Students are finding it tougher—and costlier—to borrow

The credit crunch isn't just affecting mortgages and home equity loans. Some student loans are now both harder to get and come with higher interest rates.

Federal Stafford loan requirements haven't changed, but PLUS loans, which parents take out for their children, are being looked at more carefully. To get one, parents' credit records over the past five years will be reviewed.

Private student loans are also harder to come by. A year ago a credit score of 620 would have qualified you. Now you'll need at least 650 and possibly even 700, says Mark Kantrowitz, publisher of FinAid.org, a free financial aid information site. More lenders now require co-signers, who might have their debt-to-income ratio scrutinized. And some are basing their eligibility and rate decisions on the student's major, graduation rate of the school he or she has chosen, and the rate of employment for students graduating from that school.

Interest rates are also higher as lenders pass on their increased costs to borrowers. As of October, private loan rates have gone up 2 to 3 percentage points over the last year, despite the national drop in interest rates. The worst loans are as much as 6 percentage points higher. Loan discounts are vanishing as well.

What to do. Students might have to shop harder for loans or have multiple lenders during their college career, as 137 lenders have suspended federal loans since last year and 36 have suspended private loans, says Kantrowitz.

The best advice is to max out federal loans like the Stafford first, because it offers better interest rates and more flexible repayment terms. If you expect to apply for PLUS or private loans, pay down your debt and correct any errors on your credit reports. You'll be more likely to get a loan and qualify for a better rate. Apply for as much financial aid and as many scholarships as you can. Finaid.org's advice on finding scholarships can help. Your school's financial aid office can assist you with finding lenders or discuss paying tuition in installments if necessary.

High tuition can result in a large debt burden when you graduate, so rethinking your choice of school may be wise. And while you're a student, live like a student. Keep expenses low and avoid racking up credit card debt. If you've already graduated and are concerned about your ability to pay back loans, see our recommendations for some ways to meet your bills. —Chris Fichera

Comments

[John]

There might be a silver lining in this.

If loans are expensive and difficult to get, it might force students and schools to look closer at the costs of education. Too often students are told to accumulate debt, and worry about it later. However, when they graduate they are loaded with loan payments and often can't find high paying jobs.

If the costs of student loans go up, maybe schools will be forced to offer more aid, and students might make wiser financial choices.