Most colleges around the country practice scholarship displacement, meaning they reduce financial aid when students bring in outside scholarships, even though critics say it penalizes students who put in the effort to apply for awards from community organizations and non-profit groups. What’s more, sometimes families don’t see the impact until the fall bill shows up, says Nadja Jepsen, senior financial programs and scholarships director at College Track, a California-based college access and completion nonprofit.
On the upside, the practice has gotten more attention recently, with several states moving to limit it. But for now, there’s still a chance you’ll encounter it if you win private scholarships.
Here’s why (and when) colleges rejigger financial aid, plus four steps students can take to reduce the impact of their outside scholarships.
What is scholarship displacement and why do colleges do it?
Scholarship displacement happens when colleges reduce your financial aid award by the same amount as your private scholarship, and though it’s not always dollar for dollar, it effectively leaves you in the same financial spot as before. It usually affects students who receive need-based financial aid, but it can affect merit scholarships, too.
“The impact is unpredictable from student to student, depending on what their need is according to the FAFSA formula, what school they’re going to, and the amount of the outside scholarship,” says Bernadette Astacio, senior director of training and support at uAspire, a national college access nonprofit that specializes in the financial aid process.
Colleges must adhere to the federal financial aid formula that determines your eligibility for need-based aid. Under that formula, your eligibility for financial aid (aka unmet need) is the difference between the cost of attendance and your expected family contribution.
Students can’t be “overawarded” with need-based aid, which includes federal student loans, work-study, and Pell Grants — as well as state aid and colleges’ own financial aid, although colleges can be more flexible with their own money.
Outside scholarships are considered part of your financial aid award, so if those awards push your total aid package above what the government formula determines you need, then colleges start cutting back. The kicker? In most cases, you’re still responsible for that pesky expected family contribution.
In recent years, five states have banned scholarship displacement, though the specific rules vary. Maryland’s law, from 2017, was the first and prohibits displacement at its public universities unless the total amount of need-based, merit and private scholarships exceeds the cost of attendance. Similar laws followed in Washington, Pennsylvania and New Jersey, although not all use the cost of attendance as their top limit. In California, where a law goes into effect this fall, the practice will be banned at public and private colleges, but it only applies to low-income students.
The potential impact on students’ colleges costs
It’s hard to say how many students are affected by scholarship displacement, but one recent study estimates about half of students receiving outside scholarships see their financial aid reduced.
Because most colleges don’t have the resources to meet students’ full financial need, students usually have wiggle room to earn some outside scholarships. But policies vary widely, and displacement can even affect students who aren’t overawarded. Some colleges with limited institutional money might reduce a student’s grants or scholarships in the name of helping other students who still have financial need, Astacio says.
Many colleges, like Franklin and Marshall, reduce federal student loans and work-study first to ease the pain of the effect. In the best cases, colleges are very transparent about when and how they’ll reduce aid — Duke University, for example, spells out three scenarios to help families understand its policy.
Sometimes scholarship criteria affect how a college will act. Some outside awards are “tuition only,” meaning they can’t be refunded to the student to be used for other college costs. But if the student already has an award covering tuition, then another tuition-only scholarship isn’t helpful, says Andrea Cipolla, director of financial aid and scholarships at University of Maryland, Baltimore County.
“In general, we try to let students keep as many grants and scholarships as possible as long as they’re within their cost of attendance,” she says. (UMBC reduces the Parent PLUS loan amount first, then federal student loans.)
If you don’t qualify for need-based aid, outside scholarships will likely help your family’s bottom line, but if you’ve earned an institutional merit scholarship, it’s worth double-checking the college’s policy.
Are outside scholarships still worth it?
If outside scholarships require filling out an application and writing an essay only to risk displacement, are they even worth it? Resoundingly yes, experts say. For one, many colleges reduce student or parent loans first, and that’s a win.
“But pay close attention to the colleges you want to attend to see what their outside scholarship policies are,” Jepsen says. Use the college website’s search bar to search “outside scholarships” or “private scholarships.” Or start with DISSCHOLARED, a campaign aimed at raising awareness about displacement. The website has a search function to find specific colleges’ policies.
If you’re still unsure, call the financial aid office to ask how the college treats outside scholarships, Astacio says. If it practices displacement, ask if it reduces student loans first.
“Usually, students won’t be worse off for their outside scholarships, but finding out their bill is the same because the college displaced their outside scholarship can be a nasty surprise and very disheartening,” she says.
What students can do to mitigate scholarship displacement
College policies require students to report outside scholarships to their college, so you can’t simply keep the monies you were awarded a secret in the hopes of avoiding displacement. But there are some steps you can take to reduce the pain of displacement.
1. Create a spreadsheet to track your awards
Jepsen recommends listing outside scholarship amounts and whether they’re renewable so you can track the potential for displacement.
2. Look for scholarships that aren’t earmarked for a single expense
If your tuition is covered by an institutional scholarship, a private scholarship could go toward your dorm, meal plan or other expenses. A scholarship’s purpose must be spelled out for colleges to administer it, but “scholarship providers can say ‘full cost of attendance’ or include all the items a scholarship can cover,” Jepsen says.
3. Contact scholarship providers to ask about other ways to use the money
You can request that the scholarship be applied to your full cost of attendance, rather than direct costs like tuition and dorm fees. You could also request the scholarship provider defer the scholarship until a later year, or apply it to graduate school or summer sessions, when there’s typically less financial aid from colleges.
“The worst they can do is say no,” Jepsen says.
4. Request an increase to your official cost of attendance
If none of those are options, consider whether a petition for an increased cost of attendance may work. If you live in an area with high housing costs and you can prove your expenses total more than the costs listed in your financial aid letter (or on the college website if they’re not detailed in the financial aid letter), an adjusted cost of attendance would open you up to qualify for more aid.