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Do Merit Awards Affect My Financial Aid?

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If you are applying to colleges, then you may be wondering if receiving a merit scholarship affects your financial aid. The answers are probably and it depends. (Don’t worry; we can explain.)  Schools are prohibited by federal law from “over-awarding” financial aid (that is, providing aid in excess of a school’s cost of attendance), but every school establishes its own policy to comply with the law. Ready to know more?  Let’s dig in:

First of all, the amount of financial aid that a student may accept on an annual basis cannot exceed a school’s cost of attendance by more than $300. The difference between a school’s cost of attendance and a student’s Expected Family Contribution (EFC) equals the student’s financial need. That financial need can be met by various forms of financial assistance, including grants, scholarships, work-study positions, and student loans.

The Unfortunate Practice of Scholarship Displacement

If you are awarded a private scholarship, whether it is need-based or merit-based, or some combination of both, then in accordance with federal law you must report it to your school. To avoid over-awarding financial aid, schools practice scholarship displacement, whereby the amount of financial aid on offer is reduced based on the value of private scholarships received. The bad news here is that if you receive a merit scholarship, whether from a private sponsor or the college directly, then your need-based financial aid package is reduced accordingly. The practice of scholarship displacement, therefore, prevents students from utilizing merit awards to fund their Expected Family Contributions.

Merit scholarships unfortunately won’t help you to pay your EFC, but they can typically still improve the composition of your financial aid package. Most schools, about eighty percent, practice scholarship displacement by reducing the least attractive forms of financial aid, such as student loans, first. If you have unmet financial need (also sometimes known as the “minimum student contribution” or “summer work expectation”), then private merit scholarships can often be applied to meet that need. (Merit scholarships awarded by colleges directly, however, are typically not applied to students’ unmet financial needs.)  The order by which most schools practice scholarship displacement is as follows:

  1. Unmet financial need: If a college is unable to offer a financial aid package that satisfies a student’s financial need (which, again, is the difference between the school’s cost of attendance and the family’s EFC), then the remaining funding gap is known as the student’s “unmet need”. Private scholarships, including merit scholarships, are first applied to unmet need (if any), since students with unmet needs are not considered to be over-awarded.

  2. Student loans: After any unmet need is satisfied, schools then reduce students’ eligibility for other forms of assistance. Federal student loans are generally reduced or rescinded first, as debt financing is the least preferable form of student aid. Unsubsidized loans are reduced or rescinded before subsidized loans.

  3. Work-study positions: After rescinding eligibility for federal loans, schools will next reduce or cancel offers for work-study positions.

  4. Grants: Lastly, after all other forms of financial aid have been rescinded, if a student is still over-awarded, then schools will reduce or rescind federal grant money.

Although the vast majority of schools practice scholarship displacement via the sequence above, a minority (about twenty percent) of schools take a more punitive approach. These schools effectively negate the benefits to students of winning private merit awards by choosing to reduce or rescind their own grant money first, in effort to offer more need-based financial aid to other candidates. Students attending these schools who obtain private merit scholarships receive zero financial benefit on a net basis. In addition, some schools with the most punitive scholarship displacement policies do not allow the “minimum student contribution” or “summer work expectation” to be funded by private scholarships.  

How Can I Avoid Scholarship Displacement?

If you are awarded a merit scholarship, then it is very difficult to avoid scholarship displacement, although not entirely impossible. At the outset, you can prioritize schools that practice the least punitive scholarship displacement policies. Colleges are required by federal law to publicize their scholarship displacement practices; as such, you can read about a school’s scholarship displacement policy on the school’s website.

A few other strategies for avoiding or minimizing scholarship displacement:

  • Request scholarship deferment: Some scholarship sponsors permit scholarship deferment, a practice that enables recipient students to defer acceptance of a scholarship until after graduation, for the explicit purpose of avoiding scholarship displacement. Although deferring a scholarship unfortunately does not provide any financial support during college, deferred scholarships can still assist graduates with repaying student debt. The Michael & Susan Dell Foundation, as an example, offers scholarships that may be deferred. If you have won a merit scholarship and are facing scholarship displacement, ask your sponsor about the possibility of deferment, either to a later year or after graduation.

  • Request a policy exemption: If a school has a policy of not permitting private merit scholarships to count toward to the “minimum student contribution”, or some other unnecessarily punitive policy, then you can contact the school’s financial aid office to request an exemption. You may be denied….but maybe not!  You have nothing to lose by simply asking for what you want.

  • Request a Parent PLUS loan reclassification: If your financial aid package includes a Parent PLUS loan obtained for you by your parent, then you can request that the Parent PLUS loan be “reclassified” as a contribution to your EFC. Contact your financial aid office. If the school agrees to reclassify the loan, then the amount of the Parent PLUS loan will be subtracted from your financial aid package. As a result, you will likely no longer be “over-awarded” financial aid, allowing you to keep your merit scholarship.

  • Appeal an unfavorable decision: Although there is no formal appeals process for scholarship displacement decisions, you can still contact your school’s financial aid office if your merit scholarship is displaced in a way that you believe is unfair. You can request that the displacement decision be reconsidered. Similar to requesting a policy exemption, you have nothing to lose by simply asking for what you need.

  • Attend a public college in Maryland: Hats off to Maryland!  On July 1, 2017, Maryland became the first U.S. state to outlaw scholarship displacement at its public universities. The Maryland state legislature passed a law stating that schools may only reduce a student’s financial aid package if the student’s total financial aid exceeds the cost of attendance, or if the scholarship provider gives permission for scholarship displacement to occur. Although attending a public college in Maryland is obviously not a viable solution for everyone, it certainly is an option worth considering if you live anywhere in or near the Mid-Atlantic states.

Is Obtaining a Merit Scholarship Worth the Effort?

You may be wondering by this point if trying to obtain a merit scholarship is even worth the effort. (Filling out all those private scholarship applications is undoubtedly a lot of work!)  Despite the disheartening nature of scholarship displacement, the answer is still a resounding yes. Merit scholarships may not increase the total amount of financial aid that you receive - which of course is extremely unhelpful if you cannot afford to pay for school - but private scholarships do reduce or replace the debt financing that you receive. Having less or no student loan debt when you graduate is unquestionably a good thing!  In addition, four-year merit scholarships are especially valuable because they provide assurance that you will receive at least some financial assistance every year. (Your federal student aid package, on the other hand, is subject to change annually depending on your family income, tax status, year in school, aggregate borrowing limits, and other factors.) If a merit scholarship is difficult to maintain because it requires a high minimum GPA, community service hours, or some other demanding commitment, then you may be better off accepting need-based financial aid instead.

The Bottom Line

Schools practice scholarship displacement not only to avoid over-awarding financial aid, but also to attract the largest possible number of qualified candidates. Schools have a limited quantity of financial aid dollars by which they seek to attract the most qualified students. Redistributing financial aid to students who “need it most” enables colleges to provide access to higher education to the greatest number of people, while also attracting the most qualified candidates. Bottom line: scholarship displacement is here to stay. You can avoid unpleasant surprises regarding displacement of your merit scholarship by researching your target schools’ scholarship displacement policies in advance.  If you have any questions at all, do not hesitate to call your school’s financial aid office directly. Especially if you have received a substantial merit scholarship, it is important to clearly understand how that scholarship impacts the rest of your financial aid package.

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