WASHINGTON — The supply of education loans is shrinking as credit tightens, and college-bound students might get squeezed in the process.

Smaller lenders such as College Loan Corp. and Nelnet Inc. are scaling back as their ability to sell packages of student loans to Wall Street and other investors is crimped.

But Sallie Mae, the nation's largest student lender, and investment banks are well-financed and have more flexibility to keep the lending spigot open. They are in a position to pick up market share as some lenders retrench.

Even though the Federal Reserve has cut a key interest rate five times in recent months, the shakeout in the student-loan industry will make it more expensive for students to borrow, assuming a reduced supply of funds.

Lower-income students will feel the brunt of it, college administrators say. Both federally guaranteed student loans and higher-priced private loans are being affected.

The entire student loan industry has been under pressure in recent months. Rising delinquencies last year applied the initial strain. The global credit crunch triggered by the collapse of high-risk mortgages aggravated the situation. And student-loan legislation that took effect in October cut about $20 billion from federal subsidies to lenders.

The latest squeeze on student lending is tied to trouble in the $330 billion market for auction-rate securities, about $80 billion of which is made up of bundles of student loans. Since some of these investments are backed by troubled bond insurers, investors have been reluctant to buy these securities, straining the lenders that sell them to raise cash.

"The potential for crisis occurs when the well-capitalized lenders and the banks cannot absorb all that (loan) volume," said Ben Kiser, a spokesman for Lincoln, Neb.-based Nelnet.

As the distress in the auction-securities market deepened last week, Michigan temporarily suspended one of its college loan programs, and Montana's student-loan agency tried unsuccessfully to sell $300 million in bonds. Twenty-one House Democrats asked the Bush administration in a letter Friday to shore up the market before the situation worsens.

Unlike the situation for major banks, student lending is the primary, if not sole, business of such companies as College Loan, Nelnet, EduCap, NextStudent, Student Loan Corp. and Education Finance Partners.

Some of those specialized lenders are now scaling back.

College Loan said recently it will leave the federal student-loan business, falling back on its private-loan operations. Nelnet stopped making consolidation loans, which students use to combine their federal loans for a fixed interest rate and lower monthly payments.

"I would imagine that more companies would be exiting the (consolidation) market," said Sameer Gokhale, an analyst at investment firm Keefe, Bruyette & Woods in New York.

The advice to students from experts is the same, but more so: Borrow as little as possible and try to get as much federally backed aid as possible before turning to higher-cost private loans.

As companies tighten their lending standards, "More students are going to need co-signers" on private loans, said Mark Kantrowitz, an expert on student loans who publishes the Web site www.finaid.org. Overall, however, he predicted that students will still be able to find loans.