Scholarship displacement: When winning scholarships means losing financial aid

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Joe Messinger

By Joe Messinger

February 7, 2018

Congratulations! Your client’s child has been awarded a private scholarship. Time to celebrate, right? Not so fast.

Did you know…

…if a student has also been awarded financial aid from a university that the aid amount can be reduced if the student is awarded additional outside scholarships? This practice called “scholarship displacement” is something that parents may not realize until it happens to their student. (Colleges call it “over-award”…different terminology for different points of view.)

It almost seems counterintuitive.

Here’s a student who is receiving a need-based financial aid package from a university. Perhaps they still have costs to cover, so that student applies themselves to finding additional private scholarships.

Their hard work earns them a scholarship, and they are required to report all outside scholarships to the financial aid office. That $500 award results in $500 being knocked off their financial aid package from the school. Doesn’t quite make sense.

The college’s point of view on outside scholarships…

Colleges argue that need-based aid is impacted by additional scholarships because the need changes. When a student earns an additional $500, their financial need is reduced by $500. Wouldn’t it be better to provide that $500 to another student with need? (Not all universities use this displacement practice.)

Be aware of what is included in financial aid award packages.

When most people think of financial aid, they think of true “gift aid” that comes in the form of grants and scholarships directly reducing the cost of college. Many colleges include federally subsidized student loans and work-study in their need-based financial aid award packages.

Although these funds can be helpful, this money is not free, and it does not directly reduce the cost of college. The student either must pay it back upon graduation or work for it while in school. These programs are affectionately referred to as “self-help.”

If a student’s need is not fully met by the school, colleges will often cut the $500 off the subsidized loan amount that they offered to cover any gap, but not always. Sometimes they reduce the amount of the grant by $500.


Ideal result

If a student receives a private scholarship, they must advocate for themselves and ask the school NOT to reduce any grants awarded and instead ask that the college reduce the loan amount. Reducing the loan amount is the preferred choice for the student, and it can’t hurt to ask. This tactic has been successful for many families.

Impact on philanthropies who award scholarships

Organizations including many large philanthropies that award scholarships argue that their efforts to award money are being undermined by the practices of colleges. Why bother to apply for additional scholarships if the net effect is zero? Many of these philanthropies exist to help those with financial need, and universities are unintentionally blocking them from succeeding.

Changes ahead  

States are starting to look at this practice and are getting involved. On July 1, 2017, Maryland became the first state to ban the practice of scholarship displacement at their public colleges and universities, according to the Baltimore Sun. This was a “David and Goliath”-type story of a small scholarship firm, Central Scholarship, taking on Maryland’s large universities. The state delegate is looking at legislation to apply to private institutions as well in the future.

For now, the new law states that public colleges in Maryland can only reduce the amount of the financial aid award if the additional scholarship puts the total aid above the cost of the college or when the scholarship provider allows it. This approach is a sensible solution to a long-standing problem. Perhaps this will be a trend?

Advisors, keep in mind…

When students are evaluating their financial aid award letters, be sure to consider the college’s outside scholarship award policy in determining the net price. Know which colleges will allow you to offset costs (loans, books, or room and board) with those outside dollars you earned.

Did you know that scholarships are taxable? Use our Scholarship Tax Calculator to figure out the taxable amount of your scholarships and calculate how much you’ll have to pay in taxes. Amounts used to pay for tuition and textbooks may be tax-free, but amounts used to pay for living expenses are taxable. 

Calculate how much your client will need to save for college using a combination of scholarships, savings and student loans.  

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The original version of this post was published by Capstone College Partners

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