If you are a U.S. citizen or eligible noncitizen, with a high school diploma or a GED, there are some circumstances that may revoke your eligibility for federal financial aid. Under such circumstances, you would be ineligible for federal grants, loans, and work-study – before you even applied. Unfortunately, some of these circumstances are quite common. If you’re thinking about heading to college, and any of the following situations apply to you, read on to discover how you may be able to regain your federal aid eligibility and possibly pursue an online degree.
Situation 1: You Defaulted on a Federal Student Loan
Whether you dropped out of a previous college program, or made it all the way to graduation, there’s a good chance you’ve had some trouble making your federal student loan payments. You’re not alone. Most federal loans are considered to be in “default” after roughly nine months, or 270 days, without a payment.
Now that you’re thinking about heading back to college – to finish your degree or attend graduate school – your default status will prevent you from receiving any type of federal loan, grant, or work-study stipend. In order to reclaim Title IV eligibility, you may have four options, according to the Federal Student Aid (FSA) Office’s online publication, “Collections Guide to Defaulted Student Loans.” Each option is defined by specific requirements, wait times, plus points, and drawbacks. Below is a summary (students should visit the FSA’s website or contact the organization for full, unabbreviated details):
Option 1: Repay the entire loan
Wait Time: None
Requirement 1: You need to have enough money to cover the full balance of the loan.
Requirement 2: If your loan servicer employed a collection agency to help collect your unpaid loan, additional collection costs may apply.
Positives: You won’t have to worry about future payments, and your credit report will show that the defaulted loans have been paid in full.
Negatives: This is probably an unrealistic option, as most college students or recent graduates don’t have significant cash reserves.
Option 2: Consolidate the loan(s)
Wait Time: Zero to three months
Requirement 1: You can apply for consolidation (even if you only have one federal student loan), after establishing “satisfactory repayment arrangements” with whoever services the loan – whether it’s the federal government or a commercial lender. In most cases, making three, full, on-time loan payments counts for “satisfactory.” Your loan servicer must agree to the monthly payment amount. (Applying for consolidation does not guarantee you will receive it.)
Requirement 2: Alternatively, you can apply for consolidation if you agree to repay your loan(s) on the Income-Based Repayment Plan (IBR) or the Income-Contingent Repayment Plan (ICR). According to representatives from the Texas Guaranteed Student Loan Corporation (known as TG), both IRB and ICR repayment terms are based on your adjusted gross income, your loan amount, and the size of your household. The difference between the two is, under the IBR plan, a borrower must be experiencing a partial financial hardship in order to initially select this plan. (Applying for consolidation does not guarantee you will receive it.)
Positives: If you’re approved for loan consolidation, your credit score will eventually improve, because the delinquent loan(s) will show a zero balance. Also according to TG authorities, loan consolidation may allow you to bundle all your outstanding federal loans together, including defaulted and non-defaulted loans. Then you would only have one monthly payment to one lender/servicer, at a fixed interest rate, for the life of the consolidated loan. Your monthly, consolidated payment may be lower than the original combined amount(s) due. Finally, according to TG, you may also qualify for renewed deferment benefits on your consolidation loan.
Negatives: The default notation will remain on your credit report for up to seven years. Additionally, consolidation usually extends the amount of time you’ll be in repayment (sometimes up to 30 years), which means you’ll be paying more interest and more money in the long run.
Option 3: Rehabilitate the loan
Wait time: Nine to twelve months
Requirement 1: You must make nine, on-time loan payments within a ten-month period. Your loan servicer must agree to the monthly payment amount.
Requirement 2: Your loan servicer may outline additional rehabilitation terms and requirements.
Positives: The default notation will be removed from your credit report.
Negatives: You have to wait at least nine months (twelve months for defaulted Perkins loans) before you can qualify.
Option 4: Reinstate the loan
Wait time: Six months
Requirement 1: You must contact your loan servicer to establish an acceptable monthly payment amount.
Requirement 2: Make six, full, consecutive, on-time payments.
Positives: Your new monthly payment amount may be more manageable. Also, reinstating your loan can be a prelude to loan rehabilitation. “In order to be eligible for Title IV reinstatement, a borrower must make six consecutive, on-time monthly payments,” explain TG sources. “At that point, the borrower is eligible to apply for federal student aid. If the borrower continues making payments the loans can be rehabilitated after the ninth consecutive, on-time payment and the borrower’s credit will be fully restored.”
Negatives: The default notation will remain on your credit report for up to seven years (unless you eventually rehabilitate the loan, as noted above). Also, if you stop making on-time payments, you will permanently lose your Title IV eligibility until the full loan balance is repaid.
With all the options noted above, remember that specific requirements and terms may vary, based on the type of loan(s) you have and on your loan servicer’s policies. Loan servicers are the organizations that help you manage or consolidate your loans, address hardships, and make payments. Defaulted loans are also sometimes transferred from the original loan holder to a guaranty agency. It’s important to be aware of who is holding your loans.
