The median cumulative debt among graduating Bachelor's degree recipients at 4-year undergraduate schools was $19,999 in 2007-08.
Graduate school was more expensive and it's worth looking at the table to see some of the ranges. But the main point is clear: education isn't inexpensive for the student.
What does this mean if we want skilled workers? Well, to some extent the expected value of salary increases (adjusted for unemployment rate) has to be worth both the debt and the opportunity cost. It is fine to talk about education as "self-improvement" but not if it is a requirement for a position.
So I think Mark is correct that performance based bonuses would need to be fairly high to compensate for the additional risk a pure merit pay based system would place on new graduates.