Quinn: 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.

If you need more than a Stafford, parents should always choose federal PLUS loans at 8.5 percent with a 3 or 4 percent fee. They're cheaper than most alternative loans, which run up to 15 percent, depending on credit scores.

Alternative loans for students are pegged to an interest-rate index. Rates have dropped, but many lenders are raising the number of points they charge over the index. So loan costs to students may stay steady or rise. You can't find out your rate in advance because it depends on a credit check. The rates shown on most sites are only for the very best risks. Applying to several lenders will nick your credit score (five points for one inquiry and it runs up from there), but there's no other way to compare specific costs. Do it, but refine your search first. The largest lenders include Sallie Mae, Citibank, Bank of America and Wells Fargo.

SimpleTuition.com will show you the lowest and highest annual percentage rate at a dozen or more lenders, most of which pay to participate. You'll also get a dollar estimate of what the loans will cost. For technical reasons, the rates published on the site don't always match what the lender is showing. Still, the lowest APR should win the day, founder Kevin Walker says.

When it's time to repay, you can earn a discount in the 0.5 percent range by paying on time for the first four years. But fewer than 10 percent of students manage to do it, says Sallie Mae, often because of slip-ups that cause them to miss the first payment. So ignore future discounts and choose the loan that costs the least upfront. Choose the smallest loan possible, too. And don't let banks sucker you into borrowing more than you need.

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