Student loan FAQs for parents, students

Borrowing for college can be complicated, with direct loans, subsidized loans, parent loans and private loans. Even people who've gone through the process sometimes don't fully understand it, let alone people just starting out.

Now, the entire student-aid system is in the midst of a shake-up. Lenders are fleeing the federal loan program by the dozens, and the federal government is scrambling to prop up the system.

What does it all mean for students and parents? Based on interviews with experts, here are some answers to common questions.

Question: I'm starting, or returning to, college this fall. Will I be able to get a loan?

Answer: Probably yes, though many students will have fewer lender choices. But some students will face more serious obstacles, particularly those who need private loans and already have problems such as too much credit card debt.

Question: What is happening to the student loan system?

Answer: If you need to borrow for college, the first place to look is the federal government. Depending on your school, you may end up borrowing from the feds directly. Or you may take out a loan from a private company or nonprofit that is backed indirectly by the federal government.

It's that second category, federally backed loans made by other lenders, where there are problems. Typically, it works like this: lenders such as Sallie Mae make loans to students, sell the loans as securities, and use the cash to make more loans. But right now, nobody wants to invest in the securities. At the same time, government subsidies on those loans were just cut, and lenders say that makes them unprofitable. So more than 50 lenders, including for-profit companies and state loan authorities in places such as Massachusetts and Pennsylvania, have stopped making new loans.

Question: What should students do?

Answer: Your college's financial aid office can tell you which lenders are still making loans. If your school participates in the federal direct lending program, you should have ready access to a direct loan from the government. Some schools that weren't in the direct lending program are joining, to make sure students have that option.

If you're not at a school that participates in the direct loan program, keep your fingers crossed that Congress and the Bush administration will come through with new options. Several proposals are aimed at reviving the federally backed lending system. Some would use government money to buy up loans from lenders. If all lenders stop making federally backed loans, the government can act as "lender of last resort," providing money for state guarantee agencies that they could in turn loan to students.

Some experts are confident this would solve the problem in an emergency. But others wonder whether the Washington bureaucracy could spring to action fast enough.

Question: I'm a parent hoping to borrow on behalf of my child. How am I affected?

Answer: Parents of dependent undergraduates also have a federal loan option: They can borrow up to the cost of their children's attendance to pay for college. But, unlike federal loans students take out themselves, these fixed-rate PLUS loans can be denied for bad credit. Given the economy, more parents are likely to be turned down.

Based on foreclosure data, Mark Kantrowitz, at financial aid Web site finaid.org, expects to see a 10 percent increase in the number of PLUS loan applications that are denied. And if your credit is not good enough for a PLUS, you probably can't get a private or home equity loan either.

However, if you're denied a PLUS loan, your child becomes eligible to borrow $4,000 or $5,000 more per year through the unsubsidized Stafford program than the typical cap. Proposals in Congress would raise loan limits even more for those students.