Squeezed Lenders Abandon Students

So far, 60 lenders have stopped or temporarily suspended their participation in the Federal Family Education Loan Program (FFELP), according to Mark Kantrowitz, publisher of the financial aid information web site FinAid.org. (FFELP allows private lenders to make federally-guaranteed Stafford and PLUS loans.) The nation's biggest lender, Sallie Mae, recently announced it will stop offering consolidation loans and paying for loan origination fees. Meanwhile, many large lenders including College Loan Corp., HSBC Bank, Washington Mutual and Zions Bank, are suspending lending altogether. (For an up-to-date list, visit FinAid.org's web site.)

Unfortunately, the situation is only expected to get worse as lenders continue to struggle with securitizing and selling their loan portfolios to investors, says Kantrowitz. Burned by the subprime mortgage crisis, lenders are having a hard time making a profit off of these loans. "Only the largest banks that not just originate these loans but also hold onto them are the ones likely to stay," Kantrowitz predicts.

For the time being, however, there are still more than 2,000 companies that continue to offer student loans, including big institutions like J.P. Morgan Chase that are actually looking to expand their stake in the business. (J.P. Morgan Chase declined comment for this story.) "As of now, this is a crisis for lenders, but not a crisis for student borrowers," says Michael Dunnenberg, director of the education policy program at the New America Foundation, a Washington, D.C.-based think tank. "As lenders are exiting the marketplace, others are stepping in to grab market share."

Individual schools are also helping to pick up the slack. The number of schools applying to participate in the government's direct-lending program, which has so far been immune to the credit crisis, is on the rise. Nearly 60 schools filed applications in the first quarter this year, more than you'd typically see for the whole year, Kantrowitz says. (Currently, only about 20% of the roughly 4,000 colleges and universities in the higher education system are direct lenders.)

Nevertheless, borrowing will be trickier and more time-consuming this year. "Students are going to have to be much more assertive in the process and make sure everything's going to go through," says Kalman Chany, author of "Paying for College Without Going Broke." "If you're going to a FFELP lender, you have to shop around and give it more time. Don't wait until a couple of weeks before the tuition bill is due."

Here are some things you can do to make sure you get the financing you need in today's market:

Be particularly vigilant if you're attending a smaller college with a higher drop-out rate, Kantrowitz says. Higher drop-out rates usually lead to more loan defaults, and some lenders are cutting off relationships with such schools. According to Kantrowitz, one such lender is NelNet, which is severing ties with schools that have a higher than 10% default rate. (NelNet did not return our phone calls seeking comment.) Earlier this week, Citigroup announced that its Student Loan Corporation (SLC) subsidiary will suspend lending at certain schools where loans with lower balances and shorter interest-earning periods result in unsatisfactory financial returns.

But now that the credit crunch is putting pressure on lenders of all stripes, private loans — which carry higher interest rates than federal loans — are getting even more expensive and tougher to secure. While a student could qualify for a private loan with a FICO credit score of 620 before, now they have to have at least 650, and in some cases 680 or 700, Kantrowitz says. For those who are able to secure a private loan, they'll most likely pay a premium in interest.

The good news: A majority of students don't have to resort to private loans if their parents can qualify for PLUS loans, Carpenter says. These federally-guaranteed loans now carry a fixed 8.5% interest rate — lower than most private loans currently offer. Parents can borrow up to the full cost of college, minus any financial aid received. Anyone with "relatively good credit" will get approved for a PLUS loan, says Carpenter, though if you have a bankruptcy, lien or foreclosure on your credit file you may be denied. If a parent gets turned down for a PLUS loan, however, the student may ask the financial aid office to increase the amount of unsubsidized Stafford loans that they can borrow. (For details on PLUS and Stafford loans limits, click here.) PLUS loans are also available to graduate students.