IN YET ANOTHER

signal that the credit crisis continues to take its toll, Sallie Mae, the nation's largest student-loan lender, said it will stop offering federal consolidation loans and cease paying loan-origination fees on Stafford loans.

The move echoes that of other top student-loan lenders who've been squeezed by both the credit crunch and a series of legislative moves that have left lenders to deal with shrinking profits.

Unfortunately, the situation is only expected to get worse. "If there's no government intervention and no thawing of the capital markets...there will be a mass exit of lenders from the student-loan programs," says Mark Kantrowitz, publisher of FinAid.org, an online source of student financial aid information. "Investor demand is much lower than the supply and that's causing a liquidity crisis in the student loan marketplace," he explains.

As a result, borrowers will have to pay the price. Former students who want to consolidate their loans can now only turn to the government and a small pool of lenders. Those heading to college are in an even more compromising position. Faced with the rising costs of college the average cost of a four-year private college in 2007-08 was up by 5.9% from the previous year to $32,307; public college costs rose by 5.9% to $13,589 for in-state students and $24,044 for out of state students, a 5.4% increase, according to the College Board and a string of lenders offering less financial support to incoming college students are faced with fewer options to help them afford college.

Here's what Sallie Mae's recent move means for borrowers:

No More Federal Consolidation Loans

There's a very simple reason why Sallie Mae, like other lenders, walked away from consolidation loans: They aren't very profitable. Typically, these loans command interest rates that are 75 basis points lower than the rates offered on Stafford and Plus loans, explains Kantrowitz.

"The joke in the industry is that the credit crisis took half of the profits [from the lenders]," says Kantrowitz. "And that Congress took the other half."

Introduced in the mid-1980s, consolidation loans were once a great way for borrowers to streamline outstanding federal student loans and reduce interest payments. Lenders didn't like these loans because they made less of a profit off of them, says Kantrowitz. And in early 2006, lenders further soured on loan consolidation. That year, the Deficit Reduction Act lowered borrowers' interest rates, thereby reducing the amount of money lenders could make off of these loans even more.

Last October, Congress struck again. It passed the College Cost Reduction and Access Act, which cut the interest rate that students pay on federal student loans while also reducing the subsidies that lenders were receiving for consolidation loans and increasing the fees they were paying to the government in order to sell consolidation loans. In short, consolidation loans became too expensive for lenders.

While Sallie Mae's decision to cease offering consolidation loans may seem like bad news for borrowers, it's actually not as grim as it appears. Consolidation had already become a bad idea for individuals holding onto federal student loans well before Sallie Mae's move. After all, the main incentive behind consolidation was to take your variable rate loans and combine them into one with a fixed rate. But since July 1, 2006, all federal loans have been disbursed with a fixed interest rate, thereby stripping away the most cost-saving feature of consolidation. In some cases, consolidation is now the more costly option for borrowers.

To get more information, visit this web site You're likely to pay the same consolidation rates you'd pay if you did so with Sallie Mae.

Loan-Origination Fees Will No Longer Be Waived

Sallie Mae's decision to stop paying the 1.5% loan-origination fee on both subsidized and unsubsidized Stafford loans given to students after May 2 wipes away the most common discount offered to college students. The loan-origination fee is a one-time charge at the time the loan is disbursed. Before Sallie Mae's announcement, a student with a $10,000 loan would be excused of 1.5%, or $150, paid for by Sallie Mae. "This was the biggest, most valuable discount," says Kantrowitz.

Students who are heading to college this fall should start shopping around for the remaining lenders, like J.P. Morgan Chase, who still offer to pay this fee.