What is Scholarship Displacement? How Does It Impact Me?

Colleges can take away financial aid if you win outside scholarships.

Kathryn Knight Randolph

February 27, 2023

What is Scholarship Displacement? How Does It Impact Me?
Scholarship displacement is a common practice at colleges and universities in the U.S. 
Never heard of scholarship displacement? You’re not the only one. This practice oftentimes comes as a surprise to students, but it is common at many colleges and universities across the U.S. Award – or scholarship – displacement occurs when a student receives an outside or private scholarship, which then leads to a reduction in other forms of aid. In some instances, students are seeing negative impacts to their financial aid package because of an outside scholarship, even when they still have unmet need. This leaves many students to wonder if applying for scholarships and winning is even worth it – if in the end they’ll be penalized.

Impacts of Scholarship Displacement

When applying to colleges, you’ll find that you typically receive a merit aid package along with financial aid. Merit aid is distributed on the basis of your academic, extracurricular, or athletic performance. You may then receive a financial aid package based on your financial need. A financial aid package is distributed to you by each school after you’ve completed the Free Application for Federal Student Aid (FAFSA). Students oftentimes find that their merit aid and financial aid are not enough to pay the full cost of college, so they turn to outside scholarships.
When a student receives a scholarship from a provider other than the school, they are required to report it. This oftentimes results in a reduction of funds from their financial aid package, such as loans or grants. Colleges claim that this is done to free up more funds for students requiring financial aid who may not have received any other outside help. However, there are plenty of critics to the practice who believe this is not fair. You may wonder: what’s the point of applying to scholarships if I’ll just be punished for doing so?
If you win a massive scholarship, it won’t matter much. However, if you win a smaller award and your financial aid is removed, you may find that winning the scholarship wasn’t even worth it. Critics are calling colleges and universities to be more upfront with their award displacement policies, and some states are even outlawing the practice altogether. After all, paying for school is hard enough.

States Against Scholarship Displacement

Recently, California became the fifth state to ban scholarship displacement, joining ranks with Maryland, New Jersey, Pennsylvania, and Washington.

California Scholarship Displacement

In late 2022, California banned the practice of scholarship displacement for a specific set of students. Low-income students, who qualify for the Pell Grant or for state financial aid under the California Dream Act, will no longer experience this practice.

Maryland Scholarship Displacement

Maryland was the first state to enact laws against scholarship displacement. Since 2017, it has been unlawful for colleges and universities to implement the practice, unless a student’s private scholarship winnings and aid package exceed the cost of attendance or with permission from the scholarship provider.

New Jersey Scholarship Displacement

In 2021, New Jersey’s state legislature passed a bill that would eliminate the practice in certain circumstances. It can now only occur under the following scenarios: • If outside scholarships and financial aid exceed a student’s financial need. • The scholarship provider gives permission to displace merit or financial aid. • There are financial restrictions in place due to affiliation with an athletic organization.

Pennsylvania Scholarship Displacement

Like California, Pennsylvania enacted laws to prevent award displacement for students in 2022. The new law only allows colleges and universities to displace funds for a student if their outside scholarships and financial aid surpass their financial need, or if their involvement on an athletic team comes with financial restrictions.

Washington Scholarship Displacement

Finally, Washington approved a law against scholarship displacement early in 2022. Before displacement takes place, colleges and universities must ensure that 100% of a student’s needs are met before their financial and merit aid is affected by winning outside scholarships.

Calls for Federal Laws Against Scholarship Displacement

As more states pass laws to prevent the act of scholarship displacement, the issue is receiving national attention. In fact, Democrat and Republican representatives in Congress have come together to draft legislation that would make scholarship displacement policies more transparent. If passed, the Helping Students Plan for College Act of 2021 would require colleges and universities to disclose scholarship displacement practices to prospective and currently enrolled students, detailing how and which parts of aid packages would be withheld if students won outside scholarships. The legislation also includes a call for the U.S. Government Accountability Office to conduct a survey on the effects of scholarship displacement, which would help inform further legislative action to protect students and prevent penalizations for seeking outside scholarships to help pay for school.

Ask Scholarship Displacement Questions

As students search for colleges and meet admissions and financial aid officers, it is imperative to ask them about their scholarship displacement practices. Knowing these policies in advance will help them better strategize for their outside scholarship search as well as their financial aid applications.

You Might Also Like

Join Fastweb.
Match Instantly.

Become a member and gain exclusive access to our database of over 1.5 million scholarships.

I am a:
Parents: Complete the questions using your child's information
Please select a grade level
Please enter a valid zip code.

By clicking, I agree to the Terms & Conditions and Privacy Policy.