Scholarship Displacement: Understanding the Reduction of Financial Aid

Many students face the challenge of affording tuition and other expenses associated with higher education. Scholarships are a crucial part of college financial planning, helping to reduce student loan debt after graduation and increase access to higher education. However, just because you're awarded a scholarship doesn't mean you're guaranteed it. Scholarship recipients should be aware of scholarship displacement, also known as award displacement. This article delves into the definition of scholarship displacement, its implications, and strategies to navigate this complex issue.

Defining Scholarship Displacement

Scholarship displacement is when one form of financial aid, like a university grant, is reduced or canceled when a student receives another form of financial aid, like an outside scholarship. Colleges cannot accept more aid than the student’s Cost of Attendance, so the stories about students who won a million dollars in scholarships can be quite misleading. Most need-based aid can only cover the Cost of Attendance - Expected Family Contribution. This can occur when a student receives an outside or private scholarship, which then leads to a reduction in other forms of aid. It is practiced by colleges and universities across the country. When students follow appropriate guidelines and report 'outside' scholarships, the aid offered from their institution may be adjusted to reflect this additional support. Unfortunately, instead of resulting in more cumulative aid as the student may have assumed would occur, additional scholarships may result in a decrease of grant aid or work study and/or an increase in the student's need for loans.

The Prevalence and Impact of Scholarship Displacement

It’s estimated that 20% of colleges nationwide reduce institutional grants when a student earns a private scholarship, even if a student still has demonstrated need. 31 percent of students who reported their private scholarships to their institution had their financial aid package revised, with one or more types of aid (institutional grants, student loans, and/or student employment) reduced. Scholarship displacement can create a hardship for students who are unaware that it may occur. This can certainly skew the results with the outsized cost of living in California.

How Displacement Affects Students:

Little or no actual financial gain: Students may not benefit financially, as the outside scholarship can simply replace a grant they would have received from the college. This leads to no net gain to fill the unmet need for students that qualify for need-based aid.
Undermines or invalidates donor intent: It goes against the intent of many private donors who want their scholarships to reduce a student's debt or work burden.
Can negatively impact graduation or graduate school plans: Students who graduate with less debt are more likely to attend graduate school. Displacement, particularly when it leads to higher loan amounts, can discourage students from completing their undergraduate studies and in some cases from pursuing further education.

Why Colleges Practice Scholarship Displacement

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. shares that colleges and universities are deeply student-centered and have the same goals as other scholarship providers. outside scholarship support can mean that the institution is able to support another student or multiple students. When it is necessary to enact scholarship displacement, many colleges and universities try to do so in ways that lessen the potential impact on students. subsidized loans replaced with outside aid, or their work-study reduced, resulting in graduating with less debt to be repaid or being required to work less during college. Colleges cannot accept more aid than the student’s Cost of Attendance. Over-awarded means that the student’s aid exceeds the school’s total cost of attendance figure or that the applied aid exceeds that student’s demonstrated financial need.

Award displacement occurs when a college or university reduces the amount of awarded Gift Aid due to a student’s receipt of scholarship money from an outside source. This results in no net benefit, or reduced net benefit, for the affected student.

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There are several reasons a college might displace funds:

Over-awarding: A student receives more financial aid than the school's cost of attendance or their demonstrated need. Federal regulations guide institutions on how to handle over awards, often by first reducing certain institutional aid or loans.
College-specific policies: Each college has its own policy for handling outside scholarships, and some may reduce institutional aid while others prioritize reducing loans first.
Limited institutional resources: Colleges may have limited funds and use outside scholarships to reallocate money to help more students.

State Laws Against Scholarship Displacement

Several states have responded to student and parent frustration as well as to critics’ calls to end scholarship displacement, outlawing the practice or requiring greater transparency into displacement stipulations. As more states pass laws to prevent the act of scholarship displacement, the issue is receiving national attention.

Maryland: 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: In 2021, New Jersey’s state legislature passed a bill that would eliminate scholarship displacement 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, or there are financial restrictions in place due to affiliation with an athletic organization.
Pennsylvania: Like California, Pennsylvania enacted laws to prevent award displacement for students. 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: Finally, Washington approved a law against scholarship displacement. 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.

California's Stance on Scholarship Displacement

Beginning in the 2023 - 2024 academic year, California joins only a handful of states in the country with laws prohibiting 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. The new laws, passed by the state legislature in August and signed by Gov.

What Scholarship Providers Can Do

Both institutional and private scholarship providers can help prospective and current recipients understand this practice and how it may impact them. school can be key to reducing stress for students and families. allow private providers time and space to work with individual students and institutions around potential solutions. are expended, may reduce the need for required scholarship displacement. need before loans, loans before student employment, and student employment before grants” or increasing their overaward tolerance. and potential impacts of scholarship displacement. Providers can also stay up to date on federal and state-level policies that may affect scholarship displacement, like the Helping Students Plan for College Act (introduced in 2021 by Congressman Andy Kim, D-NJ).

