As college costs rise, loans become harder to get

When Daniel Ottalini entered the University of Maryland in 2004, his family had an array of choices to cover the cost -- cheap student loans, a second mortgage at low rates, credit cards with high limits and their own soaring investments, the Washington Post reports.

By the time his younger brother, Russell, started at the University of Pittsburgh this fall, the financial crisis had left the family with fewer options. Russell has had to juggle several jobs in school, and the money he could borrow came with a much higher interest rate that could climb even further over time.

The upheaval in financial markets did not just eliminate generous lending for home buyers; it also ended an era of easy credit for students and their families facing the soaring cost of a college degree.

To pay for higher education, most Americans had come to rely on a range of financial products born of the Wall Street boom. Nearly all of these shrank or disappeared in the storm that engulfed the stock and debt markets.

Lenders have raised rates and tightened standards, dramatically limiting the availability of home-equity loans and private student loans. College savings accounts, known as 529 plans, had acute losses in the downturn. And a new law, set to take effect Feb. 22, will bar students younger than 21 from getting credit cards on their own.

Loans offered with federal backing were the lone form of student debt to expand, but only because the government stepped in last year to prevent this business from collapsing under the pressure of the credit crunch. Still, the most common type of federally backed loan has a limit of $5,500 a year, not enough to pay for most four-year programs.

Even as the financing options have narrowed for families, college expenses are rising faster than ever as schools suffer from endowment losses and cuts in state funding because of the financial crisis and the recession that followed.

Last month, California's public universities announced that tuition fees would rise by 32 percent, sparking student demonstrations across the state. University of Virginia officials said a 15 percent cut in state funding for higher education will also force them to significantly raise tuition.

Some educators are concerned that the new price tags will discourage poor students from applying and will price out middle-class families that make too much to obtain financial aid, but not enough to easily afford college.

"It's not only the credit model that has changed; the basic financial model of higher education has also become challenged," said Anthony Marx, president of Amherst College in Massachusetts. "We were already concerned that middle-class students were getting squeezed by racking up debt that could constrain their career choices after they graduate. All of that comes under more strain in these new circumstances."

Other educators worry that students will be forced to compromise on their education.

Russell Ottalini said he choose the University of Pittsburgh because he judged that it would be best for his Japanese-language studies. He relied on his parents to borrow money for his education. But he acknowledged that economic times are tough and said he is willing to transfer to a cheaper school if one parent gets laid off, even if it means attending a lesser program.