The problem is that anyone can get a loan, even people who definitely have no prospect of paying it back. With guarenteed loan money, schools can charge whatever they want and you'll just have to take out a bigger loan. And of course 18 year olds fresh out of high school don't understand the power of compound interest, they just know that they "have" to go to college to get a good job and they'll get a better job if they go to a fancy private school.
While you can't get a bachelors from our local community college, it only costs $2,500 a year in tuition and you're getting credits that can transfer to any state school. Why can a community college offer actual college classes for that little, but a 4 year school can charge $10,000, $20,000 or more for largely the same education? Its just insane.