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Top Ten Myths About Scholarships

Top Ten Myths About Scholarships

Mark Kantrowitz

October 02, 2011

Colleges Reduce Need-Based Aid When You Win Scholarships, So Why Bother?

Myth: Colleges will cut their aid when you win a scholarship, so why bother?

Reality: Colleges do cut need-based aid when a student is overawarded, but many will use the private scholarship to reduce the student’s debt and work burden, saving the student some money.

When a student receives total financial aid, including private scholarships, that exceeds the student’s financial need, the student is considered to be overawarded. Federal regulations and college policies require the colleges to adjust the overawarded student’s need-based financial aid package when financial aid exceeds financial need by more than $300. After all, when a student wins a private scholarship, the student’s financial need is lower. The reduction in the student’s need-based financial aid package is often referred to as displacement.

Although the colleges must reduce the student’s need-based financial aid package, they do have some flexibility in how they cut the financial aid package. Most colleges will try to ensure that the students still get some financial benefit from winning a scholarship. These colleges will use the private scholarship to replace all or part of the student’s debt and work burden.

Every college has an outside scholarship policy which dictates how the college reduces need-based aid when a student wins a scholarship.

The most favorable outside scholarship policies use the private scholarships to first fill the gap, reducing or eliminating the unmet need, if any. Then some of the private scholarship money will be used to reduce need-based loans and student employment. Finally, any remaining money will be used to replace the college’s own grant funds. Substituting scholarship for loans cuts the student’s costs because loans have to be repaid while scholarships do not.

The least favorable outside scholarship policies use the private scholarships to replace the college’s own grant funds first.

Scholarship providers do not like outside scholarship policies that use private scholarships to replace the college’s grants first. They especially dislike college policies that insist on forcing students to borrow. Students who graduate without debt are about twice as likely to enroll in graduate and professional school as students who graduate with some debt. (See Undergraduate Debt Causes “Pipeline Leakage” from Undergraduate School to Graduate and Professional School.)

Scholarship providers are investing in the success of specific students, not institutions. When the college fully displaces the scholarship, there is no financial benefit to the student and hence no net improvement in student outcomes. This makes it more difficult for the scholarship provider to justify the cost of the scholarship program to their board of directors.

Colleges need to adopt outside scholarship policies that ensure that both the student and the institution benefit when the student wins a private scholarship. Otherwise they risk having scholarship providers ban awards to students at their institution, which will make it more difficult for the college to attract talented students.

Note that the federal Pell Grant is never reduced when a student wins a private scholarship, even if the student is overawarded. While colleges may blame federal regulations for the reduction in need-based financial aid, in most cases it is the college’s own policies that require the displacement and that dictate the reduction in the college’s grant funding.

Before enrolling in a college, students should review the college’s outside scholarship policy to understand how their bottom-line cost will be affected by the college’s treatment of private scholarships. The bottom-line or out-of-pocket cost is the difference between the cost of attendance and all grants, scholarships and other forms of gift aid. All else being equal, the out-of-pocket cost will be lower at a college with a favorable outside scholarship policy than at a college the reduces need-based grants first. Differences in outside scholarship policies can yield significant differences in cost for students who win many scholarships.

If a college reduces grants first, the students should ask the scholarship providers for help. Sometimes the scholarship providers can encourage the college to adopt a more favorable policy, especially if they collectively contribute significant sums of money to the institution. The scholarship provider may also allow the student to defer all or part of the scholarship to maximize its impact.

Next: Searching and Applying for Scholarships is Too Much Work


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