Borrowing for college can be complicated, with direct loans, subsidized loans, parent loans, private loans. Even people who've gone through the process sometimes don't fully understand it, let alone people just starting out.
Now, the entire student-aid system is in the midst of a massive shake-up. Lenders are fleeing the federal loan program by the dozens, and the federal government is scrambling to prop up the system.
What does it all mean for students and parents? Based on interviews with specialists, here are some answers.
Q: I'm entering college this fall. Will I be able to get a loan?
A: Probably yes, though many students will have fewer lender choices. But some students will face more serious obstacles - particularly those who need private loans and already have problems like too much credit card debt.
Q: What is happening to the student loan system?
A: If you need to borrow for college, the first place to look is the federal government. Depending on your school, you may end up borrowing from the feds directly. Or you may take out a loan from a private company or nonprofit that is backed indirectly by the federal government.
It's that second category - federally backed loans made by other lenders - where there are problems. Typically, it works like this: lenders like Sallie Mae make loans to students, sell the loans as securities, and use the cash to make more loans. But right now, nobody wants to invest in the securities. At the same time, government subsidies on those loans were just cut, and lenders say that makes them unprofitable. So more than 50 lenders, including for-profit companies and state loan authorities in places like Massachusetts and Pennsylvania, have stopped making new loans.
Q: What should students do?
A: Your college's financial aid office can tell you which lenders are still making loans. If your school participates in the federal direct lending program, you should have ready access to a direct loan from the government. Some schools that weren't in the direct lending program are joining, to make sure students have that option.
If you're not at a school that participates in the direct loan program, keep your fingers crossed that Congress and the Bush administration will come through with new options. There are several proposals aimed at reviving the federally backed lending system. Some would use government money to buy up loans from lenders. If all lenders stop making new federally backed loans, the government can act as "lender of last resort," providing money for state guarantee agencies that they could in turn loan to students.
Some experts are confident this would solve the problem in an emergency. But others wonder whether the government could spring to action fast enough.
Q: I'm a parent hoping to borrow for my child. How am I affected?
A: Parents of dependent undergraduates also have a federal loan option - they can borrow up to the cost of their children's attendance to pay for college. But these fixed-rate PLUS loans can be denied for bad credit.
Based on foreclosure data, Mark Kantrowitz, who runs the financial aid website finaid.org, expects to see a 10 percent increase in the number of PLUS loan applications that are denied. And if your credit is too bad for a PLUS loan, you probably can't get a private or home equity loan either.
However, if you're denied a PLUS loan, your child becomes eligible to borrow $4,000 or $5,000 more per year through the unsubsidized Stafford program than the typical cap. Proposals in Congress would raise loan limits.
Q: I've maxed out on federal loans, and need to borrow more. Will it be harder to get a private loan?
A: Almost certainly. Lenders are tightening up. They're insisting borrowers have higher credit scores, and cutting back on loans at schools with low graduation rates. Even if you qualify, you'll likely pay more. Many lenders are charging higher rates, and they have cut benefits like rewards for on-time repayments. Although fewer than one in 10 undergraduates have private loans, many graduate and professional students depend on them, and tougher terms could hurt.
Some don't see this is a bad thing. Luke Swarthout, who does student advocacy work with the group USPIRG, says many private loans should never have been made. He believes they often hurt borrowers more than they help. Students unable to borrow what they want may be forced to attend community colleges instead of more-expensive, for-profit schools.
Not surprisingly, the Career College Association, which represents for-profit schools, sees the funding shortage as serious. The group says its students are already being forced to drop out because they can't get loans.
Q: I'm done with school. I don't need a new loan, but am still paying back some variable-rate loans and would like to consolidate. Does the turmoil in the student loan market affect me?
A: You will find fewer lenders willing to consolidate your variable loans to a fixed-rate loan. However, you can always consolidate through the federal direct lending program. Just be sure to wait until July, when the rate will almost certainly drop.