An insider's guide to student loans

Like every other aspect of lending, student loans have been dramatically affected by the credit crisis.

But don't believe rumors that you can't get loans for education anymore. They're still available -- and you still need to be careful about how much debt you take on.

Here's the scoop:

• Federal student loans are an even better deal than before. Rates are fixed now, rather than variable, and students with the most need will see rates as low as 3.4% in the future. Limits on how much you can borrow have been raised a bit, and parents who take out parental student loans now can defer payments while their kids are still in school. Although some lenders have exited the federal student loan market, the U.S. government has stepped in to make sure the remaining lenders had access to cash to make loans.
  
  "The government averted the crisis," said Mark Kantrowitz, the publisher of FinAid and a co-author of "FastWeb College Gold: The Step-by-Step Guide to Paying for College." "You don't have to worry about getting (federal) student loans."

• Don't ask your lender for a consolidation loan. Consolidation allows you to make one payment instead of many, and you may be able to lower your payments by stretching out the repayment term from the usual 10 years to as many as 30. You still can consolidate your federal student loans, but you'll need to do so through the federal government. Lenders that used to make these loans have fled the market, saying they aren't profitable anymore. Visit the U.S. Department of Education's loan consolidation site to get started.
• Private student loans are harder to get. If you want to borrow more than the federal student loan limits (which range from $5,500 to $7,500 a year for college students, depending on their year and type of loan), you typically would turn to private student loans. These come with variable rates that currently average 11% to 12%. But lenders are demanding higher credit scores plus a co-signer these days.
  
  "You used to be able to get a (private student) loan with a 620 FICO score," Kantrowitz said. "These days you need at least a 650 or even a 700."

Even if you qualify, you need to be extremely cautious about how much private student loan money you borrow. Here's why:

• Those variable rates are only going to shoot higher when the economy recovers and interest rates rise, Kantrowitz cautioned. Typically, private student loan rates aren't capped, so the sky's the limit.

• Private loans don't come with the forgiveness and income-based repayment options now available for federal loans.

• Private lenders will still loan you far more money than you can comfortably repay. They know you can't escape this debt, so they're comfortable piling it on. Student loan debt typically can't be erased in bankruptcy court, and there is no limit on how long private lenders can pursue you for collection.

So it's up to you to set limits on how much you'll borrow and search for the best possible deals.

How much should you borrow?

If you're a student, you should generally limit your debt so that your loan payments after you graduate don't eat up more than 10% of your expected monthly income. Figure you'll pay $12 per month for every $1,000 of federal student loans you borrow if you repay the loan over 10 years. If you take on private student loan debt, figure you'll pay $16 per month for every $1,000, although you could well pay more.

If the math makes your head hurt, you can just use the rule of thumb that you shouldn't borrow more in total for your education than you expect to make your first year out of school. The rule doesn't work for all careers; lawyers, for example, may scrape away at a low-paying government job for a few years before departing for the big bucks in the private sector. But the rule should prevent most students from overdosing on debt.

If you're a parent, try to keep all your loan payments -- for mortgages, cars, credit cards and education -- to 35% or less of your gross monthly income. If you try to borrow more than 40% under some private loan programs, your application will be turned down.

Whether you're a parent or a student, though, you obviously should exhaust your federal loan options before applying for private loans.