If you have a federal student loan through the Direct Loan Program or the Federal Family Education Loan (FFEL) Program, and you are not sure who your loan holder is, you can look up your information through the National Student Loan Data System. You will need your Federal Student Aid PIN number to access your loan data. If you forgot your PIN, you can request a duplicate at www.pin.ed.gov.
Situation 2: You Did Not Comply with the Terms of a Federal Grant
Normally, federal grants do not need to be repaid. However, if you received college aid through any type of federal grant program – including the Pell Grant, the FSEOG Grant, or the TEACH Grant – and you didn’t meet all the required terms of the program, you are required to pay back your award – possibly with interest. The following grant aid situations can impact your eligibility to receive future aid from the federal government:
- You received an “over-award.”
Receiving an over-award means that you got more money than you should have, resulting from a processing error or a misrepresentation that you made on your FAFSA. Even though this occurrence may not be your fault, it’s still your responsibility to return any extra funds. In fact, you’re required to pay back all the extra grant money, or enter into a repayment agreement with your school, within 45 days of being notified. Failure to do so will result in loss of eligibility for federal financial aid, along with collection actions.
If you’ve already spent the extra money, and can’t afford to return the lump sum within 45 days, your school and/or the U.S. Department of Education should help you establish a satisfactory repayment arrangement. “Satisfactory” means that you’ll make on-time, installment payments; otherwise you risk losing your federal aid eligibility until the full balance is repaid. Unlike some of the arrangements that can be made for outstanding federal loans, grant refunds can’t be consolidated or rehabilitated.
- You withdrew from your college program.
According to Angela Edwards, of the U.S. Department of Education’s Federal Student Aid Research and Customer Care Center (RCCC), students are offered federal aid under the assumption that they will attend school for the entire award period (usually a given semester). “If a recipient of Title IV grant or loan funds withdraws from a school after beginning attendance, the amount of Title IV grant or loan assistance earned by the student must be determined. If the amount disbursed to the student is greater than the amount the student earned, the unearned funds must be returned,” explains Edwards.
Again, if you’ve already spent the extra money, and can’t afford to return the lump sum within 45 days, your school and/or the U.S. Department of Education should help you establish a satisfactory repayment arrangement. Grant recipients should note that leaving college at the end of a semester, or failing out of college, is not the same as voluntarily withdrawing before an award period has concluded. Students who fail their courses or opt not to return for additional semesters are generally not required to repay federal grant aid (except in the case of the TEACH Grant, see below).
- You received a federal TEACH Grant, but never completed the required work service.
Under the terms of the federal TEACH Grant, recipients must find approved teaching roles and complete at least four years of full-time employment. Students may fail to do so for any number of reasons. They may never graduate. They may fail to earn state teacher certification. They may find preferable employment options in schools or subjects that don’t match the federal requirements. For whatever reason a TEACH recipient doesn’t honor his service agreement, his grant funds will be converted to Unsubsidized (meaning interest will accrue) Direct Loan funds. Failure to repay these loan funds can result in default and future federal aid ineligibility.
Situation 3: You Were Convicted of a Drug-Related Offense Under Special Circumstances
If you were convicted of selling or possessing drugs while collecting federal financial aid for college, your current eligibility may be affected. This rule does not apply to students who have never attended college, or who incurred drug-related convictions before they enrolled in college. It also doesn’t affect students who have never received federal financial aid.
Students who are impacted by drug-related offenses must wait one or more years (depending on the number and types of offenses) from their most recent date of conviction before they can regain eligibility for federal financial aid. Alternatively, students can opt to complete an approved drug rehabilitation program, which must include two, unannounced drug tests. Rehabilitation programs must be approved by the U.S. Department of Education. According to Angela Edwards of the USDE’s RCCC, rehabilitation programs must also meet one of the following criteria:
- Be qualified to receive funds from a federal, state or local government or from a federally or state-licensed insurance company; or
- Be administered or recognized by a federal, state or local government agency or court, or a federally or state-licensed hospital, health clinic or medical doctor.
Some Additional Points to Keep in Mind:
- Regaining (or already having) eligibility for federal financial aid doesn’t guarantee that you’ll receive it.
- Even if you’re federally ineligible, you should still complete the Free Application for Federal Student Aid (FAFSA). You may be eligible to receive student aid from your state’s government or from the college you choose to attend, and those providers rely on FAFSA results.
- If you have defaulted student loans or unpaid federal grant refunds, you should seek resolutions, regardless of your future college plans. Ignoring federal debt can severely damage your credit profile, while impacting your ability to buy a home, secure a lease, get a job, or receive other forms of government support.
- If you have thoroughly attempted to resolve federal loan/grant repayment issues with your school, your loan servicers, and any involved collection agencies, but you still can’t reach a satisfactory resolution, you may wish to contact the Federal Student Aid (FSA) Ombudsman.