Senator Eliot Shapleigh - El Paso, Texas

(Alberto Martinez/AMERICAN-STATESMAN) Whitney Tolliver says she doesn't want to take out too many loans: 'When you get out of school, if you don't have a job those loans are going to stare you down till you pay them off.'

Carlos Richardson , a sophomore studying psychology at Austin Community College, hasn't had to take out student loans — yet.

Federal Pell grants have covered his tuition so far. He plans to transfer in the spring to Tarleton State University in Stephenville, about 135 miles northwest of Austin, on a one-semester scholarship. Then he plans to move on to the University of Texas or Texas A&M University, where he'll likely take out a federally subsidized Stafford loan.

The prospect of going into debt gives him pause, Richardson said while eating breakfast on the patio at ACC's Northridge campus this week . "I'm really wondering where things are going with the credit markets and the availability for such loans."

So are millions of college students across the nation. As debt goes, federally subsidized student loans are low-risk. The problem has been largely one of liquidity, or sufficient funds to make loans. Some lenders — including Citigroup Inc., Bank of America and Wachovia Corp. — have scaled back or dropped out of the market altogether, forcing some students to find new lenders.

Meanwhile, the economic downturn and rising tuition are boosting demand for loans. Unemployment has cut into many families' income, and the plunging stock market has depleted their investment portfolios.

The federal government has taken steps, such as purchasing loans, to ensure adequate liquidity for the current academic year, but the 2009-10 academic year is a work in progress.

Federally backed student loans fund 94 percent of financial aid in the state, according to the Texas Guaranteed Student Loan Corporation. About 97 percent of the 17,600 UT students borrowing money are receiving federally backed loans, according to UT's Office of Student Financial Services. About 600 students receive private loans.

"This is the time of year when institutions and lenders are starting to put their financial aid packages together for the subsequent year, and I expect that we'll have to be even more creative," U.S. Education Secretary Margaret Spellings said during a recent meeting with American-Statesman editors and reporters. "We're working with Treasury and the Fed to try to prime the pump on liquidity and get through this — God-willing — short-term problem."

To help provide money, the Education Department has been purchasing newly issued loans from lenders. Spellings said the department will now begin buying older loans dating back as far as 2003 . The Bush administration is committed to ensuring sufficient loan capacity for all students who qualify, and the administration of President-elect Barack Obama is expected to follow suit.

The Federal Family Education Loan Program, through which banks, credit unions and other lenders issue federally backed loans, has seen $41.8 billion in loan originations so far in the current academic year, compared with $39 billion at this time last year. The Federal Direct Loan Program, through which students at some schools, including Texas State University-San Marcos, borrow directly from the Education Department, has issued $17.9 billion in loans, up from $12 billion a year ago.

The departure of some lenders from the market has created red tape for students, who must sign on with new lenders if they want to keep getting loans. A new loan won't get folded into the old loan, and therefore such students might want to consider consolidating their debts when they graduate, said Thomas Melecki , UT's director of student financial services. Consolidation lets borrowers combine all their federal student loans into a single loan at a fixed rate and extend the payback period.

Students taking out loans at UT can choose among dozens of lenders because a low default rate makes the student body an attractive market, he said. The university's financial services office no longer ranks lenders or accepts free food from them following a scandal last year that led to the dismissal of the director.

Students recently interviewed at local campuses aren't following the fine print of developments in Washington, but they're acutely aware of their own debt prospects.

Kristin Thonsgaard , a junior majoring in neurobiology at UT, is running up debt at the rate of $4,000 a semester, with $1,500 of that a federal loan and $2,500 a Texas B-on-Time loan. The latter will be forgiven if she graduates on time with at least a B average.

"I don't feel too bad considering that I'm pretty confident I'm going to graduate and get a decent job," said Thonsgaard, who plans to attend medical school, which will add tens of thousands of dollars to her debt. "So I see it as an investment."

Whitney Tolliver , a Huston-Tillotson University freshman, has borrowed $3,500 and hopes to transfer to UT and line up grants to reduce her need for loans. She said she's uneasy about amassing debt.

"When you get out of school, if you don't have a job those loans are going to stare you down till you pay them off," Tolliver said.

Alfraid Manning, a sophomore studying business at Huston-Tillotson, has avoided loans altogether, thanks to a track scholarship, Pell grants and other aid. Asked whether he considers himself fortunate, he replied: "Yes, sir."