How This Little-Known Rule Makes Some Private Scholarships Totally Worthless

What if you worked hard to earn a private scholarship for college, only to find out it made no difference in the amount of money you had to pay?

For many students across the country, this scenario isn’t just a bad dream — it’s a harsh reality.

That’s why Maryland became the first state to outlaw this practice, which is known as “scholarship displacement,” on July 1, 2017.

Never heard of it? Well, most people don’t know what it is — until they experience it firsthand.

Here’s what you need to know about scholarship displacement, why Maryland banned it, and what you can do to avoid it yourself.

What is scholarship displacement?

Let’s say you want to attend Mac and Cheese University (a fictitious school), which has a cost of attendance of $30,000 per year.

Based on your FAFSA, the government determines your expected family contribution is $10,000 per year.

That $20,000 difference is your “financial need” — and the maximum amount you can receive in financial aid.

Then let’s say you work hard and earn a private scholarship of $5,000 per year. Federal law requires you to report that award to your university.

If Mac and Cheese University practices scholarship displacement, it’ll then reduce its grants by $5,000 per year, thereby rendering your hard work pointless.

Why do colleges practice scholarship displacement?

Sounds pretty unfair, right? Why on earth would a college do such a thing?

Well, the laws surrounding financial aid disbursement are complicated. And if a college repeatedly “overawards” students (i.e., gives them more aid than they need), it could lose federal funding.

As a solution, most colleges use the following workaround:

  • Instead of reducing the grants they give to the student, they reduce the loans or work-study portion of the financial aid package.
  • This process reduces the overall size of the package (to avoid overawarding) and the burden placed on the student.

Twenty percent of colleges, however, don’t use that strategy — and reduce their students’ grants instead. Why? They say scholarship displacement allows them to redistribute aid to other students who might need it more.

“When a student’s financial position changes, perhaps because of a well-deserved honor like a state legislative scholarship, then the student’s need for our help has also changed,” a Johns Hopkins University spokesman told The Baltimore Sun. “We can put that money to use helping another student who may not have that resource.”

But scholarship providers and students say this strategy punishes go-getters who seek additional funding.

“For someone who went out and beat the bushes and pounded the pavement and submitted applications to try and get additional grants and make college affordable, the net result of their efforts is zero,” said Jan Wagner, president of nonprofit organization Central Scholarship, in The Baltimore Sun.

“That’s unfair,” she continued. “Especially when we’re talking about low-income and middle-income students.”

How does Maryland’s new law work?

Working at Central Scholarship, Wagner and her colleague Michele Waxman Johnson grew frustrated by how often they’d award a Maryland student a scholarship, only to have the student’s college reduce its aid by that amount.

So they spent two years fighting to change Maryland’s laws. And they were successful: House Bill 266, which bans scholarship displacement at Maryland’s public universities, went into effect on July 1.

Under the new legislation, schools can reduce a student’s financial aid package only in one of two circumstances:

  1. If their aid becomes greater than the cost of attendance
  2. If their scholarship provider gives permission

How can you avoid scholarship award displacement?

Although this change is a huge win for Maryland and its students, there are 49 states to go.

If you live in one of them, here are four steps you can take to avoid scholarship displacement.

1. Read your school’s policy carefully

Every university has its own policy on private scholarships — which, according to federal law, must be public.

So before you agree to attend a university, log on to its website and find its scholarship policy. If it reduces grants (and not loans or work-study) for students who earn additional scholarships, you might want to consider other options.

2. Talk to your financial aid office

In an article for Money, Amy Weinstein, executive director of the National Scholarship Providers Association, suggested asking “if the school requires a ‘minimum student contribution’ or ‘summer work expectation’ that cannot be covered by a private, outside scholarship.”

If that’s the case — and you can’t afford the contribution listed — Weinstein suggested requesting this requirement be removed.

3. Talk to your scholarship provider

If you’ve hit a dead end and your aid package is going to be reduced, Weinstein suggested talking to your scholarship provider. See if there’s a possibility you can defer or “bank” your award for another semester or year — or until after graduation.

For example, the Michael & Susan Dell Foundation allows students to save their awards until after they graduate and then use them to pay student loans, according to The Washington Post.

4. Call your representatives

Maryland was the first state to ban scholarship displacement, thanks to the hard work of two individuals.

If you think this practice is unfair, make your voice heard. Contact your representatives and tell them why this issue matters to you. Try Countable, an app that summarizes upcoming bills and makes it easy to reach your reps via phone or email.

Maryland’s new law is a step in the right direction, but it’s just that: a step. To maximize your financial aid — and reduce your student loans — you need to educate yourself about scholarship displacement.

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