Nov. 10 (Bloomberg) -- College students may have to borrow more to finance their higher education as market turmoil erodes savings, a public policy group that tracks student aid said.

For the class of 2007, the average debt for a graduating undergraduate student was $20,098, a 6 percent increase over 2006, according to the Project on Student Debt. Declining home values and rising unemployment have led one-third of parents to slow college savings, an August survey by TD Ameritrade Holding Corp. said.

``Their other sources of money have dried up,'' said Robert Shireman, executive director of the Berkeley, California-based Project on Student Debt. ``At worse they have lost their job and a lot of others will see their savings account diminished.''

The Standard and Poor's 500 index has fallen 38 percent year to date. According to financial data firm Morningstar, Inc., all 79 of the so-called 529 college savings plans in its database have fallen in value this year, with 60 dropping more than 10 percent.

In the 2007-2008 academic year, more than $143 billion in financial aid was distributed through federal loans, grants, federal work-study, federal tax credits and deductions, according to the College Board, a New York- based nonprofit association of colleges. An additional $19 billion was borrowed from state and private sources.

Real Challenges

``We have been staying close to the developments in federal student aid and in student lending,'' Sara Martinez Tucker, Under Secretary for the U.S. Department of Education, said in a news conference today.

On Nov. 8, the Department of Education announced an extension of legislation passed by Congress in May that maintains increased lending limits and loan-buying capacity through the 2009-2010 school year.

``Having a purchase program would give confidence to lenders that there would be a home for these loans,'' Martinez Tucker said.

The University of Maryland set up a committee to handle financial aid appeals as parents find their ability to pay has changed, said Sarah Bauder, director for the office of student financial aid.

``Now parents are coming and saying, `How did we know the economy was going to come spiraling down?''' Bauder said. Monthly payment plan delinquencies are on the rise for the first time in recent memory, she said.

Aid Applications Rise

Applications for financial aid at the University of Delaware rose by 800 for the 2008-2009 academic year, said Johnie Burton, director of scholarships and financial aid. The majority of aid packages involve federal loans and some students took advantage of the higher loan limits, he said.

At Temple University in Philadelphia, spokesman Ray Betzner said any increase in loan applications likely will come in the spring as most students have already secured the financing they need for the 2008-2009 academic year.

For those needing to borrow to finance an education, U.S.-backed loans remain the best option, said Mark Kantrowitz, publisher of FinAid.org, a college funding information Web site based in Cranberry Township, Pennsylvania.

Fixed Rate

``Federal loans are fixed rate and, except for the best credit customers, are much less expensive than private student loans,'' he said.

Federal student loans are mostly disbursed through banks and are U.S. government-backed. Stafford loans are the most common type and generally don't require students to demonstrate financial need.

Unsubsidized Stafford loans currently have a fixed interest rate of 6.8 percent with repayment beginning after graduation and undergraduates can borrow a total of $31,000. The loans require borrowers to be in good standing on any other student loans they might have. Subsidized loans are available for those with fewer financial resources and carry a 6 percent interest rate.

Federal Perkins loans are subsidized and are only for students with exceptional financial need. The school acts as the lender, providing loans at a set 5 percent interest rate with a 10-year repayment period. Undergraduates can borrow up to $20,000 and as much as $40,000 for undergraduate and graduate school combined.

PLUS Loans

Parents and graduate students also can take ``PLUS'' loans to cover the balance of tuition if necessary. PLUS loans currently have a fixed interest rate of 8.5 percent and require good credit. If a parent is denied a PLUS loan, the student is then eligible for up to $57,500 in Stafford loans.

If a student's financial aid package is insufficient, negotiate for more or consult with a financial aid adviser, said Reecy Aresty, author of ``How to Pay for College Without Going Broke.''

``You don't have to take it at face value,'' he said. For private schools, any student, no matter their parent's income, should qualify for some kind of subsidized aid, he added.

``If people understood the financial aid process everything would go a lot smoother,'' Aresty said. ``It's just like knowing the tax code -- a really good CPA will get somebody absolutely the best deal legally.''

No Problem

Students shouldn't have a problem obtaining federal loans, said Tom Joyce, spokesman for Reston, Virginia-based Sallie Mae, the largest student lender in the U.S.

In May 2008, Congress enacted legislation that increased the amount of federal student loans to $31,000 from $23,000 per undergraduate, expanded parental eligibility for PLUS loans and gave the Department of Education the temporary authority to purchase loans.

The program will continue for the 2009-2010 academic year, Secretary of Education Margaret Spellings said in a joint Nov. 8 statement with the U.S. Treasury.

The Department of Education's plan to buy fully disbursed federal student loans was also extended to include all unconsolidated federal loans awarded between Oct. 1, 2003, and July 1, 2009. Under the expanded provisions, up to $135 billion in loans are now eligible for purchase.

Increased Loan Limits

``The federal government has increased federal loan limits and that I think will help and has helped,'' Joyce said. ``It's working perfectly.''

Total costs including tuition, fees, room, board and expenses averaged $14,333 for a public college and $34,132 for a private school for 2008-2009, according to the College Board.

Private loans, many with variable interest rates, are still an option and are difficult to find amid the credit crunch, Kantrowitz said. Bank of America Corp. ended its private student loan program in April and Wachovia Corp., soon to be acquired by Wells Fargo & Co., ended its program in August.

``It's going to be harder to qualify for them without a creditworthy cosigner,'' Kantrowitz said. ``Prove your credit but be prepared for the possibility that the lenders might not be there.''

Sallie Mae Loans

The annual percentage rate on a $10,000 Sallie Mae signature private loan including fees ranges from 7 percent to 16 percent, depending on credit worthiness. The rate is based on the 1-month London Inter-Bank Offered Rate, or Libor, plus a margin of 4 percent to 14 percent and is adjusted quarterly. The one-month Libor rate was 1.62 percent on Nov. 7.

``You can't really predict what's going to happen with interest rates or indexes,'' Shireman said. ``A fixed rate just provides better protection.''

The best way to reduce the college debt burden is to continue saving as much as possible even in a tough economic environment, said Jason Olim, chief executive officer of Freshmanfund.com, an online college savings registry, based in New York.

``There's never a time when savings isn't a good idea,'' he said, adding that he considers the 529 plans, which provide tax-free savings for higher education, the best way to save. ``They all offer a range of investment options from the more speculative to the ultra-secure.''

To limit losses, the conventional wisdom of moving from high-risk to low-risk allocations as college enrollment approaches is still valid, Olim said. Many state 529 programs, such as New York's and Connecticut's, automatically shift balances into safer investments as the child ages.

``You might as well stay in and continue to invest,'' Kantrowitz said. ``The best way is every month put in a certain amount and right now you're buying bargains.''

To contact the reporter on this story: Amy Eagleburger in New York aeagleburger@bloomberg.net.

Last Updated: November 10, 2008 15:50 EST