I posted in the other thread that some of the interest income is (or at least was) earmarked. I realize the Feds move money around so maybe it doesn't matter but it still reduces revenue. So maybe you could charge what the Feds pay to borrow what they loan but it causes short falls elsewhere.
The other concern I have with it is reducing the cost of borrowing will encourage more borrowing which drives the cycle again and puts upward pressure on tuition.
IOW - I don't know if reducing interest rates would be a net positive.
Personally I advocate reducing the borrowing limits to put pressure universities/colleges to be more cost efficient. Might hurt in the short term but reduces the structural problems that will keep this problem a constant.