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A Prospective Student is Ineligible for Financial Aid Because of a Student Loan Default

Mark Kantrowitz

August 01, 2011

I gave college a shot when I was 18 and dropped out due to major health problems. Student loans obviously did not disappear because of this and I have been struggling with them ever since. Now at age 24 I finally feel that I am healthy enough to give school a second try. I thought I had every detail worked out down to registering for my classes. Unfortunately, I have not been communicating with the student loan people because I am not in a good place financially right now. I just got a brief message from my school saying something along the lines of: “You can’t get your financial aid because you defaulted on a student loan.” Now I am freaking out and don’t know what to do. I’m finally ready and excited to give school a second try but certainly can’t afford it without any financial aid. What can I do? — Mary S.

Students who are in default on a federal student loan are ineligible for additional federal student aid.

There are only two options for regaining eligibility for federal student aid. One is to repay the loan in full. The other is to make arrangements with the loan holder to repay the loan. After you have made at least six consecutive monthly payments according to those arrangements, you will regain eligibility for federal student aid. If you are subject to a judgment for failure to repay the loans, the six monthly payments must be voluntary. Payments made through wage garnishment or the offset of income tax refunds are not considered voluntary, but those involuntary payments may be considered by the loan holder when determining an acceptable monthly payment amount. You must continue to make these payments as required by the loan holder to continue to retain eligibility for federal student aid.

(If you make 9 out of 10 consecutive, full and voluntary monthly payments, the loans will be rehabilitated and the default will be cleared from your credit history. The loans will then once again be eligible for deferments. After you have rehabilitated the loans, you can switch into the income-based repayment plan, which usually yields the lowest monthly payments. Under income-based repayment, the monthly loan payments are based on a percentage of your discretionary income, as opposed to the amount you owe. If your monthly income is less than 150% of the poverty line, your monthly loan payments will be zero. Financially-distressed borrowers often choose the income-based repayment plan.)

Regaining eligibility for federal student aid by making six monthly loan payments is a one-time opportunity. If you default on the loans again, your only option for regaining eligibility for federal student aid will be by paying off the loans in full. So be sure to continue making the payments as required. You will be able to get an in-school deferment on the loans after you have rehabilitated them.

Thus the quickest way to regain eligibility for federal student aid is to pay off the loans in full. Perhaps a relative is willing to help you pay off your debts? If you are willing and able to make a lump sum payment to settle the debt, it is sometimes possible to get the US Department of Education to waive the collection charges or part of the accrued but unpaid interest on a defaulted loan. See Student Loan Debt Settlements on the FinAid site for additional details.

Otherwise it will take six months for you to regain eligibility, which may force you to delay your enrollment.


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