How to Deal with a Defaulted But Paid-Off Student Loan that Reappears

<b>Years ago, I went to a two-year school and obtained my Associate's degree. I defaulted on the loan. However, my taxes were taken years later (twice) to take care of the loan. In 1995, I enrolled at a different college and was awarded the Pell Grant. I didn't take out any more loans. I paid the difference with a scholarship from my church. I have since enrolled in another college to finish my bachelor's degree. Financial Aid is saying that I have an outstanding school loan and that isn't true. What can I do to settle this once and for all? I would like to finish my degree. I'm a single mom who knows that there is money out there to assist me, but I can't get it because of this looming issue. I don't want to take out loans to finish school. The loan I had was taken care of and I have the award letter from the second college to prove that I was awarded the Pell Grant after the default, which should signify that the loan was repaid. Please advise so I can get in school ASAP. I've been unemployed for over a year and I have to feed my kids! Please help! — P.E. Defaulted loans are like the game Whac-A-Mole. No matter how many times you deal with them, they keep on popping up. It is not uncommon for a defaulted loan to reappear years later, even if the borrower rehabilitated or repaid the debt. This is why it is important for borrowers to preserve all student loan paperwork indefinitely. There are many reasons why a loan can reappear even though the borrower believes the loan was resolved long ago. Sometimes there are errors in lender or guarantee agency records or old records are restored from backup tapes. Sometimes a borrower mistakenly believes a loan to have been paid in full, only to have the remaining balance resurface when skip tracing eventually catches up with the borrower. For example, the borrower may have repaid the original amount borrowed but not the interest that accrued on the loan. Or the borrower may have made payments equal to the outstanding loan balance, but did not realize that collection charges of up to 25% are deducted from each payment, leaving about a quarter of the debt still owing. Even borrowers who were subjected to administrative wage garnishment or Treasury offset of income tax refunds may not have paid off the debt in full if the total payments fell short of the required payoff amount. Students who are in default on a federal student loan are not eligible for further federal student aid. There is no statute of limitations on federal education loans, so the loss of eligibility for federal student aid can persist indefinitely. Students who have defaulted on a federal student loan may regain eligibility for federal student aid by rehabilitating the loan, consolidating the loan or repaying the loan in full. Loan rehabilitation involves making a series of on-time voluntary monthly payments according to an agreement between the borrower and the guarantee agency or the US Department of Education. After six consecutive on-time monthly payments, the borrower regains eligibility for federal student aid. After the borrower makes 9 out of 10 consecutive on-time monthly payments, the default is removed from the borrower's credit record. Rehabilitation is a one-time opportunity. If a borrower rehabilitates a loan and then redefaults, the only way to regain eligibility for federal student aid is to repay the debt in full.