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Will Getting Private Scholarships Reduce My Financial Aid?

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If you have been awarded a private scholarship, first of all: congratulations! You may be wondering how or if your financial aid package will be affected. The answer is that coming into new money for college could reduce the financial aid you receive from the colleges that accept you. While schools’ practice of scholarship displacement is very frustrating for students, there are concrete steps that you can take to improve your chances of getting the support that you need.

What is Scholarship Displacement?

First, let’s begin with the basics. If you are awarded a private scholarship, then in accordance with federal law you must report it to your school. The practice of scholarship displacement occurs when a school reduces the amount of financial aid that is available to you based on the value of the private scholarships that you have received. 

Scholarship displacement policies are established individually by each school and vary widely (more on this below). They are also implemented regardless of whether or not you obtained the scholarship in effort to cover a budget shortfall. If you received your award letter from the college and are hoping to fill a gap between what you can pay and what the college will charge you, scholarship displacement could actually mean the gap is increased if colleges learn that you received a scholarship from elsewhere and reduce your financial aid.

Why is Scholarship Displacement Practiced?

Schools practice scholarship displacement for two different reasons:

  • To avoid “over-awarding” financial aid - that is, providing  financial aid in excess of a student’s financial need, which is defined as the difference between a school’s cost of attendance and the student’s Expected Family Contribution (EFC). Schools that repeatedly “over-award” financial aid jeopardize their eligibility to receive federal funding.
  • 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. By need-based financial aid to students who “need it the most,” schools are attempting to provide access to higher education to the greatest possible number of people, while also attracting the most qualified candidates.

How Does Scholarship Displacement Work?

Every school sets its own policy regarding scholarship displacement. However, about 80 percent of colleges practice scholarship displacement by utilizing the following aid reduction sequence:

  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.” (Unmet need is also referred to as “minimum student contribution” or “summer work expectation.”)  Private scholarships are first applied to unmet need (if any), since students with a nonzero unmet need are not considered to be over-awarded. If private scholarships are less than the unmet need, then displacement will not occur.
  2. Student loans: After any unmet need is filled by scholarship money, schools then begin to 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 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 by utilizing the sequence above, a minority (about 20 percent) of schools take a more punitive approach. These schools choose to reduce or rescind their own grant money first, in order to offer more need-based financial aid to other students. As a result, the student who earns the private scholarship receives no financial benefit on a net basis. In addition, some schools do not allow the “minimum student contribution” or “summer work expectation” to be funded by private scholarships, which can result in the student being penalized by scholarship displacement despite the existence of unmet financial need.

How Can I Avoid Scholarship Displacement?

If you are awarded a private scholarship, then it is difficult to completely avoid scholarship displacement, although not impossible. The following strategies can help to minimize the negative impacts of scholarship displacement.

Apply for Certain Types of Financial Aid

Some forms of financial aid and certain assistance programs are protected from scholarship displacement. When applying for financial aid, minimize the risk of scholarship displacement by prioritizing the following forms of student assistance:

  • Federal Pell Grants: Available to undergraduate students, Federal Pell Grants are never reduced or rescinded, even if you are over-awarded.
  • Campus-based financial aid: Some financial assistance programs administered by schools’ financial aid offices directly are not subject to scholarship displacement unless a student is over-awarded by more than $300. Campus-based financial aid programs include:
  • Deferred scholarships: Some sponsors of private scholarships permit recipient students to defer acceptance of a scholarship until after graduation, for the explicit purpose of avoiding scholarship displacement. Although deferred scholarships cannot provide students with any financial support while they are still in school, deferred scholarships can still assist you with repaying loans after graduation. The Michael & Susan Dell Foundation, as an example, offers scholarships that may be deferred.

Do Your Homework

You can avoid unpleasant surprises regarding scholarship displacement by researching your target schools’ policies in advance. Colleges are required by federal law to publicize their policies on scholarship displacement. As such, you can read about a school’s scholarship displacement policy on the school’s website. If you have any questions at all, do not hesitate to call the school’s financial aid office directly. Especially if you have received a substantial private scholarship, it is important to clearly understand the implications of private scholarships for the rest of your financial aid package.

Take Action

Beyond just asking questions, there are several concrete actions that you can take to minimize scholarship displacement. Below are key strategies for deriving the maximum benefit from private scholarships:

  • Request scholarship deferral: Contact your scholarship sponsor to request deferral of a scholarship to a subsequent year or (if possible) after graduation. If you have been awarded multiple non-renewable (one-time) scholarships, then this may be a viable option to avoid accepting all the scholarships in the same year.
  • Request a policy exemption: If a school has a policy of not permitting private 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 loan reclassification: If you are a parent who has obtained an unsubsidized federal loan (such as Parent PLUS loan) to help pay for your child’s college education, then you can contact your child’s financial aid office to request that the unsubsidized loan be “reclassified” as a contribution to your child’s EFC. If the school agrees to reclassify the loan, then the amount of the Parent PLUS loan is subtracted from the child’s financial aid package. As a result, your child will likely no longer be over-awarded financial aid, allowing her keep the 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 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.

Is Obtaining a Private Scholarship Worth the Effort?

You may be wondering by this point if trying to obtain a private scholarship is even worth the effort. Despite the disheartening nature of scholarship displacement, the answer is still a resounding yes. 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 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 scholarships are especially valuable, because they provide assurance that you will receive at least some financial assistance every year. (By comparison, your federal student aid package will change annually depending on your income, tax status, year in school, aggregate borrowing limits, and other factors.) However, if a scholarship is difficult to maintain because it requires a minimum GPA, community service hours, or some other commitment, then you may be better off accepting need-based financial aid instead.

Hats Off to Maryland!

On July 1, 2017, Maryland became the first state to outlaw scholarship displacement in 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.

If you like what Maryland has done, and want to see your state follow suit, then contact your state legislator!  Speak up and make yourself heard - you’ve got nothing to lose by doing so.

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