Undergraduate students are increasingly turning to federal student loans to meet their college expenses, according to a new report from the National Center for Educational Statistics that looks at trends in student loan volume over a 15-year period.

The release of the NCES report, “Trends in Undergraduate Borrowing II,” comes at a time when three large banks and more than two dozen nonbank lenders have stopped offering federal student loans.

Underscoring undergraduate students’ reliance on low-cost federal student loans, the report revealed that in the 2003-04 academic year, 73 percent of dependent Stafford loan borrowers took out the annual allowable maximum in combined subsidized and unsubsidized Stafford student loans, up from 57 percent in 1995-96.

Among financially independent undergraduates, 36 percent of Stafford loan borrowers took out the maximum subsidized and unsubsidized combined loan amount in 2003-04, up from 13 percent in 1995-96.

The study also found unexpected socio-economic and institution-based trends among student loan borrowers:

* The sharpest increases in borrowing were seen among middle-income students. Among both dependent and independent undergraduates, a greater percentage of Stafford loan borrowers came from lower-middle-, upper-middle-, and high-income groups in 2003-04 than in 1995-96.

* More students are taking out Stafford student loans. Between 1995-96 and 2003-04, the percentage of undergraduate students with unsubsidized Stafford student loans, which are available to students regardless of financial need, more than doubled to 21 percent from 10 percent. During that same time period, the percentage of undergraduates who took out both subsidized and unsubsidized Stafford student loans also more than doubled to 15 percent from 7 percent.

* Borrowing rates for students at private for-profit institutions have increased. These students borrowed at higher rates and in larger amounts than did students in any other group. In 2003-04, 72 percent of undergraduates enrolled in private for-profit institutions took out a Stafford loan, compared with 11 percent of undergraduates at public two-year institutions, 42 percent of those enrolled in public four-year schools, and 53 percent of those attending private not-for-profit four-year institutions.

This increased demand for federal student loans, coupled with the current credit crunch, prompted Sen. Edward Kennedy, D-Mass., to urge Congress to increase the limits on how much students can borrow in federal money, the Chronicle of Higher Education recently reported.

Although a growing number of students are turning to private student loans to supplement their federal college loans, families are being urged to make sure they’ve taken advantage of all their low-cost federal financial aid options first, since federal student loans typically have lower interest rates and more attractive terms than private student loans.

Lauren Asher, associate director of the Project on Student Debt, reminds students that federal college loans are the largest source of student financial aid in the country and offer borrower benefits unmatched by most private student loans, including low fixed interest rates, payment deferment and forbearance periods, and flexible repayment and student loan forgiveness options. And despite the ongoing credit crisis, Asher told the Houston Chronicle, federal student loans are still available.

“Federal loans are and will remain available to anyone who qualifies,” she said. “The worst-case scenario is that you’ll have to get your loan next year from a different lender, but you’ll still get your loan.”

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