Just because it's unsecured doesn't mean we shouldn't be able to discharge it with bankruptcy.
Get the government out of the loan business and the market will correct itself. You won't be able to get a loan for a useless degree and if you end up being unable to pay off your loan you can go through normal bankruptcy proceedings and their consequences.
http://www.economist.com/node/21559618 quoting a research paper:
"With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks — which consist mostly of changes in financial aid — account for the lion’s share of the higher tuition."
And then:
"so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay."
If existing lenders aren't willing to loan to minorities, then there would be a fantastic opening to make a profit in loaning money to poor minorities with high test scores to study STEM.
The US is very deeply invested in the idea that the way to overcome the disadvantages faced by members of certain minorities is education. But those same disadvantages make those students worse credit risks. A credit-based system looking to optimize return wouldn't give these students access to the same educational opportunities.
If the problem is that minority students have difficulty achieving at the level of white students, let's focus on that. I don't think it's very helpful that we saddle these students up with loans but then they don't even end up graduating. Instead of forcing lenders to lend to bad credit risks, let's come up with ways to support minority students so they aren't credit risks. I personally would be happy to invest in minority students studying CS, for example.
And yes, it will be somewhat painful in the short term. We'll have to confront the reality that lending to students with low SAT scores to study esoteric subjects is maybe not a good idea. Perhaps it would even encourage such students to not waste their time and money on bad degrees.
Then again, if less ppl could afford a degree in Queer Musicology (does exist - https://www.musicology.ucla.edu/mission-and-history-1) or let's say Environmental Studies etc maybe the supply and demand would even out so that'll be a good thing.
If you got rid of the insanity that is federal loans it would just increase demand for state schools and community college.
Given that federal loans have always had rates set by government policy (not market rates) and the fact that private participation in the program was ended in favor of exclusively direct loans in 2010, I'm not sure what the concern for "market rates" is -- there is no market involved.
God forbid.
Absent a government, lending is a lose-lose situation. The lender has little recourse to compel the lendee to pay, and the lendee has no protection from the lender.