The recent Wall Street Journal article, “Lenders Predict Harsher Climate For Student Loans“, had four noteworthy quotes:

“There is no question in my mind that, unless something changes in the marketplace, there will be a shortfall of funds available to make student loans,” says Mark Valenti, president of the Connecticut Student Loan Foundation, a nonprofit lender based in Rock Hill, Conn. “I’ve been doing this since 1978, and I’ve never been more nervous.”

It’s notable that these are the words of a non-profit lender. Non-profit lenders generally enjoy more advantageous terms in the marketplace than for-profit lenders like the Student Loan Network.

Concerns were heightened Tuesday when the Michigan Higher Education Student Loan Authority, a state agency, said it would suspend a major student-loan program because it was unable to raise capital in the markets. “I think a lot of agencies like ours are going to be running out of money,” says Tom Saxton, a deputy treasurer for the state of Michigan. “It just hasn’t hit yet.”

The idea that state agencies themselves may run out of money isn’t a huge surprise - all state-level governments are dealing with lost revenues from the mortgage crisis.

Brazos Higher Education Service Corp., which has a $15 billion student-loan portfolio, was one of the lenders whose auctions failed this week. Company executives have been working on related problems since the fall, when the market for auction-rate securities first ran into trouble, says Ellis Tredway, executive vice president. Nothing is clear yet, he says, adding that with the summer borrowing boom coming up, lenders like Brazos, based in Waco, Texas, are anxious.

“It is not hard to look down the road and ask whether there may be a funding crisis for student loans this fall,” he says.

When an auction fails, it means the lender, instead of being able to sell the loans to generate money for additional loans, must hold onto them instead. While they do generate interest income, it’s a fraction of the money needed to make a significant number of new loans.

The Vermont Student Assistance Corp., a nonprofit public agency that originates and guarantees student loans, says it has funds to keep making loans for the next few months but needs to raise $200 million in June and July for the next school year. In the meantime, a failed auction this week means it will have to pay higher interest rates on $300 million in bonds it has already used for student loans.

Don Vickers, the agency’s president and chief executive, says if the credit crisis isn’t resolved by summer, agencies like his may not be able to afford to keep funding students’ college tuitions. “If it’s not resolved by then,” he says, “it’s going to be catastrophic.”

VSAC as another non-profit making this warning is indeed a cause for concern. Is it a cause for panic? Hard to tell, though certainly the words of Secretary Paulson at a recent press briefing did not lend any comfort to the financial services industry.

What does all this mean for you? Based on my own research of the credit markets, things probably will not get better by summer; the largest batch of subprime mortgage resets begins in March 2008 and continues for the rest of the calendar year, bringing with it continued declining economic conditions.

If you need to take out a federal or private student loan for the 2008 - 2009 school year, apply quickly. By quickly, I mean as soon as you can. Stafford federal student loans become available as soon as your financial aid office issues its award letter. Private student loans can be obtained at any time as long as you meet eligibility and credit requirements. Borrow responsibly, borrow minimally, but get your application into a lender sooner rather than later. You can prevent interest from accruing on private student loans by choosing the “pay interest during enrollment” option.

Finally, as if it needed to be said, you absolutely, positively, and unconditionally must crank your scholarship hunt into top speed - right now. Grab our scholarship search eBook, hit up our scholarship search directory, and start finding scholarships.