Getting accepted into a top-choice university or college used to be the biggest challenge students faced with the application process. But now, many face an even bigger hurdle: landing a private student loan.

Blame it on the credit crunch, which this year prompted several major private student loan lenders, including Bank of America (BAC: 26.53, +3.74, +16.41%), Wachovia (WB: 6.31, +0.46, +7.86%) and College Loan Corporation, to suspend their private loan programs. The lenders that remain have tightened their lending requirements dramatically. Students seeking loans not only need a stellar credit score (a difficult feat considering they typically have little to no credit history), but now most of them also need a co-signer.

Those who do manage to land a loan must brace themselves for high interest rates, says Mark Kantrowitz, publisher of FinAid.org. Interest rates on these loans now average between 12% and 14%, up from 10% to 11% last year, he says. Some rates even hit close to 19%, according to the National Consumer Law Center.

Making matters worse, rising tuition and other costs are forcing more students to seek private financing. Private loans already comprise about 24% of the education loan volume in the U.S., and their yearly growth is outpacing that of federal loans, according to the NCLC’s March 2008 survey.

“Students are faced with problems on several fronts,” says Deanne Loonin, director of the Student Loan Borrower Assistance Project, part of the NCLC. “If the economy doesn’t improve, it will become harder to get approved for these loans. And it will become even harder to repay them.”

Here’s what students (and their co-signers) need to know before they start shopping for a private loan:

Limited Lenders

The pool of private lenders is shrinking fast.

Since September 2007, 36 lenders suspended their private student loan programs, according to Kantrowitz. Of those, nine exited the marketplace in the last month and a half, including Wachovia, College Loan Corp. and My Rich Uncle, he says.

While roughly two dozen lenders still underwrite private loans, many of them have such strict requirements that few borrowers are eligible, says John Hupalo, a former chief financial officer for First Marblehead Corporation (FMD: 1.86, +0.05, +2.76%), a private student loan lender. To improve their odds, borrowers should pull up their FICO score (get it for free on sites like freecreditreport.com and annualcreditreport.com), then find out the lender’s minimum credit score requirements. Then they should only apply to lenders that will accept their score, he says. The reason? Each time a student applies for a loan, their credit score may drop by around five points, says Kantrowitz.

Higher Credit Score Requirements

As the credit crunch continues to tighten its grip, skittish lenders are being extremely selective about who they lend to.

Last year, a borrower could get approved for a private student loan with a credit score of as low as 620, says Kantrowitz. Now, some lenders require at least a 650 to 680, while others won’t even look at an applicant with a credit score below 700. For a loan with the lowest interest rate possible (prime rate minus 0.5%, or the London Interbank Offered Rate (LIBOR) plus 2%) and low origination fees, the applicant needs at least a credit score of 810, which only 5% to 6% of borrowers have, he says.

Co-Signer Requirements

High credit scores are rare among college students who tend to have a short or nonexistent credit history. That’s where the co-signer comes in.

Bring a parent or older relative to the table who’ll pledge equal responsibility for repaying the loan. Lenders always prefer doling out loans to students who have a co-signer, but now most of them are requiring it, says Hupalo. “Lenders are trying to keep their risk as low as possible. And student loans — with higher co-signer rates — have fewer delinquencies and defaults,” he says.

Rising Interest Rates

Interest rates on private student loans are rarely set in stone. In fact, students can expect the rate to rise several times through the repayment period. Before signing up for a loan, make sure to understand the terms and how the interest rate can fluctuate.

Most private student loans carry variable interest rates that are pegged either to the prime rate, which is the rate at which financial institutions lend to customers, or to the LIBOR, which is the rate financial institutions use when lending money to one another. Loans with interest rates pegged to the prime rate are currently a safer bet. The rate is relatively low right now and could move lower if the Fed decides to cut interest rates again and banks follow in that direction, says Hupalo.

Loans pegged to the LIBOR are a different story. The LIBOR is currently rising in part because financial institutions are skittish about lending to each other, says Kantrowitz. Loans that move in tandem with the one-month LIBOR are particularly vulnerable to its spikes. (With those loans, some lenders base their interest rates on the average of the one-month LIBOR while others base it on where the LIBOR is on a specific date each month) In the beginning of September, the one-month LIBOR was at 2.48%. About one month later, on Oct. 6, the rate hit 4.09%.

If the LIBOR continues its ascent, student loans pegged to it will see an additional increase in coming months, warns Kantrowitz.

Smart Money