The Pell Grant is the foundation for all other types of government financial aid for students. As of 2011, applicants who have significant financial need as demonstrated by the FAFSA receive an annual Pell Grant of up to $5,550, which does not need to be repaid. However, applicants who are in default on some types of loans forfeit their Pell Grant eligibility.
Pell Grant Eligibility
Applicants hoping to receive a Pell Grant, along with any other type of federal student aid, must not currently be in default on any federal student loan. A federal student loan is in default if the borrower has failed to make any payments for at least 270 days, or 330 days if payments are not due monthly. However, being in default on other types of loans, including auto loans and private student loans, does not affect Pell Grant eligibility, because the federal government does not run a credit check on applicants.
Rehabilitate Defaulted Loan
Borrowers who have student loans in default can rehabilitate the loans to not only regain Pell Grant eligibility, but also have the default status removed from their credit reports. Removing the default makes it easier for the student to receive other types of credit, such as credit cards, car loans and mortgages. One method of rehabilitating is to make nine full payments, each within 20 days of the due date, over a 10-month time period. The other method is to make six consecutive on-time payments before the due date. In both cases, contact the lender to enter the rehabilitation process.
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Pay Defaulted Loan in Full
A loan in default is due in full immediately, so if the borrower can afford to, he can repay the loan in full to gain immediate eligibility for future student aid, including a Pell Grant. One method of doing this is to use a credit card to repay the defaulted loan in full. The borrower can then pay the credit card balance off over time. However, this might be very costly because the credit card interest rate is likely to be higher than the interest rate on the defaulted loan.
Consolidate Defaulted Loan
Consolidating a loan in default will make the student eligible to receive a Pell Grant. Borrowers can consolidate any type of student loan except for an existing consolidation loan, Perkins Loan, health professionals loan or a defaulted loan with a current judgment issued against it. After consolidating the loan, the borrower must repay it using the income contingent repayment plan.