What Student Loan Squeeze?

Still haven’t nailed down your student loans for the coming semester? Worried about your chances of getting money amid reports that student loans have dried up? Fear not. Federal loans, the best and by far the most prevalent student loans, are still available.

As for private loans, which make up a relatively small part of the student-loan universe, students with good credit and a creditworthy cosigner can still get those, too. But expect to pay higher fees and interest rates than in past years. Here’s the skinny.

Stafford Loans: Still Available

A few months ago, the picture for all student loans looked grim. Many lenders, including several big ones, were having trouble financing the federally backed student loans known as Staffords. That represented potential disaster for the six million students who rely on these loans, which offer a fixed interest rate (6.8% or less), flexible repayment and other generous terms.

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Lawmakers averted the crisis by giving the Department of Education authority to buy back the loans from lenders or otherwise provide financing for them. The move staunched the flow of lenders out of the student-loan market but didn’t stop it altogether. Since last spring, more than 100 private lenders -- most recently Brazos and the Massachusetts Educational Financing Authority -- have suspended some or all of their federal student-loan programs, according to Mark Kantrowitz of Finaid.org. But other lenders, including big players such as Sallie Mae, PNC and Citibank, have picked up the slack.

The effect of all this drama? For students who attend schools that participate in the federal Direct Lending program, none: Those students borrow directly from Uncle Sam. As for students who borrow their federal loans through private lenders, as most do, those who haven’t already lined up a lender should head straight to the financial-aid office, says Kevin Walker, of SimpleTuition.com, a student-loan comparison site. "Those offices are on the front lines. They know who is making the loans and who isn’t."

Private Loans: Tough to Get

The solution isn’t as easy for families who still hope to secure private loans, which some families depend on to fill any gap between federal loans and the cost of tuition. About 30 lenders, including Bank of America and Wachovia, have lately dropped or suspended their private student-loan business, and lenders who remain have tightened their underwriting criteria.

Where once students with poor credit -- say, a FICO score of 620 -- could get one of these loans, it now takes a score of 650 or higher plus a creditworthy cosigner. And borrowing the same amount of money will cost more in interest rates and fees than it did a year ago.

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Some lenders are refusing to make any private loans to students who attend community college or career-training schools, where the population tends to be lower-income. "A year ago, probably 75% or 80% of our students were approved for a private loan. Today, the estimate is 25% to 35%," says Harris Miller, president of the Career College Association.

To help students with poor or no credit fill the gap between federal student loans and tuition, lawmakers recently raised the maximum on unsubsidized Stafford loans by $2,000 annually. Students can now borrow up to $5,500 for their freshman year, $6,500 for their sophomore year, and $7,500 each for junior and senior years. That boost has been especially helpful for students at career colleges, says Miller, because $2,000 represents the amount they typically borrow in private loans to cover tuition.

For students who still fall short, "institutions will have to look at what they can offer," says Justin Draeger, of the National Association of Student Aid Administrators. The financial-aid office may have the flexibility to give your strapped student a tuition discount, a bridge loan or a tuition payment plan. Meanwhile, students should scout out grants and scholarships until the last minute, says Miller. "Pursue all the avenues."

PLUS Loans: To the Rescue

Parents who are willing to borrow to help finance their kids’ education have another great resource: PLUS loans. The parent equivalent of Staffords, these federally backed loans not only offer a fixed rate of 8.5% or less plus flexible repayment terms, but they also let parents of dependent students borrow up to the full cost of attendance.

To get the loans, parents must pass a basic credit test. Standards have always been relatively lenient, but recently they’ve been relaxed even more. At one time, being seriously delinquent on mortgage payments or bills would have been a deal breaker. But the same legislation that raised the limit on Stafford loans leaves the door open to applicants who are no more than 180 days late on repayment of a home mortgage and no more than 89 days late on other debt.

Under the old rules, repayment of PLUS loans had to begin within 60 days of disbursement unless lenders agreed otherwise. Under the new law, you can defer repayment until six months after your student graduates.

Dependent students whose parents don’t pass muster under the new standards have yet another fallback. They qualify for a higher amount of Stafford loans: up to $9,500 a year for the first year, $10,500 as a sophomore and $12,500 as juniors and seniors.

Home Equity: Don't Count on It

Not long ago, home-equity loans represented a crucial element in college financing, and for good reason. Families could tap the equity in their homes and deduct the interest on up to $100,000 of the borrowed amount. In recent years, families have tapped as much as $25 billion annually in home equity to cover education expenses, says Walker.

In areas where housing prices have dropped, however, lenders have frozen or reduced home-equity loans, limited the amount homeowners can take out in new loans, or stopped making the loans altogether. (See The Home Equity Door Slams Shut.) Parents who no longer have access to this resource can go with a PLUS loan or call their student’s financial-aid office to discuss other options.

For a full rundown on the ins and outs of borrowing for college, see Borrow Smart.