Steps to Take if You Suspect Award Displacement

Once a student determines they may be subjected to award displacement, what comes next? The sooner a student confirms the details of their financial aid package and their school’s award displacement policies, the sooner the student will be able to determine if they are eligible the receive outside aid. It may be possible for a student to appeal the Need assessment by their school, but that can be a long process. It may also be possible for outside aid to cover some isolated costs, such as health insurance purchased through the school or a new computer, but the student must ask for these waivers and there may be income tax implications resulting from accepting aid for these purposes.

Strategies to Avoid or Mitigate Scholarship Displacement

Check college policies: Before accepting an outside scholarship, research your college's specific policy on outside scholarship displacement. The best policies let scholarships replace unmet need and student loans instead of reducing grants. This will reduce the net price, which is the cost of attendance (COA) minus grants and scholarships.
Talk to financial aid officers: Discuss the potential for displacement with your college's financial aid office. Try to appeal to the financial aid officer to increase the student's COA if there are costs that can justify an increase.
Discuss with scholarship providers: Ask the scholarship provider if they offer flexible options, such as contributing directly to a 529 plan to help avoid displacement.
Advocate for change: Some states, like California, Maryland, Pennsylvania, and Washington have laws preventing displacement in most cases.

The Importance of Understanding Financial Aid Packages

Each student has a unique financial profile. Cost of Attendance (COA)-The total estimated cost, including indirect costs such as travel, to attend a college or university for one academic year. Need-The difference between the COA and the amount a college determines a student can afford to pay. Each college has its own formulas for determining a family’s ability to pay and a student’s Need. It is important to note that colleges that advertise meeting 100% Need are not saying they will cover 100% of the COA. Financial Aid Package-The total financial aid offer made by the college or university to the student. This includes any offered merit aid, need-based school aid, federal aid, loans, and work-study requirements.

Below are examples of different types of financial aid packages offered by colleges and what that may mean for the student when it comes to award displacement. If student is offered federal loans, the ratio of unsubsidized loans to subsidized loans may be affected by an outside award. Student should be aware of tuition cost vs. There may be income tax liability for scholarship money that covers expenses other than tuition and books. Some schools will reduce need-based aid by 50% of the amount of outside scholarships regardless of unmet Need. For Youth Foundation purposes, this type of award displacement is disqualifying. Even if the student does not plan to accept the offered loans, they should be able to receive outside aid in the amount of the loan portion in the financial aid package. If there is a gap between determined Need and the COA, that is not considered unmet Need by the college-it is what the family is expected to pay. Some colleges breakdown the amount not covered by aid into a “student portion” and “expected parent contribution”. These are often the most generous packages from schools with very high endowments, but it can be extremely difficult for students to use outside scholarships to cover the portion of the COA that is not covered by the financial aid package. For some students, the entire, or virtually entire, COA will be covered by aid from the college, so there is no gap for outside aid to fill. For other students, the calculated Need is covered in full, but there is still a significant portion of the COA left uncovered. Once a college determines how much they believe a family should be able to afford, the college expects that amount to come from the family. Even when loans are not offered to cover a portion of the calculated Need, loans may be used to cover the parent expectation.

Additional Tips for Scholarship Success

Since financial need has surged there is a huge emphasis on winning scholarships. Students spend months, even years, searching for scholarships, applying for scholarships and hoping to win them in order to make college more affordable. Students should keep a spreadsheet of all of their scholarships so that they know exactly how much money they will receive every term. Some scholarships are non-renewable, which means that they do not extend past the first year. This can happen with freshman-only scholarships where a college will offer an extra generous financial aid package to entice more students to enroll, and then offer a less generous package in subsequent years. The next piece to consider is: what is required to keep the scholarship? Scholarships come from many sources and each individual scholarship may have different stipulations for their students to maintain their scholarship. Students should be wary of scholarships requiring them to maintain a high GPA in order to keep their funding. The average college GPA is below a 3.5 and it can be difficult to maintain a high GPA throughout the entire time in college. If a scholarship requires a student to maintain a 3.5, then the student needs to treat their GPA like a second job and prioritize keeping their grades up. Students should inquire if the scholarship has a probationary period for them to raise their GPA prior to dropping students who fail to make grades. STEM-specific scholarships are on the rise, as well as other scholarships that are tied to the major a student is studying. These scholarships can be great because they will attract a smaller applicant pool of eligible students. Many outside scholarships have touchpoints or reciprocal communication expectations with their scholars to be considered “in good standing” and eligible to continue receiving the scholarship. These requirements can vary from a call once per term, to monthly and even weekly communication expectations. There is usually a document submission requirement, like submitting a transcript or class schedule but sometimes students will be expected to send progress reports, financial documents and may even need to write essays to the scholarship provider.

Calls for Federal Laws Against Scholarship Displacement

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. There is a growing movement nation-wide to end the practice of award displacement by colleges and universities. Advocacy groups focused on aiding outside scholarship providers, such as the National Scholarship Providers Association (NSPA), and advocacy groups focused on grassroots efforts at the student level are working to end what is considered by many as a fundamentally unfair practice. NSPA’s members have the same shared goal: to serve students and support their postsecondary success.

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