By John W. Schoen Senior producer
msnbc.com
updated 8/19/2008 11:32:36 AM ET 2008-08-19T15:32:36

Paying for a college education — with a price tag now north of $50,000 a year at some top-priced private schools — has never been easy.

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But this year, on top of the complexities of multiple public and private lending programs and hit to college savings accounts from the turmoil in the financial markets, parents and students have another obstacle to overcome. The ongoing credit crunch has prompted dozens of private lenders to stop making student loans.

Money is still available from government-sponsored, direct lending programs. But parents applying for student loans from private lenders are finding money is much tougher to get.

“I’ve been hearing from lots of families that are asking: 'How can I find a loan?' Because they’ve been applying to three lenders and they’ve been rejected from all three," said Mark Kantrowitz, publisher and founder of FinAid.org, a Web site that offers information about student loans.

“Many of the lenders that students may have used last year are no longer in the business,” he said. “And your lender may be leaving and give you no notice.”

Trouble has been brewing since the subprime mortgage mess threw the global credit market into disarray last summer. Then, in response to complaints about colleges accepting payment to steer families to “preferred” lenders, Congress cut subsidies to private lenders, making these loans less profitable. Now, with the credit markets still tight, many private lenders have retreated from the student loan market altogether.

Sorting through the maze of student loan programs is daunting in the best of times. Both Stafford loans, which are available to students, and PLUS loans, which are offered to parents, are available directly from the federal government or through private lenders. Historically, those private lenders have offered more choices in the loan terms — everything from the interest rate charged to the repayment period.

But, with private lenders leaving the market, those choices have been severely curtailed. And those lenders that remain are getting choosier about who they lend to, according to Mary McGrath, a financial planner with Cozad Asset Management in Champaign, Ill.

“They’re tightening the criteria to get the very best rates and then they’re punishing you even more so when you can’t get those,” she said “They want a very good credit history, so if you don’t have that your best option is to anyone who can cosign for you so you can get a better rate.

Of the 100 largest private lenders, some 27 representing more than 12 percent of last year’s Stafford and Plus loan programs have left the market, according to Kantrowitz. For consolidation loans — which students use to wrap up multiple debts after they graduate — the retreat has been wider: 41 of the 100 biggest lenders, representing 85 percent last year consolidation loan volume, are not longer in the student loan market.

With two weeks left before school starts, it’s not yet clear how many students and families will come up short. But financial aid officers are busy with last-minute appeals for help from families whose personal finances may have taken a turn for the worse.

“Every year we get the appeal from some who says, ‘I just lost my job’ or ‘My condo, which I thought was valued at X is now valued at Y’ or whatever it might be,” said Daniel Barkowitz, Director of Student Financial Aid and Student Employment at MIT. “Are we hearing more of those? I don’t know yet. But the voices certainly sound a little more desperate.”

On top of tighter credit and stretched household budgets, families with college students are coping with a relentless rise in costs.

The average cost of tuition, room and board for in-state students at public four-year colleges and universities last year — the latest figures available — was $13,589; that's 5.9 percent more than a year earlier, according to the College Board. Out-of-state students paid an average of $24,044, up 5.4 percent. At private, four-year colleges, the average bill came to $32,307, up 5.9 percent. Some of the most competitive private, four-year schools now cost more than $50,000 a year.

Lenders are also getting choosy about the type of education they’ll underwrite. Students at community colleges and trade schools are having a tougher time than those at four-year school colleges and universities. Students attending medical school outside the U.S., for example, don’t qualify for direct federal loans, according to Kantrowitz.

“A lot of these schools are scrambling to try to find a way to keep their student from dropping out because they can’t pay the bills,” he said.

Other forms of credit also have tightened. In better times, families who owned a home could use a home equity loan or line of credit to pay college expenses. Many are now finding that lenders are charging more for those loans — or canceling lines of credit altogether. Families in areas of the country where home prices are still going down are especially vulnerable.

Financing this fall’s tuition bill has also been made complicated by the drop in the stock market — which took a bite out of so-called 529 college savings plans that were invested in stock mutual funds or stock indexes. That’s why some financial planners recommend “age-based” college savings plans that automatically shift money out of volatile stocks into bonds in the years leading up to college

“People that do it on their own very rarely make those decisions at the right time,” said McGrath. “It’s so difficult to pull the trigger when the market’s going up. And when the market’s going down you don’t want to pull the trigger. And then there you sit with your money still in stocks and tuition bills to pay.”

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