When it comes to college scholarships, more could mean less.
That is because unbeknown to many families, outside scholarships and grants—which students are required to disclose—can reduce the amount of their college’s financial-aid package.
The issue is known as “scholarship displacement,” and it effectively means that students who received private scholarships and grants may not reap their full benefit, if any. It can be especially frustrating to families because each school has its own policies for dealing with the issue.
Typically scholarship displacement occurs when the total amount a student receives in aid (including outside scholarships and grants) exceeds the cost of college, or when the total is more than their demonstrated financial need, a calculation that is based on the family’s financial situation and the college’s cost of attendance. The student is then considered “over-awarded.”
When the package includes federal aid—as most aid packages do—federal regulations dictate that the student’s financial aid must be reduced accordingly. In some cases, however, students may experience scholarship displacement even when there is no over-award. One reason this can occur is because certain universities, as a matter of policy, reduce their institutional grant money based on outside scholarship awards.
“Students and their families can be discouraged when they learn that the private scholarship the student worked hard to earn will make little or no difference in paying for college,” says Jackie Bright, executive director of the National Scholarship Providers Association, a nonprofit whose members include private foundations, public charities, community foundations, colleges and universities.
Regulators are starting to take note. In 2017, Maryland became the first state to pass legislation that restricts scholarship displacement at its four-year public colleges and universities. Other states could eventually follow suit. Today, however, most universities have discretion to determine their own policies on scholarship displacement.
Four-fifths of institutions have private scholarship policies that the National Scholarship Providers Association considers optimal. These schools will apply outside scholarships to a student’s unmet need, if any, before they reduce self-help like loans and work-study, and they will reduce self-help before gift aid. Within self-help, loans are reduced before work-study. In the case of a loan reduction, this can actually benefit the student because the private scholarship money essentially replaces the loan money, meaning the student will graduate with less debt.
More infuriating for outside scholarship recipients is when the school’s policy is to start off by reducing its institutional grant money in the case of an over-award, or to reduce institutional aid whenever a student receives an outside scholarship. This would mean that a student who receives $1,000 in grant money from the school and a $1,000 private scholarship could stand to lose the $1,000 school grant. Also upsetting to students is the policy of some colleges to factor in the amount of a renewable scholarship when doling out aid in subsequent years.
From a school’s perspective, swapping out institutional grants for outside scholarships can make sense, since the student’s level of need is being met, albeit from a different source, says Karen McCarthy, director of policy analysis at the National Association of Student Financial Aid Administrators.
Given that institutional funds are often limited, such swaps often help schools offer more money to more students in financial need. Even so, it can be devastating for students who receive large scholarships and had expected them to supplement their original financial-aid package, she says.
Students in this situation may have some options. For instance, they can see if the school is willing to take away a different part of the aid package, such a loan or work-study award, instead of the grant money.
Students also can ask a scholarship provider whether there is flexibility with how the award can be used. For example, a provider might defer part of the scholarship to a subsequent year or to graduate school, if this will allow the student to make fuller use of the money, Ms. Bright says. Or a provider might allow the funds to be used for summer courses, internship expenses or to pay back loans after graduation.
Some scholarship providers may also allow the award to be contributed to a student or parent-owned 529 college savings plan, which avoids taxes and displacement, though this option isn’t yet widely available, Ms. Bright says.
Experts advise students to ask each college about its approach to scholarship displacement so they can make more informed choices when applying.
Additionally, once students receive their financial-aid award letters from prospective universities, they should call each school’s financial-aid office to determine the actual impact, if any, their outside scholarships will have, says Elaine Griffin Rubin, a communications specialist at Edvisors, a provider of free information on paying for college and financial aid.
The answer could be a deciding factor in choosing a school; at the very least, Ms. Rubin says, it is an important consideration when deciding which college is the right financial fit.
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