Figuring out how to pay for college can feel overwhelming, and that’s partly because the stakes are so high. Students and their parents are rightfully worried about racking up student loan debt that can take decades to pay off, especially since it appears blanket student loan forgiveness isn’t going to happen.
Many families focus their efforts on securing other types of financing in lieu of loans as a result, including private scholarships that come from corporations, organizations and individuals that offer college funds that don’t have to be paid back.
But, even that strategy isn’t foolproof since colleges and universities can decide to “level things out” on their end after the fact.
What Is Scholarship Displacement?
Schools taking steps to “level things out” is known as scholarship displacement. This is something you should know about if you’re pursuing private scholarships to help pay for college.
According to Stephanie Owen, who serves as assistant professor of economics at Colby College, scholarship displacement or financial aid displacement is “when colleges and universities reduce the amount of financial aid they award to a student as a result of that student receiving other types of aid.”
How does scholarship displacement come about? Kevin Ladd of Scholarships.com points out that, ideally, each student attending college completes the Free Application for Federal Student Aid (FAFSA) near the beginning of the process. In doing so, the student and their family are assigned an EFC (expected family contribution) amount that is based on factors like household income, expenses and other circumstances.
When a student reports winning a $10,000 scholarship, Ladd says this amount can be added to the EFC, reducing the amount of institutional aid offered by the college by $10,000.
“This means that all of the time and effort the student put into finding, applying for and winning the scholarship was essentially for nothing more than the honor of having won a competition or essay contest,” he said.
Owen also offers the example of a new law in Maryland that came about after students receiving private scholarships from a local nonprofit reported that their aid packages were reduced after they were awarded the private scholarship. The Baltimore Sun reported about scholarship displacement and the results from the practice in the state, which you can read about here.
Owen adds that scholarship displacement can be an unpleasant surprise to students and families who expected outside scholarships to simply add to their aid packages. Unfortunately, the practice isn’t regulated well (with a few exceptions), and how often it happens varies widely by state and institution.
That said, students should be aware that at least six states have laws that help prevent scholarship displacement, including California, Maryland, Minnesota, New Jersey, Pennsylvania and Washington. Some other states are currently considering legislation as well.
How to Avoid Scholarship Displacement
Dennis Epple, who serves as professor of economics at Carnegie Mellon University’s Tepper School of Business, points to CollegeBoard as one of the best places to find information on avoiding scholarship displacement at specific schools. After all, each school can decide to treat your private scholarship funds differently. For example, CollegeBoard notes that some schools may reduce the amount of your student loans as a result of scholarship funds, which can be to your benefit. Others might apply your scholarship to the next semester or use it to displace other financial aid you receive.
With this in mind, Epple says students who were accepted to or are considering multiple schools should ask each institution’s admissions office about their policies on financial aid. How do they treat private scholarships? And will receiving private funding to pay for school mean losing out on other types of financial help?
“The applicant can then take that information into account in deciding which college to attend,” said Epple. “For a student who gets private aid while in attendance at a college, the policies of the college will determine how that aid affects the student’s cost of attendance.”
Ladd agrees with Epple in the fact that students need to know how colleges they’re considering treat private scholarships for the purposes of calculating other financial aid. He adds that, when researching colleges, students can benefit from trying to remain as open as possible to a number of colleges and asking each about their policy with regard to reducing their scholarship and grant dollars should a student find other scholarships elsewhere.
“Like any major time and financial investment, you need to arm yourself with as much information as possible in order to make an informed and intelligent decision,” said Ladd. “As college can now cost as much as a small home, start as early as possible researching all of the above in addition to the myriad other factors, financial or otherwise, that one must know and consider when deciding where to attend college.”
Education advisor Tom O’Hare of Get College Going adds that, in addition to asking schools about their scholarship policies, one potential workaround is asking scholarship providers to issue the award directly to the student or the family instead of to the school.
Finally, Chuky Ofoegbu of Sojourning Scholar also says students who are worried about scholarship displacement can seek out scholarship opportunities that allow for more flexible spending. This can include scholarships that can be used for living expenses or books, as “these are less likely to displace grant money specifically allocated for tuition,” he said.
The Bottom Line
Applying for a scholarship takes time and effort, and you don’t want that effort to go to waste due to unfavorable scholarship treatment by a college or university. While there’s nothing you can do to prevent schools from playing a shell game with your funds in order to maximize the money they take in, you can avoid a nasty college funding surprise by knowing about this issue ahead of time and taking steps to avoid it.
No matter what you do, don’t head off to college without having an idea of how you’ll pay, how the different financial aid options work and steps you can take to minimize your out-of-pocket costs. A college degree can be well worth the investment, but going off to college without a plan can leave you paying off student loan debt until old age.
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