Must someone be a Lawful Permanent Resident (LPR) to get Federal Loans, Grants, Financial Aid?

This question involves federal financial aid and college bureacracy moreso than immigration law...

Need my wife be a full LPR with the 10-year green card, or does it suffice to be a conditional (2yr green card holder, awaiting full LPR status and the 10 year card)? She otherwise meets all requirements to be eligible and we applied more than one year before the 2007-8 school year starts, so from everything I can research, she would seem to be eligible.

However, the school classified her as a "non-resident for tuition purposes" anyway, so we will probably have to jump through some hoops, show the green card/marriage cert/ utility bills/pay stubs/ tax data to the residency office at the college. The college advised to just file the AB540 request which would exempy them from nonresident status, but this forces you to waive access to financial aid (I think AB540 is designed for mexican illegals, not for Japanese wives of citizens)...

Any advice?

Yes, if your wife is an eligible non-citizen then she will be eligible for federal financial aid (one grant program she will not be eligible for is the ACG or SMART - you have to be Pell eligible to receive those, but you also have to be a U.S. Citizen among other criteria). When completing the FAFSA she will just have to provide her Alien Registration number; sometimes a school will have to verifiy it, so don't be surprised if you have to provide more paperwork.

Have you all recently moved to the current state in which she will be attending college? If so, most colleges have stipulations for residency such as living and working in the state for one year (without attending college) in order to be considered a resident for tuition purposes. It may not be an issue at all of her being an LPR.

Good luck!