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Is the Pell Grant Reduced When the Student Wins a Private Scholarship?

Mark Kantrowitz

August 27, 2012

My daughter has been approved for a Pell Grant. She recently received notification that she has won a $1,000 scholarship. Will the scholarship reduce her Pell Grant? — Virginia M.

The Pell Grant is never reduced when the recipient wins a private scholarship.

Some forms of need-based financial aid are reduced when a student wins a scholarship. These include federal campus-based aid, such as Federal Work-Study (FWS), the Supplemental Educational Opportunity Grant (SEOG) and the Perkins loan, as well as the subsidized Stafford loan. Colleges will also reduce their own grants and other financial aid funds.

Financial need for federal student aid purposes is defined as the difference between the college’s total cost of attendance and the student’s expected family contribution (EFC), and is reduced by grants, scholarships and other forms of non-federal student financial assistance.

Thus when a student wins a private scholarship, the scholarship reduces the student’s financial need. If the need-based financial aid package then exceeds the student’s financial need, the student is considered to be overawarded and the college must reduce the amount of financial aid to compensate. This reduction in financial aid is often referred to as displacement. Some colleges will reduce the financial aid package even when a student isn’t overawarded.

While federal overaward regulations are often blamed for award displacement, in most cases the college’s own policies control the displacement. Colleges prefer to reduce their own financial aid funds to eliminate the overaward instead of reducing federal campus-based aid. Colleges have the flexibility to choose what forms of financial aid are reduced. For example, some colleges will reduce need-based loans first, in which case the student benefits financially by replacing loans with the private scholarship. But other colleges will reduce their own grants first, leaving the student with no net financial benefit from the scholarship.

A form of financial aid is considered to be last dollar if it is intended to cover the last dollar of financial need after all other forms of financial aid have been awarded. Some state grant programs, for example, require colleges to reduce the state grant first when a student is overawarded. Some colleges treat their own grant funds as last dollar.

Most private scholarship programs prefer that the colleges use the private scholarship funds to reduce the student’s work and debt burden instead of reducing the college’s grants. Otherwise, if a private scholarship is fully displaced by reductions in the college’s grants, there will be no improvement in outcomes for the scholarship recipient. This makes it more difficult for a scholarship program to justify the expense to its board of directors.

The Pell Grant program, on the other hand, is one of the few forms of financial aid that is considered to be first dollar. The Pell Grant is never reduced when a student wins a private scholarship, not even if the student is overawarded. The Pell Grant is based on the student’s EFC, not financial need, so changes in financial need do not affect the amount of the Pell Grant. (While the Pell Grant is not based on financial need, it is capped at the difference between the cost of attendance and the EFC. But the receipt of non-federal student financial aid funds does not reduce the amount of the Pell Grant.)


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