Scholarship reduction – The dirty little college secret

Would you ever consider a scenario where the scholarships your student won actually resulted in a scholarship reduction elsewhere?

One of the students we work with, whom we’ll call Caitlyn, was a dream that every parent (and counselor) hopes for: kind, bright, studious and incredibly engaged in the college process. In addition to having nearly perfect grades, Caitlyn was highly motivated to reduce the cost of college as much as possible for her family and selectively applied to a number of private scholarships she identified were good fits.

Her hard work paid off, and she and her parents were thrilled when she won a total of $20,000. They hadn’t saved much and were staring at the likelihood of quite a bit of loan debt — and weren’t quite sure how they and Caitlyn could afford many of the schools she was considering.

The new windfall greatly boosted their spirits, and Caitlyn enthusiastically applied — and was accepted! — to a number of top schools. The scholarships she worked so hard to get were finally making their dream come true.

Or so they thought.

As the financial aid awards from colleges began to arrive, Caitlyn and her family were absolutely stunned. A number of the schools actually reduced their own financial aid to the family, some by the exact same $20,000 she had won in scholarships.

Welcome to scholarship reduction, the dirty little secret of college financial aid. Otherwise known as “scholarship award displacement,” this occurs when private scholarships result in a reduction of other forms of financial aid.

This provides the family no net gain in dollars and as a further slap in the face, wastes all the time spent on pursuing the private scholarships.

This happens because the private scholarships received push the family’s financial aid awarded over the threshold of what is needed as determined by the school. As a result, the school must reduce some aid so the family is not given more aid than deemed appropriate.

What you can do

First, ask about the scholarship reduction policy at the schools you are considering so you aren’t caught by surprise. If the schools practice it and are good fits, it may not be worth spending any time pursuing private scholarships. Or, those schools may not be a good financial fit for your family and you may choose to remove them from your target list.

If your financial aid award gets reduced, request that the school take away the loans first from its financial aid offer and not the grants.

One of the most confusing elements of financial aid awards is that many colleges act as though loans and grant dollars are equal forms of financial aid and ways to reduce the cost of attendance. In reality, grants are truly free money that doesn’t have to be paid back while loans have to be paid back plus interest.

So play the same game as the college and if its needs to reduce aid, make sure the loans get reduced first. That truly is a better deal for your family and reduces debt.

Last dollar scholarships

Finally, families don’t realize that scholarships have restrictions, so understand what your scholarships can and cannot cover. For example, “last dollar” scholarships cover any remaining financial need after all other sources of aid are considered, while others can only be used for tuition and fees.

According to Amy Weinstein, former executive director of the National Scholarship Providers Association, if the scholarship is restricted, you can ask the provider to “bank” the scholarship for a future year when your financial need may increase, apply the funds toward other school-related expenses, or apply the scholarship toward your student loans after you graduate.