"the psychological effect of borrowing from the government - I think people tend to feel safer doing this than borrowing from an obviously competitive private firm. If you read the article, the casual attitude of student debtors to defaulting on their loans shows this - the government has no teeth. The private firm goes bankrupt if it doesn't get a return on investment. "

All of the above is incorrect.

(a) Student loans in the US are mostly not from the government in the first place, they are from private investors or banks that the schools have made deals with. The USG role is guaranteeing them.

(b) Generally, in classical capitalism, firms will go bankrupt if they don't get adequate returns on investment - but this situation has been distorted by the government guarantees. They get reimbursed if the debtor defaults, and carry on. By exploiting this subsidy they make big profits, that's why they're in it.

(c) I don't know about student-loan-borrower attitudes, but their debt and enforcement of it are not casual. The GSLs are not dischargeable in bankruptcy, so they are basically a lifelong burden unless paid off. And defaulters are subject to wage garnishment and other onerous court judgments.