I believe that all schools should have partial liability for the defaults of their students. You make a good point that this heavy-handed regulation of schools by shutting them down can hurt a few people who may benefit from alternative schools.

If all schools were partially liable for loan defaults (say 50%), they would pay far more attention into creating programs that have good job prospects and less on programs that just sound good. They'd also have an incentive to charge a reasonable tuition instead of maximizing the cost based on what can be borrowed. And they would spend a great deal more effort on job placement after graduation. The government would not have to pick and choose what schools to close down.