The Student Loan Shuffle

How tight will it be when you look for student loans this year? On paper, loans should be cheaper, thanks to the interest-rate cuts driven by the Federal Reserve. But as America's giant credit bubble bursts, students are getting splattered, too. The lender you borrowed from last year may have shuttered its loan window for 2008.

Federal loans—Staffords for students, PLUS loans for parents—will still be widely available, but from fewer players. To make these loans, some lenders relied on an obscure financing source called auction-rate notes, which recently ran off the tracks. Others got hit with high borrowing costs when municipal bond insurance tottered. Pennsylvania's higher-education agency suspended student lending last month. At least 15 private sources have exited, too, due to a profit squeeze, says Mark Kantrowitz of Finaid.org.

Then there's the market for "alternative" loans where students can borrow more than the federal program provides. So far, three state agencies—in Michigan, Missouri and New Hampshire—have dropped out, as have at least five private lenders.

Others are tightening up. Last year students or their cosigners (usually a parent) could qualify for an alternative loan with credit scores as low as 620 (out of a maximum of 850). This year that might rise to 650 or more, Kantrowitz says. Sallie Mae, the nation's largest lender, might turn you down if your debt load is high or if your school has a high dropout rate.

The message to families? Call your school, right now, to see if your usual lender is providing funds. If not, start the hunt for other sources. You don't want to be scrounging during the week before tuition is due.

There's another message. Look beyond the student-aid office. You might find a better loan than the ones on your school's list. Take federal Stafford loans, list-priced at a maximum 6.8 percent with a 2.5 percent fee. Most major lenders eliminate the fee. Some cut the interest rate, too. MyRichUncle.com charges 5.8 percent when the loan enters repayment, with a 1.5 percent fee. By law, rates for subsidized Staffords will drop to 6 percent on July 1. MyRichUncle says it will cut its prices, too.