But there is the other side: schools have less restraint on raising tuition. If the government is giving out loans like candy, schools don't mind hiking the tuition higher and higher every year (well beyond the level of inflation).

I noticed that with my school. I was in graduate and under-graduate school at the same university. I was there for 7 years. The tuition kept going up at an enormous pace and the school just stared building stadiums, shopping areas, recreation centers and other seemingly useless stuff. Incoming students and their parents had to take higher and higher loans.

I graduated without any loans and we payed my wife's loans in 2 years but that is definetly not the norm.

Producing graduates that are enslaved to paying back giant loans makes less able to competitively choose work places (they can't quit a job they don't like as easily because they have to keep paying another, rather large monthly bill).