There's a surprising downside to winning a private scholarship to pay for college
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For students trying to cover the high cost of higher education today, private scholarships can be a dream come true.
But at some colleges and universities, private scholarships are running up against the nightmare of scholarship displacement financial aid policies.
To meet college costs today, most students and families cobble together a patchwork of savings and financial aid like grants, scholarships, loans, and work-study that the federal government, their state, or a college awards.
Private or outside scholarships are awarded by organizations or other entities, such as private companies, nonprofit foundations, or community groups.
Private scholarships are awarded on the basis of merit and need. For example, students might be eligible if they have a particular skill, live in a certain area, or are working toward a specific major.
Private scholarship awards can range from as little as a few hundred to thousands of dollars. For many students, they’re an important piece of the equation to cover the total cost of college, from tuition and fees to room and board, books, transportation, and miscellaneous items.
A downside of private scholarships, though, is that at many colleges these awards can displace other forms of financial aid. Students are required to tell their institution when they are awarded a private scholarship.
If the student's entire financial aid package with the private scholarship now exceeds his or her financial need as determined by the Free Application for Federal Student Aid, the student is considered "overawarded," and federal regulations may require the college to reduce some part of the student's financial aid package.
College policies, though, vary on the type of aid the institution displaces to make room for the private scholarship. According to a National Scholarship Providers Association survey of higher education institutions, 80 percent of respondents reduce self-help aid, such as loans or work-study. That’s not so bad, since a scholarship that doesn’t have to be paid back is preferable to a loan.
However, 50 percent said they also reduce institutional gift aid that doesn’t have to be paid back – meaning the student is still on the hook to take out student loans.
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Further, some college policies require every student to have a "minimum student contribution expectation," typically between $1,500 and $3,500, which cannot be satisfied by an outside scholarship. When a student receives an outside scholarship, these institutions will reduce the aid to make sure the student still has an unmet need that equals the minimum student contribution.
Some colleges argue that their financial aid administrators need flexibility in adjusting financial aid packages for outside scholarship recipients, because the college has limited funds and must award institutional aid to the financially neediest students. A student who receives a private scholarship has less need than one who doesn't, after all.
Other schools argue that students do better academically or appreciate the education more when they have a financial stake in it.
But many private scholarship providers and student advocates decry the practice of displacement, saying that it undermines the full benefit of the scholarship by compelling students to take on debt when they shouldn't have to. Outside scholarship providers also argue that displacement makes them rethink their giving strategies if they feel the students aren’t receiving the full benefit of their awards.
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Maryland recently became the first state in the nation to pass a law that restricts scholarship displacement at public colleges and universities in the state to only specific cases, including when a student's total gift aid surpasses their financial need. Central Scholarship – a Maryland nonprofit that awards scholarships and interest-free loans to students – initiated the bill.
Additionally, the bill states that the school can further lower the institutional grant with approval from the private scholarship provider. The only other instances under which a school may engage in scholarship displacement is if a student athlete’s institutional grant needs to be reduced to comply with NCAA rules or the private scholarship is affiliated with the institution and requires the college's assistance with selecting recipients. The law goes into effect July 1.
But what if you're a student in another state? If you receive a private scholarship, talk to your school's financial aid office about its displacement policy and see if it's negotiable. You may also want to check with the scholarship provider to see if you can delay the scholarship for a future year when your financial need may be higher.