Paying for College in a Post-Credit World

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Student loans used to be some of the easiest, and cheapest, forms of credit available. Not anymore.

The credit crisis has reduced access to student loans, thanks to a combination of defaulting lenders and tightened restrictions. Meanwhile, the cost of college tuition and fees continues to soar, rising at four times the rate of inflation since 1982, according to the National Center for Public Policy and Higher Education.

Here's what you need to know if you've got college bills to pay:

Federal versus private aid: Federal aid, which includes grants, loans and tax benefits, still represents the lion's share of funding for undergrads. Federal dollars accounted for 56% of aid in the 2007 to 2008 academic year, according to the College Board. Private sector loans represented 12%, an increase of 3% over the past decade. (The remaining 32% came from state and institutional sources.)

The rise in private funding is in part due to the relatively low limits on federal funding. Until last year, dependent undergrads were limited to a total of $23,000 in federal loans over their undergraduate careers. Although the limit was recently raised to $31,000, many borrowers must still turn to private loans to make up the difference.

The problem with private sector loans? They're not subject to the same rate caps and protections as federal loans. That means the average borrower pays interest at nearly double the federal rate of 6.8%. Furthermore, lenders have tightened their standards due to higher default risks. Lenders such as Wachovia (WB) and Bank of America (BAC) have stopped offering private loans altogether. And lenders that do offer student loans, such as JPMorgan (JPM) and Citigroup (C), have tightened standards so that these loans are now out of reach of families without good credit.