A Financial Lifeline

Critics of private education lending, including student-advocacy groups, say these loans typically have higher interest rates and fewer consumer protections than government loans, and that many borrowers would be better off seeking a cheaper education than resorting to them.

Even so, they have become a financial lifeline for many students. Antonio Flores, president of the Hispanic Association of Colleges and Universities, an industry group that represents schools serving Hispanic students, says that if access to private loans is cut off, schools and families would expect Washington to "do something to insure that private lenders are stimulated to do what is right and provide loans to the students who need them."

Students and their families often turn to private loans when they have borrowed as much as they can under lower-cost federal programs. Theoretically, after a student has used up the federal maximum -- usually $7,500 a year for students at the undergraduate level -- parents can borrow all that their child needs to pay for college via a federal "Plus" loan, but the parents must be deemed creditworthy. Needy students with parents unwilling or unqualified to borrow have few alternatives other than private lenders.

Getting By

Amorelle Henry, 25, has two semesters left to go of nursing school at the University of Northern Colorado in Greeley, Colo. She borrowed about $15,000 in private loans from various lenders in each of the past two years to supplement federal grants and loans and cover her living expenses. This year, her lenders rejected her loan applications, citing her FICO score, which, at 626, is unchanged from last year, she says. She says that her parents are dealing with financial setbacks of their own and haven't qualified for federal Plus loans in the past.

Ms. Henry says she will try to get through the fall semester by working 24 hours a week as a nurse's assistant while also dealing with a full load of classes and clinical assignments. But she worries she won't be able to maintain her B average and handle the job during the spring semester, when she is required to complete an unpaid, 40-hour-a-week internship. "I'm scared half to death," Ms. Henry says.

In May, the securities markets that lenders use to raise capital for students loans -- both federal and private -- seized up. The Bush administration announced a plan to avert problems with the federally guaranteed loans made by private-sector lenders. Using authority granted earlier this year by Congress, the government plans to buy and invest in such loans, freeing up capital so lenders can make new ones. But that didn't provide any new money for private lending.

Some industry observers say that families may be able to cobble together the funds to pay for the fall, but then run into trouble later in the year. Their concern is that lenders may grow even more selective, and some parents could face job losses and see a decline in the home-equity lines that many have tapped for college costs. "The second semester could really be a problem," says Maureen Budetti, director of student-aid policy for the National Association of Independent Colleges and Universities.