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Can a Student Receive Both Need-Based Grants and Merit-Based Scholarships?

Mark Kantrowitz

May 14, 2012

If a child does receive FAFSA can they still receive scholarships and grants? — Y.P.

The Free Application for Federal Student Aid (FAFSA) is used to apply for need-based financial aid from the federal government, state governments and most colleges. The financial aid will include a mix of grants, loans and student employment.

The terms grants and scholarships are often used interchangeably, but have different meanings. A grant is a gift of money that does not need to be repaid, typically awarded based on financial need. Financial need is the difference between total college costs and the expected family contribution (EFC). Financial need is reduced by other financial assistance received by the student. The largest federal grant program is the Pell Grant. Scholarships are also gifts of money that do not need to be repaid, but are typically awarded based on merit, such as academic, artistic or athletic merit.

When a student receives a private scholarship it reduces the student’s financial need. Federal overaward regulations and the college’s outside scholarship policy require reductions in the need-based financial aid package corresponding to the amount of the outside scholarship. This is often referred to as displacement.

However, colleges have flexibility in how they reduce the need-based aid package. About four fifths of colleges will reduce the student’s unmet need, if any, and then the student’s loan and work burden before reducing the college’s grants. Such a favorable outside scholarship policy will reduce the student’s net price by ensuring that the student retains some financial benefit from winning a scholarship. Other colleges, however, will reduce grants first, yielding no net financial gain to the student.

Some sources of financial aid consider their funds to be first dollar, awarded before all other forms of financial aid. For example, the federal Pell Grant is never reduced, not even if the student wins many private scholarships. Other sources of financial aid consider their funds to be last dollar, awarded after all other aid. For example, some state grants are awarded based on the student’s remaining financial need and require colleges to reduce the state grant first even if the college itself has a favorable displacement policy. He who has the gold makes the rules.

Most scholarship providers dislike displacement rules. When a scholarship provider grants a scholarship to a particular student, the scholarship provider is trying to reduce the student’s loan and work burden. This helps the student succeed in college by removing money as a barrier to retention and completion. But if a college fully displaces the scholarship by reducing its own grants, there is no net improvement in student outcomes. This makes it more difficult for the scholarship provider to justify the scholarship expense to its board. If the scholarship provider wanted to help all students at the college, as opposed to specific students, it would make grants directly to the college, not to individual students.

Some forms of financial aid are also subject to cost-of-attendance limits, where total financial aid cannot exceed total college costs or total financial need. For example, if the total financial aid, including non-federal private student loans, exceeds the cost of attendance, federal regulations treat the excess funds as a resource, reducing need-based aid dollar for dollar. In some cases a cost-of-attendance cap will be applied on a payment period basis, so that total aid for the semester cannot exceed total costs for the semester.


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