Under his reign as leader of the SPD, Schulz has seen the party support decrease dramatically with a recent poll, taken by the firm INSA, putting the social democrats only a single percentage point above the populist anti-mass migration Alternative for Germany (AfD).
Ms Nahles was named by Mr Schulz as his chosen successor last week.
Handing over the leadership of the SPD may not be as simple as many in the party would like as resistance to Nahles is growing.
Nahles, a plain-speaking 47-year-old former labor minister with a left-wing slant and strong oratory skills, is the frontrunner and would become the first female leader in the party's 154-year history.
Olaf Scholz, appointed SPD interim leader on Tuesday, said European Union reform plans included in the coalition agreement were a strong reason to back the deal.
He said he hoped the party could "regain its former strength" under Nahles' leadership and as part of the German government - if members agreed to that in the upcoming ballot.
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"I will defend the idea of joining the big coalition, I will do all it takes to achieve this, "said Nahles, whose party, however, disagrees about joining a new large coalition of conservatives".
In a cartoon on Tuesday, the Sueddeutsche Zeitung daily showed Nahles with a whip riding an SPD snail.
That leaves open who from within the SPD may take up that post. Mr Schulz on Friday abandoned his plan to become Germany's next foreign minister after the SPD's youth wing accused him of securing a favourable position for himself. Media have speculated that one option might be Katarina Barley, a former SPD general secretary and family minister, or SPD veteran Thomas Oppermann.
Scholz played up the SPD's achievements in coalition negotiations with Merkel's Christian Democrats (CDU) and her Bavarian allies, at which the centre-left party won the powerful finance ministry to the frustration of many in the CDU. Merkel's conservative bloc was also down 1 point at 29.5 percent.
They argue that the SPD needs to go into opposition to rebuild its identity and reconnect with voters, because at the moment too little divides Germany's two largest parties. Last Wednesday, the SPD reached an agreement with Merkel's Union in formal government coalition negotiations, a move likely to end the longest ever new government vacuum after the September 24 federal elections.