It's exactly the same moral hazard as with home loans. There, the bank repossesses and sells the underlying asset so the only time they can ever lose is if housing prices crash. Presumably student loans are secured-by-fiat for precisely this reason.

Financial gamers inherently desire airtight abstractions so they can leverage the heck out of them. But this doesn't mean they should get this wish, since the purpose of the financial system isn't simply to perpetuate itself but to optimize for people.

Everyone needs a place to live, so under financial primacy the only limit on housing prices in a developed area is the economic rent on the principal. A college degree is worth a heck of a lot over one's lifetime, so the fully-optimized market solution is for most of that surplus to go to the credentialer.

In all cases of secured credit, the effect is for prices to rise such that things that used to be able to be owned are instead rented by most people.