A troubled economy can help or hinder your family's ability to obtain loans for college expenses.

There are times when it's tough to find the silver lining in a dark thundercloud. Today's prospective college students can certainly see the clouds: tough economic times, rising expenses, and a struggling job market. The silver lining lies in how these factors affect one's eligibility for student loans and other forms of financial aid.

If your household finances are being noticeably and negatively affected by the economic crisis, it might make it easier for you to obtain financial aid. But because eligibility is based on the previous year's tax return, your child's aid advisor won't know your situation has changed unless you tell him. You're allowed to appeal an aid award based on financial hardship if you can document the changes to your finances. There's a caveat, however; some changes may actually hinder your eligibility, so you don't want to plead your case if it's going to backfire.

Live on less; qualify for more

Reduced income, depressed home equity values, and limited access to credit are some of the common challenges associated with economic down-cycles. A significant reduction in household income generally increases your household's eligibility for student loans and other forms of aid. "Significant" can mean a 10 percent pay cut, or being out of work for five weeks or more. You would need to provide documentation to the school's financial aid office, such as your walking papers from the former employer, and pay stubs from the new one.

If your reduced income has shuttled you into foreclosure, an appeal is likely to work against you. A foreclosure may disqualify you from certain low-cost loans.

Depressed equity-a two-sided coin

The National Association of Realtors reports that home prices dropped 6.3 percent between May of 2007 and May of 2008. Chances are that you've seen your home equity dip measurably in the last year or so. Home equity isn't a factor for public school eligibility, but this change may improve your prospects for aid with a private school.

On the other hand, a reduced home equity value also limits the amount of money you can borrow via a second mortgage. Thankfully, this shouldn't affect your decision to appeal your financial aid package, but it is something to consider as you plan your costs.

Limited credit; limited options

If you're faced with disappearing credit, such as cancelled or decreased credit card accounts, an appeal might help. You'd have to point to a reason why your credit has dried up, or show what affect that change has had on your finances. If you have to pay off a large credit balance, for example, you may find two silver linings in that dark cloud. Your eligibility for aid may increase because your cash balance will be lower, and you'll have a lower level of debt to manage going forward.

Published on August 8, 2008