Winning a Scholarship is Awesome – Until It Isn't.

Winning a Scholarship is Awesome – Until It Isn't.

Too many students are riding the award displacement roller coaster, and they want off.

Teachers, counselors, and parents, alike, encourage students to find and apply for as many scholarships as possible. Some even say “make it your full-time job,” as scholarships reduce a student's reliance on loans and the number of hours they must work while earning their degree. So, winning a scholarship can be a momentous event in a student's life—until it isn’t.

For many students, the thrill of winning a scholarship is short-lived. When a student's college or university learns of the outside scholarship, an emotional roller coaster may ensue for the student and their family.

What goes up, must come down

Imagine this: A student earns a $5,000 scholarship from the local rotary club for the upcoming academic year. That student notifies their college or university that a check is forthcoming from the scholarship organization. The student expects to see this $5,000 award stacked on top of the grant or scholarship the school has already offered.

Instead, the institutional scholarships and grants get reduced or offset by the same $5,000 that was added in an external award. This results in a zero-net gain toward covering the student's costs for the academic year. Adjusting financial aid packages in this manner by colleges and universities is called Scholarship Award Displacement.

Why displacement occurs

The law requires colleges and universities to adjust student financial aid packages in certain circumstances. However, the decision to reduce grants and scholarships instead of loans or federal work-study when a student still has a financial need is a choice made by institutions. Adjusting awards in this fashion is done to better-leverage their internal dollars to other students who have financial need but no additional funds, like outside scholarships.

The offsetting of aid dollars from one student to another represents an effort to support the school's need-based student population's overall financial health. However, it may have also become something of a necessity for the health of an institution. Schools are threading a needle that maximizes the limited pool of institutional dollars they have across the greatest number of students. Displacement may be one tactic relied upon to increase the impact of these school dollars, but even deeds done with good intentions can have unexpected consequences.

Scholarship displacement's effects

The glaring problem with scholarship award displacement is that the scholarship recipients sought out and applied for scholarships but ended up in the same financial position as they were before receiving an external award. Displacement not only negates the incentive for these students to apply for scholarships in the future but can leave recipients feeling slighted by their institution. So much so, that many students are speaking out and pushing for legislation to ban the practice. But students are not the only ones angered by displacement.

External scholarship providers try to satisfy their donors' intents when awarding recipients, just as schools work to fulfill their own internal donors' wishes. When scholars from external organizations end up with no net-gain from their outside scholarships, the external organization's purpose becomes questionable as they have not fulfilled their donors' wishes.

Early tactics for stopping scholarship displacement

Some providers have supplemented their checks with paper letters to prevent displacement, where they ask for the funds to be returned to the provider if the school will displace the scholarship. Others have tried sending their scholarship checks to institutions later, thinking aid won't be adjusted. Both tactics have been unsuccessful, leaving external providers and their donors equally frustrated.

The law and scholarship displacement

In 2017, the state of Maryland passed a law preventing scholarship award displacement in public institutions. Central Scholarship, a small external scholarship nonprofit in Owings Mills, Maryland, led the two-year effort. The law does not bind private colleges and universities in the state, but 12 of the 13 private institutions have voluntarily agreed not to displace on a 3-year agreement. However, Maryland students are not protected if they attend college out-of-state because four years after Maryland first passed its law, no other state has yet followed suit. California and New Jersey may be close to introducing bills soon.

But some colleges and universities may have agreed not to displace scholarships from some providers if those organizations agree not to join state bill initiatives to ban displacement within the school's state.

Getting forty-nine more states to pass such bills appears to require a herculean effort of will, leadership, and coordination, of which thousands of disconnected scholarship providers do not collectively have. Therefore, scholarship providers have been looking for alternative solutions to stop the displacement of their scholarships that they can implement independently.

Fund 529 plans instead of sending scholarship dollars

The Michael and Susan Dell Foundation has implemented a program where Dell transfers the funds into a 529 Plan owned by the student, instead of sending scholarship funds directly to the school on behalf of their scholars. Dell deposits the number of funds the student needs for the school year into the student's 529 account. The student then pays their college bills out of the 529 account. The student's grants and institutional scholarships remain intact because the 529 payments are not a scholarship.

Despite all the questions that may come to mind for implementing this type of program, Dell has seemed to develop solutions for making it work for them, thereby resulting in a net-gain towards covering education costs for their scholars. However, it is not a silver bullet.

One of the most significant lifts for this type of program is getting scholarship recipients to set up the 529 Plans. Many students may not even have a checking account. Students also must be 18 years of age, so there is a timing factor. Even though this program may work for an organization like Dell, smaller providers may not have the resources to set up and manage this type of program or have the desire to do so based on the number of scholarships they award each year. Therefore, they may look to the following alternatives.

Fund community projects over college scholarships

Nonprofit organizations looking to satisfy their donors' wishes and avoid displacement may end up using their variance power to fund community projects instead of scholarships or encourage their donors to do so.

For example, the Adams County Community Foundation in Gettysburg, Pennsylvania is beginning to steer donors away from college scholarships and toward other ways to support students. They may reach out to local K-12 school presidents or superintendents to identify any shovel-ready projects requiring funding. These might be projects to fund computer labs, hands-on vocational programs, create internships, or even something as simple as paying for college prep programs and Advanced Placement (AP) exam fees. Financing these types of programs still helps students, just not while in college. These programs may also give donors a more tangible view of their gifts' impact, indeed, more so than dollars displaced at colleges and universities that leave their recipients no better off financially.

Provide reverse scholarships

Providers can also look to avoid scholarship displacement by supporting students on the backend of their college journey. Called reverse scholarships, these programs support college graduates by offering to pay down their student loans once they have earned their degree. You may think of them as loan forgiveness programs, but from a specific community (and in exchange for conducting work in that community where there is a skill deficit.) For example, a community may need more local engineers, nurses, or teachers.

Reverse scholarships were not created to avoid scholarship displacement but may grow in popularity. The Huron County Community Foundation manages one such program in Bad Axe, Michigan.

The outliers

Finding colleges and universities that don’t practice displacement is like finding a needle in the haystack. Rarer so are those that don’t displace but also provide access to outside scholarship opportunities. One such school doing both is the University of Pittsburgh. Pitt students have access to thousands of external scholarships and awards won by students, are not displaced when it can be avoided, per federal regulations. This alignment encourages students to participate in their own financial success journey.

So, what’s next?

Will scholarship displacement continue or increase if colleges and universities struggle to hit enrollment targets as a result of COVID-19 or due to the looming enrollment cliff? Will more scholarship providers abandon traditional scholarships and opt for some of the alternatives outlined above?

It’s unclear how scholarship displacement will evolve, but it’s clear that evolution is taking place. How institutions, scholarship organizations, and leaders address this challenge will be front and center in the coming years.

Meet the authors
Ken Downs, Associate Product Manager
Ken Downs
Associate Product Manager

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