CURRENT ECONOMIC WOES

may actually improve your ability to pay for college.

"Financial aid is affected by the many moving parts in the broader economic picture," explains economist David Braverman, author of "The Standard & Poor's Guide to Saving and Investing for College." The credit crunch, weakened job market and decreasing home values may make you eligible for more aid than you think. However, for some especially hard-hit families (like those who've had their homes foreclosed) these same factors could also hinder their ability to secure certain loans.

The key to finding out whether you're eligible for more money is to assess the impact that the slowing economy has had on your finances and assets. If you have reason to suspect that your tax return for 2008 will be even slightly lower than 2007's, inform the college right away to ensure you get ample aid for the 2008-2009 academic year, advises Carl Buck, vice president for Chase Education Finance. Otherwise, extra help won't arrive until fall 2009. Problem is that the Free Application for Federal Student Aid (FAFSA) that colleges use to parcel out loans and grants is based on your previous year's tax return, and so lags behind. Unless you alert the college, it has no way to know you're suffering financially from a sudden job loss, or dried up home equity. "Even with the economy tanking right now, most families are submitting old data," says Cindy Bailey, executive director of education finance services for the College Board.

"Ask for further review and reconsideration based on hardship," says Buck. "Colleges have discretionary funds to address these kinds of appeals. But we have to be real here: It's a matter of timing." The bulk of available aid gets allocated by March and offered to incoming students when they receive their acceptance letters. The longer a student waits to apply for aid, the more likely that help will come in the form of loans, rather than grants.

Current students can appeal by updating their FAFSA online and faxing the documents that support the changes in their financial situation to the college's financial aid office. A prospective student who has been accepted, but has yet to choose a college can try to secure a better offer by scheduling an in-person interview with the financial aid director at their top choice school.

Whichever way you appeal for more financial aid, be cautious. Some of the same economic factors that may entitle you to more funding, may also limit your ability to apply for it. Here are five economic factors and their potential impact on your chances of securing more financial aid:

Salary Cuts and Layoffs

Assessment: Good. An income dip increases aid eligibility.

When recession looms, a slowing job market is never far behind. The unemployment rate has hovered at 5% since December, with another 17,000 jobs lost in January. Even those employees with job security aren't safe from pay cuts. Last month, IBM announced a 15% base salary pay cut affecting nearly 7,000 of its U.S. workers.

Any annual drop in salary of 10% or more is worth reporting to the financial aid office, says Braverman. Even if you snag a new job fairly quickly, consider how that brief period of lost income affects your annual earning potential. "To a family paying for college, the difference between making $50,000 and $45,000 is significant," he says. As evidence of the hardship, present your termination papers, severance package or altered pay stubs.

Also, students graduating in the next year or two ought to consider the strength (or weakness) of the job market and what they might be earning post-graduation to determine how much they should borrow. "Just because there are limits on how much you can borrow doesn't mean you ought to borrow the full limit each year," says Bailey. If an on-campus job could pay for two semesters' worth of books, that's $1,000 less in interest-accruing loans you'll be paying off later.

Foreclosures

Assessment: Bad. Parents may be denied a PLUS loan.

Nationwide, the number of foreclosures increased 75% in 2007, to a record-high 1.3 million properties, according to RealtyTrak, an online real estate site. For parents who have lost their home to foreclosure in the past five years, or who are currently in the process of going through one, chances of getting approved for a PLUS loan are slim, says Mark Kantrowitz, founder of FinAid.org. The application requires a review of your credit history over the past five years. Lenders are now extremely alert to any warning signs, including late payments. So a black mark like a foreclosure won't bode well.

Not all hope is lost, however. If you're turned down for a PLUS loan, your child can take another $4,000 in unsubsidized Stafford Federal Student Loans for his first two years, and $5,000 for each year thereafter to balance out the hardship of having parents who are unable to contribute.

Plunging Home Values

Assessment: Mixed. Increases aid eligibility at private institutions, but may hinder ability to use a home equity line of credit (HELOC) for funding.

Home equity doesn't count as a family asset on the FAFSA, but it does on the PROFILE application, a College Board supplement used by some 300 private colleges and 500 scholarship programs. And given that the average U.S. home's value plunged 5.5% last year, according to online real estate service Zillow.com, you could be eligible for more aid if you have less equity in your home than previously reported on your PROFILE application.

Even if your college doesn't openly gauge home value, it can't hurt to notify them that this traditional source of easy money has dried up, says Buck. Less equity may also limit your ability to take out a home equity line of credit, something many parents opt for instead of a PLUS loan.

For help assessing your home's current value, read our guide

Credit Crunch

Assessment: Bad. Fewer choices and higher rates on private student loans; fewer borrower discounts on federal loans.

The subprime meltdown hasn't just wreaked havoc on consumers' ability to apply for a credit card or home equity loan. "Private [student loan] lenders are tightening their criteria," says Kantrowitz.

In January, Sallie Mae cut back its so-called recourse loan programs with several for-profit education companies. These high-interest loans (up to 13%) were extended to students with poor credit scores and to other high-risk borrowers. Other providers have stalled for lack of investors willing to secure the loans. The Michigan Higher Education Student Loan Authority suspended its program Tuesday for that very reason.

Come fall, you could have fewer lender choices for private loans, says Bailey, and may end up with higher rates if your credit score is less than impeccable say, below 650. But it's unlikely that you won't be able to get financing at all. In fact, there's no need to worry about snagging a Stafford, Perkins or PLUS because such loans are federally backed and eligibility and rates are regulated. Lenders may offer fewer incentives, however, like discounts when you make on-time payments.

Interest Rate Cuts

Assessment: Good. Lock in lower rates on consolidation loans.

The Federal Reserve has cut the federal funds rate five times since September. The rate now stands at 3% and recent remarks by Fed Chairman Ben Bernanke indicate that further cuts are to come.

This is fantastic news for recent and soon-to-be grads. The rate cuts should make for a great deal on consolidation loans when student loan rates reset on July 1. These loans allow grads to combine multiple loans into one, and lock in the rate for the life of the loan. "Nobody should be looking to consolidate before then," says Kantrowitz. "The interest rate on variable-rate loans is going to be going way down, by more than 3%."