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Scholarship Displacement: the Potential Downside to Outside Scholarships

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There are many scholarship dollars available to college applicants. You expect they will ease the burden of paying for college, but beware: the hard work you put into researching and applying for outside scholarships may not ultimately be beneficial if the college to which you are applying  practices “scholarship displacement.”

It is important to understand why scholarship displacement is an element of the college application funding process and how it may impact you and your parents. You also need to know potential ways to avoid its ramifications.

What is scholarship displacement?

Scholarship displacement is when a  school reduces, or “displaces,” the financial aid they have awarded you by the amount of an outside scholarship.

Let’s say your award letter says you are eligible for $10,000 of financial aid in the form of grants or merit financial aid. Then, you win a $1,000 scholarship from a civic organization in your town.  

Your college may require you to report that scholarship to the financial aid office, and if so, the college may reduce your financial aid award to $9,000 because now you’ll be able to contribute another $1,000 to the cost of your education.

Is scholarship displacement fair?

Colleges say that this practice frees up funds to help them meet other students’ needs – and that is certainly true. It is also true that a college cannot award financial aid that exceeds the cost of attendance.

However, there are plenty of critics who believe the practice is unfair.

At least six states have laws limiting or banning scholarship displacement, which, according to the National Conference of State Legislatures, are Washington, California, New Jersey, Pennsylvania, Maryland, and Minnesota. And in these states, if the total of financial aid and scholarships exceeds the cost of attendance, it’s still permitted.

Other states are considering legislation. In 2021, a bill was introduced in Congress to limit the practice, but the bill did not advance.

Does your college practice scholarship displacement?

According to the Hechinger Report, no one tracks how many universities use scholarship displacement or how many students it affects. A study in 2013 for the National Scholarship Providers Association (NSPA) found that half of universities and colleges reduced institutional financial aid to students who received outside scholarships.

Applicants will have to do a deeper dive into their college’s financial aid website to find the answer to that question. You can also contact the financial aid office to find out how outside scholarships are treated.

Can you avoid scholarship displacement?

There are ways in which funding can be allocated that will not reduce the awards you’re your school, and will, instead, optimize full use of the school’s scholarship or grant and the outside scholarship.

To clarify, if you are awarded a scholarship from an institution or organization other than your college, and you decline that scholarship, you then CAN utilize the full scholarship offered by the school towards college funding with no threat of it being displaced. Every dollar counts, so make sure you’re informed of the possible different ways to get your scholarship money applied.

Tips for getting around scholarship displacement

Ask the college if they will apply your scholarship first to any unmet need, then to reduce room and board and your student contribution. Next, ask for the scholarship funds to be used towards fees, books, travel, or even a computer if the direct costs (tuition, room, and board) have already been covered.

Scholarship grantors want to ensure you receive the full benefit of the scholarship, so they will try to work with applicants to maximize scholarship proceeds. Because of this, it is certainly worthwhile to reach out to the organization awarding the grant/scholarship to ask them to help you most efficiently utilize the scholarship funding to use the money to reduce your college costs.

Many organizations issuing the scholarship will cover fees, athletic costs, or even room and board if the award letter is written correctly. For example, if you have already received financial aid that covers tuition, ask the organization granting the scholarship if they can remove the word “tuition from its award letter so that the scholarship can be applied towards room and board, books or fees.

Another alternative is to ask the scholarship grantor to transfer the funds into your 529 college savings account, if you have one. If not, it may be prudent to establish a 529 for this purpose. This way, the scholarship funds stay intact and can be used for any qualifying higher education expense.

You can also ask the scholarship grantor if it will apply the scholarship toward student loans after graduation. This is known as a “reverse scholarship.”

Final thoughts on scholarship displacement

To reiterate, you can decline a scholarship if the school practices scholarship displacement. However, with the goal of maximizing all scholarships, grants, and other supportive college funding, this should be your last resort.

It’s best to try to work with the scholarship grantor first to attempt to find a solution to maximize the use of all your college funding dollars.

How to research the costs of colleges on your list

If you’re still researching colleges and deciding where to apply, it’s essential to know how much each school will cost you. By comparing the schools on your list by tuition and other factors, like the average financial aid award, you’ll have the ability to make confident decisions.

Simply click the button below to create a free account and begin the college cost comparison and planning process. Smart students like you want to be in charge of your college decisions, and Appily will give you that power.

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