For thousands of Pennsylvania college students, turmoil in the financial aid sector will hit home this fall, with average state grants that could be $500 smaller than last year, the head of the state's loan agency said yesterday.

James Preston, president and chief executive officer of the Pennsylvania Higher Education Assistance Agency, discussed the recent state grant reduction and various issues related to the nation's student loan squeeze during a meeting with the Pittsburgh Post-Gazette editorial board.

He said PHEAA, recently criticized for spending excesses, is in the midst of an effort to eliminate unnecessary costs.

Along with bond market upheaval that has fed a nationwide credit crunch, federal law changes enacted after last year's private loan scandals have eroded the profit potential for private lenders. A number of those firms have stopped making some student loans or have indicated they will tighten lending requirements or raise interest rates.

In March, PHEAA suspended a loan program that includes Stafford Loans.

Mr. Preston, appointed to the job in March, said yesterday that PHEAA has set as its highest priority ensuring that students have other loan options. He said his agency is working to line up other lenders and to involve the federal government as part of a broader effort to prevent sources of student loans that were decades in the making from drying up.

"If we don't stabilize the bond market, these pieces of the [loan] infrastructure will go away and students and parents will be hit by it," he said.

The potential risk goes well beyond the ability of an individual college student to afford an education.

"If schools can't meet their tuition targets -- many of these schools are tuition-driven -- what do we do then?" he said. "In many of these small communities those schools are the biggest employers."

This fall, the number of students receiving aid through the state grant program is expected to increase slightly, to 163,000 from 159,000 last year.

But under a measure approved last month by PHEAA's board, the awards those students will be eligible for in 2008-09 will be significantly smaller.

That's largely because the unsettled bond market left PHEAA unable to contribute toward the grant program this year. Last year, it contributed $61 million toward the $435 million state grant program.

Based on current projections, the maximum grant award a student can receive will range from $2,128 to $4,000, depending on tuition costs at the college the student plans to attend. That compares with last year's maximum award that ranged from $2,500 to $4,700.

For students attending lower priced institutions, the loss may be significantly offset by growth in the Pell grant, Mr. Preston said. But many students eyeing higher priced schools may have to make tough choices, he added.

"What I'm worried about is people coming out [of college] with too much debt," he said. "There has to be a discussion up front as to what they can afford."