Getting University Financial Aid With Student Loans in Default

I Want to Go Back To College, But...

Many working adults are going back to college to get a degree after a long hiatus from their undergraduate days. You may have any one of a number of very good reasons for wanting to go back to college as an adult.

You want to increase your marketability to job prospects. In this difficult economy, a college degree in your field sets you apart from less credentialed candidates for a position.

You want to change careers. Acquiring a university degree in a new field may be the key you need to fast-track your way to not just a new job, but a new career. Many colleges even have job placement assistance for graduates.

You want to finish the degree you once started. Almost all colleges offer evening,  weekend and online courses designed for working adults who want to finish a degree they started years earlier.

For many, the main challenge of returning to school as an adult is affording the tuition and other fees. This is especially true if you were once in an undergraduate or graduate program for which you took out student loans. If your student loans are not in default status, going back to school may allow you to defer your student loan payments, but if your student loans are in default, it can be very difficult to qualify for financial aid of any kind.

Definition of Defaulted Student Loan

Your student loan will go into default status if you have not made any payments on it in 270 days. At this point, you will no longer be eligible to make payments on the loan, and it will go into collection status.

The Department of Education may hire a collection agency to collect the debt from you in full, which is their legal right. A collection agency may tack on as much as 25% more in collection fees to your initial student loan debt. You then become responsible for paying the amount of the initial loan, plus any collection fees.

A defaulted student loan is a failure to pay a debt to which you are contractually obligated. Unfortunately, unlike most failures to pay a debt, there is currently no statute of limitations on student loan debt borrowed from a government program. This means that a defaulted loan may adversely and seriously affect your credit the entire time it remains in default.

Worse still, it may make getting financial aid next to impossible.


The FAFSA & Defaulted Loans

To qualify for any grants, scholarships or government student loan programs, you must first complete the Free Application for Federal Student Aid.

The FAFSA is a free form which sends your financial information to the universities of your choice to help them determine your eligibility for scholarships, grants and loans. The federal government also uses this information to help you determine what types of university financial aid programs you qualify for.

Unfortunately, if you have a student loan in default status, you are automatically ineligible for any federal financial aid. This includes Stafford loans and other federal student loan programs, as well as any federal grant programs such as Pell Grants.

Additionally, the federal government will not allow you to go forward with your FAFSA application. If you attempt to complete and submit a FAFSA while you have a defaulted student loan, the US Department of Education will send you a letter telling you that you are not eligible to go forward with the application due to the default status.

College Scholarship Basics

College Scholarships With Student Loans in Default

Of course, you can pay for a college education without the help of federal programs.

Can You Apply for Scholarships?

Many people subsidize the cost of a college education by applying for private scholarship programs. Unfortunately, almost all scholarship applications require that you complete a FAFSA before being eligible for scholarship consideration. This includes scholarships from federal, state and local government programs, as well as private scholarship sponsors. Scholarships want you to first apply for federal grant and scholarship programs so that they can serve those with real funding needs. This means that if you have a student loan in default, you won't be able to apply for almost any scholarships either.

Getting Your Student Loan out of Default

The reality is that if you want to go back to school with a defaulted student loan and can't or don't want to pay for your tuition and fees entirely out of pocket, you must get your loan out of default to qualify for any financial aid.

Fortunately, the Department of Education offers several options for people looking to get their student loans out of default status. Any or all of these options may help you in getting your loan out of default status so that you can begin your college education pursuits anew.

  • Pay your student loan in full. If you pay the loan in full, you may avoid the collection fees if a collection agency has been assigned to your account. This will get you out of default within 30-60 days - the fastest route. You can pay for it out of pocket, or allow the IRS to garnish your income tax refund to cover all or part of the outstanding debt.
  • Arrange a new repayment plan. Contact the Department of Education about setting up a repayment arrangement for your defaulted student loan. After six timely, consistent and continuous payments on your loan, you'll once again be eligible for financial aid again.
  • Rehabilitate your student loan. The Department of Education may allow you to restore your loan to its original terms by making nine continuous monthly payments on it. After this initial period of nine months, your loan will be out of default status and you'll be able to apply for financial aid again.
  • Consolidate the loans. If you have several student loans in default, consider consolidating them through the federal government's Direct Loans program. Loan consolidation combines all your student loans into one lump sum debt and immediately gets all your loans out of default status. You must then repay the consolidated loans under the new loan terms. There are several pros and cons to doing this - the main con being that if you have any loans with deferred interest, consolidating them into one loan will almost certainly do away with any deferment terms - but aside from paying the loan in full, loan consolidation is the quickest way to get your loans out of default.

How Else to Pay for College

Perhaps for some reason, you can't or don't want to get your student loan out of default before returning to school. There are still two ways to finance your college education without the help of financial aid.

Pay for all the tuition and fees yourself.
This may not be as painful as it may first appear. Many colleges allow you to set up installment plans which divide the tuition you owe into monthly installments over the course of the semester. This may make affording college much more accessible to you, particularly if you choose a low-cost school such as a state university or community college. You may find that, with some budgeting, you can afford to pay for your college tuition free and clear.

Take out a small personal loan from a bank.
If you don't want to or can't afford to pay your tuition out of pocket, you can still apply for a small personal loan from your local bank to cover the cost of going to college. Keep in mind that these loans often have much faster and stricter repayment terms and may have higher interest rates than federal student aid. Also, a student loan in default may significantly damage your credit score, making it much harder to qualify for a loan from a private lending institution.

Your best bet for going back to school with a defaulted student loan is to get the loan out of default first. It may delay your college plans for a few months, but may save you thousands of dollars in the long run. It is also the only way you will qualify for university financial aid.

Have you gone back to school with student loans in default? Let me know in the comments what your strategy was, and how it all turned out for you!

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Comments 1 comment

marcela 4 years ago

Excellent suggestions.thanks for all this info.

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