Let's say that banks could set rates based on risk and this did force lower quality colleges to reduce their tuition. Those colleges would bring in less revenue and program quality would likely suffer, possibly resulting in a feedback loop. Meanwhile, ivy league universities that are funded primarily by endowments would be able to raise their tuition without burdening their students, who would be able to afford larger loans given that they would be paying lower interest rates. In short, rich schools get negligibly richer while poor schools get significantly poorer. More importantly, Ivy league program quality would not improve significantly while lower tier college programs would spiral downwards.
If the goal is to promote quality education, the current system lets ivy league students subsidy lower tier college students to some extent. It makes more tuition dollars available to institutions that depend entirely on tuition at the price of restricting tuition dollars available to institutions that are less reliant on them. The status quo has significant advantages over what this article proposes. Higher default-rates are a problem, but the lesser of several evils (unless you happen to be a banker).
North of the border, university tuition is subsidied by provincial governments and regulated by them as well. It varies from province to province, but average tuition in Canada is far lower than it is in the U.S.. In most provinces, tuition is still expensive enough to be considered an investment, but cheap enough that thrifty living, summer jobs, and a minor scholarship or two can see you through undergrad without debt. It's a different approach that's worth considering.