Paying for college: Where to go for a loan

The credit crisis is hitting student loans, but there's no need to panic. Not yet, anyway.

Sure, there's plenty of bad news: More lenders are dropping out of the market or tightening their standards every week, and financial aid offices say they're worried. With colleges starting classes this month and bills coming due, many parents and students are worried too.

But for all that, experts say they have yet to see students blockaded from college loans. Though it's harder to qualify for most private loans, a law passed in May makes federal loans more accessible.

"There's certainly some troubling signs," said Haley Chitty, spokesman for the National Association of Student Financial Aid Administrators, or NASFAA. "But it's hard for us to envision a scenario where students can't get federal loans for school this year."

There are basically two types of student loans: federal loans such as the Stafford and the Parent PLUS, and private loans. Federal loans are backed by the government and usually offer lower interest rates. Private loans have the potential to be more lucrative for banks and other lenders, but they're also riskier.

Mark Kantrowitz, publisher of FinAid.org, counts at least 131 lenders that have reined in student lending -- private, federal or both -- since the credit crisis hit last summer. They include big names such as Capital One Financial, Citigroup, JPMorgan Chase & Co., SunTrust Banks. and Washington Mutual.

Charlotte's Wachovia Corp. told colleges this month it would stop issuing private loans to undergraduates. The Bank of America stopped issuing all private student loans in April. Both are still issuing federally backed loans.

All together, the cuts by federal-loan providers represent about 12 percent of that market, Kantrowitz said.

Lenders have been squeezed from multiple directions. Congress cut their federal subsidies last fall in order to increase student aid. And investors -- skittish after being burned by subprime mortgage-backed securities -- don't want to buy securities backed by student loans, either.

"The joke is that Congress took away half their profit, and the credit crisis took away their other half," Kantrowitz said.

Chitty, at the financial aid trade group, said the market problems with student loans are not a reflection of the loans' quality. Defaults, which hit all-time lows in recent years, are at about 4 percent, compared with 20 percent two decades ago, he said.

"It's not like subprime mortgages, where people just took out loans and weren't able to repay them," Chitty said. Besides, he added, "The government guarantees these loans. These are very secure investments."

With private loans getting harder to obtain, more students and parents are turning to government for aid and loans.

In the first six months of this year, the number of North Carolinians filling out the Free Application for Federal Student Aid increased 22 percent, or by 45,000 people, over the year before. The College Foundation of North Carolina, which administers state aid programs, fielded 23,800 consumer calls in July -- up 33 percent from the year before. And the state has $600 million a year to dole out in need-based aid, which can cut down on the need for loans, said College Foundation spokesman Ben Kittner.

Congress has responded to concerns about a student-loan crunch. A law that took effect this summer, the Ensuring Continued Access to Student Loans Act, increases borrowing limits on Stafford loans, allows payment on Parent PLUS loans to be deferred till graduation, and loosens credit standards for those PLUS loans, among other measures.

The Higher Education Opportunity Act, which is awaiting the president's signature, would streamline the application process for federal financial aid and require increased transparency in college pricing. For example, solicitations for private loans could be required to carry notices that the student might also qualify for federal loans.

Still, some see more problems on the horizon. Last month, NAFSAA warned members that some federal-loan providers were denying applications of eligible students who attended schools with smaller loan volumes or higher rates of default.

The result, NAFSAA said, is that students at community colleges or at schools with a larger percentage of low-income students are being discriminated against.

"This runs counter to the goals and purpose of the federal student loan program, which was established to provide loans to students who would not otherwise be able to borrow to pay for college," Philip Day, the group's president and CEO, wrote in a letter to members.