Credit woes may hinder college-bound

The credit crunch will make it harder for many families to pay for college this fall, particularly if their children plan to attend high-cost private or out-of-state schools.

Federal student loans remain available, but the caps on how much students can borrow have lagged far behind college costs. Freshmen, for instance, can't borrow more than $3,500 in federal loans. And other sources of funding are drying up:

•Private loans. In a recent survey, 43% of private colleges said one or more lenders on their "preferred lender" list have stopped offering private student loans, according to the National Association of Independent Colleges and Universities, which represents private colleges.

Lenders that are still offering private loans have tightened their lending standards, says Mark Kantrowitz, publisher of FinAid. To get a private loan, most students will need a co-signer with excellent credit, he says.

•Home equity. During the housing boom, "Many families viewed their home as an ATM machine to pay for college," says Kalman Chany, author of Paying for College Without Going Broke. A 2007 survey by Next Step, a magazine for college-bound high school students, found that nearly a quarter of parents planned to use home equity loans to pay for college.

But as home values have plummeted in many parts of the country, "The home equity spigot has been turned off," says James Boyle, president of College Parents of America. Millions of families now owe more on their mortgages than their homes are worth. Some lenders no longer offer second mortgages. Others have frozen access to borrowers' existing lines of credit.

•PLUS loans. The Parent Loan for Undergraduate Students, or PLUS loan, lets parents borrow up to the cost of college, minus any financial aid their child receives. The federally guaranteed loan carries a fixed rate of 8.5%, and parents don't need a high credit score to qualify. But parents won't be able to get a PLUS if they have a foreclosure on their credit record, Kantrowitz says. As foreclosures rise, he says, "The number of denials of PLUS loans is going to significantly increase."

Last week, Sen. Edward Kennedy, D-Mass., introduced legislation that would raise loan limits for federal student loans. Similar legislation was introduced in the House. But the limits are unlikely to be increased by the time students start college this fall.

Families that are worrying about paying the cost of the college their child wants to attend should talk with the financial aid office as soon as possible, says Phil Day, president of the National Association of Student Financial Aid Administrators. Financial aid administrators may be able to help families find other sources of funding.

"If there are going to be some gaps," Day says, "you want to know what those gaps will be."