<p>What happens if you declare bankruptcy on a personal loan? The bank gets nothing. What does the bank get on a foreclosure? About 80% (which results in an overpayment that’s redistributed back to the defaulters, in many cases).</p>
<p>The fundamentals of the system (what’s germane to this discussion) are sound. The problem was the the banks underestimated the risk on subprime mortgages and extremely low down payment mortgages because of some nifty bundling to hide the risk, leading to more high risk-loans than should have happened with shoddy oversight. That’s not relevant to the comparison between student loan rates and mortgage rates.</p>