Senator Eliot Shapleigh - El Paso, Texas

The joke in the student loan industry is that Congress took away half the lenders' profits and the credit crunch on Wall Street took the other half.

Not funny?

It's not meant to be.

In recent months, 33 lenders have suspended or ended their participation in the federal student loan program and 11 more have halted their private student loan programs, said Mark Kantrowitz, publisher of financial aid site FinAid.org.

"Many of these lenders are in the top 100 of student loan lenders," he said, including College Loan Corp., M&T Bank and HSBC.

The lenders say they can't raise money in the securities markets to finance student-lending programs or make money on loans because of a 2007 law that cut federal student loan subsidies.

As ugly as that sounds, Kantrowitz said, "it's more dire for the lenders than it is for the students."

That's because if all lenders exit the higher education loan business, college-bound students and those already enrolled will still get loans to pay for their schooling.

The federal government, through the Department of Education, is required by law to serve as the lender of last resort if the student loan market collapses.

Right now, the Department of Education finances about 19 percent of the student loan volume through its Direct Loan Program. Those loans are issued through higher education institutions, and about 20 percent of all eligible schools participate.

That percentage is likely to rise as other sources of student loan banks, nonbank lenders such as Sallie Mae and Nelnet, and state loan agencies exit the market.

"Since January a total of 59 schools have applied to participate, and 17 of them are brand new to the program," Kantrowitz said. "The number that has applied is about four times the typical rate. So there is an uptick, but not a stampede."

Things have changed

State loan agencies borrow money by issuing bonds. Then they loan that money to students. But no state loan agency has had a successful bond issue since the fall of last year, when the credit crisis started.

That means they are making loans on the money they raised in previous years. When that dries up, they won't have any fresh money to lend out if the capital markets continue to avoid their debt.

Last week, Texas' state loan agency, the Higher Education Service Corp. in Waco, said it would stop offering new student loans as of March 27.

Again, that does not mean that parents preparing to send their children off to college will not be able to get loans to cover those expenses.

It's likely giant commercial banks, such as JPMorgan Chase and Bank of America, could use this as an opportunity to increase their student loan market share.

However, with fewer lenders to choose from, parents and students may find themselves paying higher interest and fees in the coming years.

Federal law sets the maximum interest rates and fees on federal education loans through the Federal Family Education Loan program, the main source of student loans.

Offering discounts

Lenders have been offering discounts on those fees and interest rates to attract and reward borrowers with high credit scores and consistent repayment histories. Kantrowitz prepared a policy paper on the crisis and found that several lenders have cut discounts in half or eliminated them completely.

Lenders have more flexibility with private student loans and have exercised their ability to reprice loans higher. Kantrowitz found that private student loan interest rates have risen by 0.25 percent to 3 percent, with most of the increases imposed on borrowers with bad or marginal credit.

Lenders are also demanding higher credit scores for private education loans to students and their parents. That will be a hard criteria to meet for many families with variable rate mortgages they cannot afford.

Kantrowitz predicts 1 percent to 2 percent of borrowers will be considered ineligible for private student loans "as a result of the increase in foreclosures and tightening of credit underwriting criteria."

There's absolutely nothing funny about that.