Credit Crunch Crushing Private Student Loan Business

As the credit crunch deepens, it's putting more private student loan companies out of business and leaving fewer students able to qualify.

Three private student loan companies recently suspended lending: College Loan Corp., My Rich Uncle and Campus Door, a subsidy of Lehman Brothers .

In all, 33 private student loan companies have ceased private student loan lending since July 2007, according to Mark Kantrowitz, publisher of FinAid.org. Included in that number are larger banks like Bank of America and Wachovia

“This is certainly unprecedented,” says Kantrowitz, adding that in a typical year just one private lender leaves the business.

Undergraduate students borrowed $14.5 billion in private loans during the 2006 to 2007 school year, according to the College Board.

“After the subprime crisis, lenders looked at their loan portfolio and realized that student loans are not very secure,” says Dave Kenney, CEO of CollegeZapps. As a result lenders have either halted lending or increased their lending requirements, making it harder for students to get a private loan.

It’s now virtually impossible for students to get loans without a cosigner, says Christopher Penn, chief technical officer at the Student Loan Network, a student loan and information Web site. What’s more, credit score requirements have increased.

In previous years, he says a credit score -- also known as a FICO score -- in the low 600s was enough to get a private student loan; now lenders are looking for a score in the low 700s.

The tighter requirements may exclude up to 20% of borrowers who were previously eligible, says Penn.

With private loan requirements tightening, here are some tips students and parents should keep in mind:

Be Price Conscious

Experts advise students to be aware of how much tuition can cost. Rita Johnson, a financial planner at the Millstone-Evans Group of Raymond James & Associates, recommends using FinAid.org's college cost calculator to get an estimate of how much a college education will cost over the years. Even if you qualify for financial aid at a more financial school, you may be unable to make up the difference with loans and savings.

Apply to More Schools

Kenney recommends students apply to about six to ten colleges so that they’ll have a mix of different financial aid packages to choose from. Applying to just two or three schools can get you stuck with enrolling in a school that you can’t afford. Although applying to several colleges will cost more (the average application fee is about $35), Kenney says it is well worth it, especially if one college offers thousands of dollars more in financial aid.

Visit the Financial Aid Office

The next step is to speak to financial aid officers at your school, says Johnson. Students should be talking to them about maximizing all federal loans and scholarships. Private loans should always be the last resort. Federal loans are significantly cheaper and offer better repayment terms than private ones.

Try Local Scholarships

In addition to applying to nationwide scholarships, students should also look into local scholarship opportunities, says Kenney. There’s a better chance students will win local scholarships since there is less competition than with national ones.

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