Getting College Loan May Not Be as Hard as Feared

Despite a recent scare over the state of the federally guaranteed student loan program, most students attending college this year shouldn't face major troubles getting funding.

But students looking for supplemental loans to attend higher-priced universities as well as institutions with lower graduate rates, such as community colleges and trade schools, could be hard-hit by a liquidity shortage that has been a byproduct of the larger credit crunch in banking.

A series of moves by the Department of Education to stabilize the shaky secondary market for federally guaranteed student loans should take care of students who qualify. But that's not always enough.

Parents and students going to private banks for unsecured student loans to pay expenses beyond what grants and federal Stafford loans cover could be in for a harder time.

"It's that particular market that's really taking a beating where a lot of the lenders have toughened their underwriting standards," says Kevin Bruns, of America's Student Loan Providers. "Families that have low incomes or attend a school where there is a low graduation rate may have difficult getting private loans or they may have to pay more for it."

Stafford Loans, administered through Sallie Mae in cooperation with participating lenders, provide up to $23,000 per dependent student over four years of school. Though federally guaranteed, even those funds were in some question as dozens of banks said they were exiting the business due to liquidity concerns.

Congress has been forced to fix a problem it in essence had created when it lowered default guarantees last year and cut into the profits banks were making on student loans. The auction-rate market on which student loan funding depends eventually dried up as investors found that returns had dwindled to almost nothing on the bonds used to back student debt.

The federal government this year has acted to stem the tide, with the House recently passing legislation due to be signed by President Bush that allows the Education Department to pump liquidity into the system through bond auctions, eases qualifying standards for homeowners and those who are behind on medical bills, and gives parents the ability to wait until after their children leave college before repaying supplemental loans, something not currently allowed.

"The focal point of this type of activity is going to be on those more at-risk students," Paul Combe, president and CEO of American Student Assistance, says of the legislative efforts. "This is like delivering Social Security funds. They have to figure out how to do it."

Financial aid experts are advising students to get moving on the aid application process. While there has been no evidence so far that the credit crunch will impact the Stafford program to a great extent, the full impact isn't likely to be known until summer after the rush of financial aid applications has been processed.

Congress has worked feverishly to get the legislation ushered through, but there has been political opposition to some of the provisions, particularly one in which the Education Department would have the authority to buy up loans from student lenders to make sure they have capital and can continue operating.

"The fact is we're nine months into the credit crunch and it's still hanging around like an unwanted party guest. There's no telling when this thing will be extinguished for good," says Greg McBride, an analyst at Bankrate.com. "The conditions of the student loan market are just a reflection of the broader credit crunch. Until the credit crunch goes away, you're going to continue to have issues like these."

McBride and others say that with Congress in the mood to back up higher education funding, students ought to use up all their federal options first before thinking about going the supplemental route.

"The steps that have just been taken here are really positive steps for students and their families," says Patricia Nash Christel of Sallie Mae. "It shows that Congress wants to be sure that students are able to go to college and Sallie Mae has the resources to make sure that's possible. It's a positive step."

© 2009 CNBC.com