The season for scholarship awards. Congratulations to ALL
Recognition of academic and personal accomplishments in and out of school. Shared with students and families at commencement ceremonies, local civic and community award dinners, and workplaces for employees’ children. Valuable financial resources that students and their parent(s) spend countless hours researching, searching, and competing applications. Funded by individuals, groups, and philanthropic donors who support students and families working to finance their education to career journey. Vital for first-generation, low-income families, students already enrolled, or even those returning to complete a journey started.
Scholarships are a valuable gem that, when found and received, can mean the difference in attending, squeezing a tight family budget, or turning to borrow from a private education loan lender. As an advisor, I encourage students and families to seek these valuable financing resources. I have co-authored a Scholarship Workbook with my colleague Shelley Honeycutt of Pivotal College Years.
But there is a hidden dilemma, a concern that students, parents, and even the providers of these valuable financial resources may need to be made aware of – Scholarship Displacement.
Scholarship Displacement is a practice used by many private and public colleges and universities, often resulting in a negative net gain for students and their families. An action governed by institution policy, not a regulatory requirement, whereby a school replaces its funds with external scholarship funds. A swap, saving (replacing) the school funding and leaving the student and family absent of the resources they worked hard to secure.
Federal Regulations require a school to adjust a student’s need-based aid package to prevent an over-award when made aware of (receipt of fund or a letter) of the awarding of external funds. In question is not the occurrence of an overworld, but what action the school takes to correct the problem. In most cases, the school swaps out the funds for a need-based grant they have extended to the student as part of their enrollment and recruitment practices.
- Be sure to read your school statement regarding outside aid, private, federal, or state aid that arrives after a school has calculated and awarded need-based aid.
So, what is the solution? Here are some suggestions if you find yourself (student/family) in such a predicament:
Contact the Financial Aid Office to inquire:
- What is the institution’s procedure for adjusting a need-based financial aid package in the case of an over-award caused by an external scholarship?
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- Deduce or eliminate a Direct Student Loan (subsidized or unsubsidized) or Federal Work-Study award? 100% preferred action.
- Ask the school to allow the funds to pay indirect educational costs, including a computer, transportation, food, academic support services, and other campus expenses.
- Credit the scholarship to a future semester or academic year
- Will the institutional need-based grant be untouched?
- Does the school have a tolerance dollar value where no action is required?
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If the school takes no action, it may be up to you to eliminate the over-award. This may require the student to:
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- Decline the Federal Direct Loan or Federal Work-Study up to and including the total of the external scholarship amount, eliminating a loan. A 100% preferred action.
- Notify the scholarship provider you have been the victim of Scholarship Displacement. They may not even know. Ask them to communicate with the school to request that the funds be used for educational costs, including a computer, transportation, food, academic support services, and other campus expenses.
- If you know the school’s practice and policy and can inform the scholarship provider before the award, they can take corrective action, including delivering the funds directly to the student.
- Ask them to discontinue using a School Notification Form, which placed the burden on the student, and family to notify the school that you have an external scholarship.
Along the way, there may be some pushback regarding the IRS Tax Codes. OK, technically, the awarding of scholarship funds should be considered untaxed income. OK, follow the tax codes; however, in 2024-2025, the question regarding untaxed income is projected to be removed.
Thanks to the work of Michele Waxman Johnson, Zanya Lewis, my colleague Shelley Honeycutt, and countless others, many states are waking up to this concern and passing legislation to stop Scholarship Displacement. Contact your legislative representatives locally and nationally to make them aware of this concern.
Financing college is hard enough.