject to political pressure, and will still concentrate rather than distribute risk. A poor forecast of the future demand for philosophers, or the decision to train more teachers for the public good will still result in human capital misallocation, even if it's not as bad as the current system. Compare this to private loans, which use the price system and mechanisms like futures markets to evaluate and distribute risk. Instead of one formula to price risk, many formulas compete and the information they contain is aggregated and summarized by relative prices. Risk is distributed among many lenders instead of concentrated in the hands of government. The worst possible equilibrium seems to be the system in place now: price signals are distorted by subsidies that cover most of the loan market, while private lenders serve those whose educations are so expensive that they aren't covered by already-generous government subsidies. Private lenders encourage these students to take out risky loans, while strict rules on default shift the risk to borrowers. There are all kinds of alternatives to student loans, but they will not be competitive while federal subsidies continue to distort the student borrowing market. One of my favorite ideas is human capital contracts (here's a good paper: http://www.cato.org/pubs/pas/pa462.pdf http://www.cato.org/pubs/pas/pa462.pdf), which would work like equity instead of debt. Students could sell "shares" of their future earnings to investors in exchange for the start-up capital for an education. There are lots of potential pitfalls with this model, but I think it aligns the incentives of lender and borrower (or investor and future earner) in a much more positive way: investors would have strong incentives to help students succeed that do not exist under the current debt-based model. Unfortunately, big subsidies are a big barrier to entry: there's no reason to offer equity when one can easily obtain a subsidized loan. I chose to attend a large state university on a generous scholarship and graduate without debt rather than attend one of the more prestigious schools where I was accepted and take on student loans. So far, I think it was the right choice. But if I had the necessary capital, I'd start a Y combinator for students: find students like me who would otherwise stay in-state and finance "prestige degrees" at an Ivy or other top university in exchange for a share of future income. The model would operate very much like a start-up incubator: providing mentorship and advice and placing students in well-paying jobs after graduation would have a direct effect on the profitability of the investment. It's just a matter of figuring out how to pick (or make) students who will succeed.