"She has been in complete denial and thought maybe she could skate by," a source told E! News. "She refused to accept any jail time and thought the DA was bluffing. She was adamant she wouldn't do any jail time."
"Lori is finally realizing just how serious this is," the source continued. "She is seeing the light that she will do jail time and is freaking out."
Loughlin, 54, and fashion designer husband Mossimo Giannulli were arrested last month for allegedly bribing their daughters' ways into the University of Southern California (USC) for $500,000 each. The former "When Calls the Heart" star and Giannulli allegedly paid scam mastermind William "Rick" Singer to get daughters Isabella and YouTube star Olivia Jade recruited to the USC crew team despite neither girl being a rower. Isabella and Olivia's statuses at USC are on hold as the school's investigations continue into individual cases.
Loughlin and Giannulli rejected the plea deal that "Desperate Housewives" star Felicity Huffman, who was also implicated in the case, accepted earlier this week. On Tuesday, Loughlin and Giannulli were indicted on charges of fraud and money laundering; if convicted, the couple faces up to 40 years in prison.
"Their lives will never be the same," an insider said of Loughlin's family. "They are scared and they don't know what's coming next. It all feels like a terrible nightmare."
"She is very distraught and is in crisis mode," a source said specifically of Olivia Jade. "Olivia is more embarrassed than anything and doesn't know how to handle all of the stress and scrutiny that has been surrounding her and her family. She feels completely lost. Her and Lori are leaning on each other a lot for full support right now."
Still, Olivia has been focusing on her friends more than her family, an insider told Us Weekly, and is struggling to rebuild her brand after being dropped from several endorsement deals following the scandal.
“Olivia is focusing all her time on hanging with her friends, a lot of whom are social media influencers and Internet stars, and she’s been filming some content with them,” a source said. “She’s trying to live her life normally again.”
The family was reportedly status obsessed, an insider said, which was why Loughlin and Giannulli, 55, flew on a private jet to court to avoid humiliation — and why Loughlin insisted on getting her daughters into USC at any cost.
“Lori is used to getting what she wants,” a family source told People. “This is why she got in trouble in the first place. She got fixated on getting her girls into USC," adding, "It was absolutely a status thing."
"She's trying to keep a somewhat regular schedule — going to yoga and Pilates and seeing friends for lunch," the insider said. "She is very faith-based, and she knows her faith will get her through this."