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I called Joe at zspeed and he said since the clutch goes all the way up and its engaging properly he thinks it's the clutch or pressure plate thats broken. He stated that if the stick shift goes into gear when the car is off and doesn't when it's on, most likely indicates broken or worpped pressure plate. So I'm going to drop the transmission again today and take a look at the pressure plate before I fork out $500 again.
Posting an update for anybody that comes across this thread with the same problem. Finished replacing the clutch to southbend stage 2 street, replaced the pressure plate on the Jwt Flywheel, and changed transmission oil to redline gear oil. Went for a small drive and it engages properly and the noise is reduced by 95%.