Scholarship Displacement – How Can Winning a Scholarship Cause You to Lose Financial Aid?

By Joe Messinger, CFP®

July 31, 2020

3 min READ

Every year, students work very hard to apply for and receive scholarships from private sources like rotary, civic, and religious groups, to name a few. These private scholarships are outside the aid students might be receiving from the colleges themselves. Parents sometimes assume the awards are in addition to the financial aid offered by the college. They might be wrong.

Scholarship Displacement

Did you know that the aid amount offered by the college can be reduced if the student is awarded an additional outside private scholarship? (We touched on this topic in a previous blog.) This practice called “scholarship displacement” is something that parents may not know about 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.

Why do colleges do this?

Colleges argue that need-based aid is impacted by additional scholarships causing the “need” to change. When a student earns an additional $500, their 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.)

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.

What can a family do?

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

Also keep the practice of scholarship displacement in mind when searching for a college that best fits your needs. If you know that your plan for paying for college must include a combination of financial aid from the college and outside private scholarships, you need to understand how each college on your list approaches this practice.

Will this practice change?

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.

On July 1, 2017, Maryland became the first state to ban the practice of scholarship displacement at their public colleges and universities. (You can read the “David and Goliath”-type story of a small scholarship firm, Central Scholarship, taking on the large universities here in the Baltimore Sun.) 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.

When we originally wrote this blog in 2017, we hoped this would be a new trend for states; however, so far that has not been the case.

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

Originally published 7/2017
Updated 7/2020