Despite credit crunch, federal student loans can be easy to get

If you're starting college this fall, you've probably got a lot on your mind. Choosing a major. Making new friends. Hoping you won't end up with a roommate who keeps an ant farm under his bed.

No question, this is a stressful time in your life. But here's one thing you shouldn't worry about: getting a federal student loan.

The credit crunch has made it harder for borrowers who don't have stellar credit to get a private student loan. But federal student loans are still widely available. Though a handful of lenders have stopped offering federal loans, more than 2,000 lenders are still in the business. And some banks plan to expand their lending to college students in the upcoming academic year, the Consumer Bankers Association, the main trade group for the banking industry, said last week.

The Education Department recently contacted college financial aid offices and found no instances in which an eligible student was unable to get a federal loan, Education Secretary Margaret Spellings said Friday. In cases in which a lender has stopped participating in the federal student loan program, Spellings said, other lenders have stepped in to provide loans. Spellings made the comments in testimony to the House Education and Labor Committee.

If you need to borrow for college, you're unlikely to get a better deal than you'll get from the federal loan program. Unsubsidized federal Stafford loans, which carry a fixed interest rate of 6.8%, are available to all students. The rate for subsidized Stafford loans taken out after July 1 will be 6%. The subsidized loans are available to students who can demonstrate economic need. Both subsidized and unsubsidized federal loans typically offer lower fees and more flexible repayment terms than private loans do.

Loan limits

There is, however, a limit on how much you can borrow from the federal loan program. If you're a freshman, the most you can borrow is $3,500. For sophomores, the cutoff is $4,500. Thresholds are higher for independent students (see box, right).

As a result, students who attend high-cost private or out-of-state public schools often must turn to private loans to pay for costs that aren't covered by their federal loans.

Interest rates for these loans range from 6% to more than 14%, but to get the best rates, most borrowers (or their co-signers) need excellent credit scores, says Mark Kantrowitz, publisher of FinAid, a financial aid website.

And because most private loans carry variable rates, he adds, your rate could rise significantly before the loan is paid off — even if you make your loan payments on time.

Sen. Edward Kennedy, D-Mass., chairman of the Senate education panel, has proposed raising the limits for federal student loans. But previous efforts to raise those limits have failed, and even if Kennedy's effort succeeds, it's unlikely that federal loan limits will be expanded in time to help students who will start college this fall.

In the meantime, there are alternatives to private loans. Families that have maxed out on their federal loans should consider a federally guaranteed Parent Loan for Undergraduate Students, or PLUS loan. These loans let parents borrow up to the amount of college costs that aren't covered by the student's financial aid package, at a rate of 8.5%. That's lower than the rate for many private loans, and it's fixed.

Some parents dislike PLUS loans because they don't want to be responsible for repaying the loan (although the student is allowed to take over the payments). But if you're a parent, telling your child to get a private loan won't necessarily get you off the hook. To get favorable terms on a private loan — or, in some instances, to get a loan at all — most students need a co-signer with good credit. And a parent who co-signs for a loan is responsible for payments if the borrower falls behind.

Parents can qualify for a PLUS loan even if they don't have a high credit score. But PLUS lenders are allowed to reject parents who have a foreclosure or bankruptcy on their credit record. Ordinarily, 75% to 80% of parents who apply for PLUS loans are approved, but rising foreclosures could make more families ineligible, says Robert Shireman, director of the Project on Student Debt.

Even if that happens, you can avoid taking out a private loan, or at least reduce the amount you need to borrow through private loans. If your parents are turned down for a PLUS loan, you're eligible for higher loan limits on your federal student loans, Shireman says. If you're a freshman, for example, and your parents were denied a PLUS loan, you'd qualify for up to $7,500 in federal loans.

You can find more information about federal student aid at the Education Department's website,

Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. Click here for an index of Your Money columns. E-mail her at: