HIGHER EDUCATION BUBBLE UPDATE: Generation Jobless: What Hedge Funds Can Teach College Students.

Historically, investors have assumed 25% to 30% of student loans bundled into their bonds will default. But today they are baking in between 30% and 40% default rates among the current crop of graduates, said Chris Haid, a director in asset backed trading at Barclays Capital. Even those assumptions are a best guess and defaults could ultimately go higher if unemployment rises, Mr. Haid said.

This analysis translates into some surprising insights for students and policy makers. For example, in the current economy, it may make more sense to enter a technical college than to go to law school. . . . Failure to graduate is the single most important predictor of whether a student will default on loans, which stands to reason since the unemployment rate is 8% for Americans between the ages of 20 and 24 with four-year college degrees, compared to 21% for those without.

Just as important is finishing on time. Investors in bonds backed by student loans hate to see perpetual academics in their portfolio, chronically changing majors or stopping and starting school, adding years of tuition to their debt load.

“When you see a guy in a loan made in 2005 that is still in school, you throw that away,” said investor Rubin Bahar, of Eagle Asset Management.

In terms of picking a school, technical colleges may be less prestigious, but their low cost relative to the higher wages they deliver makes them attractive, according to Mr. Ades.

It’s an investment. You need to think carefully about whether it will increase your earnings enough to service the debt and still leave you ahead — especially after adjusting for risk, including the risk that you won’t graduate, or won’t do as well as you hope.