Crunch time on loans for college

DALLAS - It's crunch time for families seeking college financial aid as bills come due for the fall semester's tuition and room and board.

The ongoing credit crunch has caused some lenders to stop making student loans and to raise lending standards - forcing many students and their families to seek alternative sources of financing.

Key among those: federally guaranteed student loans, special programs offered at schools, and peer-to-peer lending on the Internet.

"It's definitely gotten a bit worse," said college-financing expert Mark Kantrowitz, who runs FinAid.org. "The timing couldn't be worse from a student perspective."

Private student loans help bridge the gap between the actual cost of education and the limited amount the government allows students to borrow. These loans are offered by lenders such as banks and are not guaranteed by the federal government.

Because of the tightening credit market, lenders are requiring higher credit scores for borrowers. The FICO score is the dominant measurement used by lenders to gauge a person's ability to repay a loan.

"The FICO score is going from 620 to 650 for private student loans," Kantrowitz said. "Anybody under 650 is considered subprime."

Eligibility for private student loans often depends on a borrower's credit score, but experts advise students to get a cosigner with good credit.

"This year, what's most important is to have a cosigner," said Harrison Wadsworth III, special counsel to the Consumer Bankers Association. "It's the cosigner's credit which will permit the loan to be made, and hopefully reduce the interest rates and fees associated with the loan."

Interest rates on private student loans range from 5 percent to 16 percent, depending on credit.

Susan Jones Knape, marketing director for a Dallas law firm, cosigned private student loans for her daughters, Jordan and August, who will enter college this fall.

"Keep your credit report spotless," Knape advised.

They also did what many student-loan experts advise - obtained federal student loans.

"The girls were awarded several federal loans, which I have since learned are great deals - very low interest rates - and some don't even accrue interest until after graduation, when the payment schedule begins," Knape said.

In fact, seeking a federal loan should be your first choice, experts said.

And it is not too late to apply for a federal loan for the fall.

The main federally guaranteed loan for students is the Stafford Loan. All Stafford Loans are either "subsidized," which means the government pays the interest while the borrower is in school, or "unsubsidized," meaning the borrower pays all the interest, though the payments may be deferred until after graduation.

To receive a subsidized Stafford Loan, a borrower must be able to demonstrate financial need.

For the 2008-09 academic year, the interest rate on subsidized Stafford Loans is 6 percent for undergraduate students and 6.8 percent for graduate students. The rate for unsubsidized Stafford loans is also 6.8 percent.

Parents also can take out federally backed loans to supplement their dependent children's financial-aid packages. The Parent Loan for Undergraduate Students, or PLUS loan, lets parents borrow money either from private lenders or directly from the government to cover any costs not already covered by the student's financial-aid package.

PLUS loans are the financial responsibility of the parents, not the student. If the student agrees to make payments on the PLUS loan but fails to make them on time, the parents will be held responsible.

For this year, the interest rate for PLUS loans is 8.5 percent for loans from private lenders and 7.9 percent for loans from the government.