‘August surprise’: That college scholarship you earned might not count

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Yvette Hernandez started applying for college scholarships when she was still a junior in high school — 50 in all, by the time she was done — because she knew her family could not afford to pay for her tuition, room, board and other expenses without them.

Some of this momentum coincides with public anger at student loan debt and the mounting cost of college; even though tuition increases have slowed in the past few years, families are paying more out of their own pockets for a higher education than they did 10 years ago, according to the student loan company Sallie Mae.

Half of responding students who got private scholarships reported having their institutional financial aid affected. Of these, three-fifths said their universities and colleges reduced the grants they’d been awarded, rather than their loans or work-study hours.

At the same time, there’s renewed concern about the disadvantages already faced by low-income students. Social media has also given more attention to a frustration that families previously suffered in silence, with rants about scholarship displacement even making their way to TikTok.

“They tell you ‘work hard and you’ll get a scholarship,’ but they don’t tell you what will happen to it,” said Michael Wiafe, who took to Twitter when his financial aid was cut by San Diego State University after he was elected president of the California State Student Association — a position that paid a stipend the university considered to be an outside scholarship.

Like Hernandez, Wiafe got an email from the financial aid office: “Your financial aid has been adjusted.” “I was like, ‘Wait, what?’ ”

He took out loans, then went to graduate school to study public policy, in the meantime lobbying for California’s ban on scholarship displacement — though it is coming too late for him.

“The majority of folks I talked to about this went into more debt” to afford to stay in school and pay for their related expenses. Wiafe said. “What else are you going to do?”

“They tell you ‘work hard and you’ll get a scholarship,’ but they don’t tell you what will happen to it.”

Michael Wiafe, former president, California State Student Association

No one tracks how many universities use scholarship displacement or how many students it affects, and institutions aren’t required to disclose this; among other provisions, the congressional proposal calls for an investigation of the issue by the Government Accountability Office.

The most comprehensive study was conducted in 2013 for the National Scholarship Providers Association, or NSPA. It found that half of universities and colleges reduced institutional financial aid to students who got outside scholarships. Private colleges and colleges that are the most expensive were twice as likely to do this as public and lower-priced institutions, that study found.

In a 2021 survey by Student Beans, a company that offers discounts on retail products to college students, half of all responding students who got private scholarships reported having had their institutional financial aid affected. Of these, three-fifths said their universities and colleges reduced the grants they’d been awarded rather than their loans or work-study hours.

“It’s like a 100 percent tax on any scholarship you get,” said Catharine Hill, managing director of the nonprofit higher education research and consulting firm Ithaka S+R and former president of Vassar College.

At least one million students and their families in California alone have been experiencing this annually, Scholarship America, the nation’s largest private, nonprofit scholarship organization, estimates.

“It’s like a 100 percent tax on any scholarship you get.”

Catharine Hill, managing director, Ithaka S+R

“When students have their scholarships displaced, they come to us angry and frustrated,” said Kalwis Lo, the organization’s director of strategic partnerships. “If there’s a zero net benefit for them, it begs the question of why they put in all this work to get the scholarship.”

Universities contend that reducing grant awards to students who get outside scholarships helps them stretch their own supply of financial aid.

“Especially for institutions with limited resources, reducing institutional aid from one student who received outside scholarship support can mean that the institution is able to support another student or multiple students,” said Lauren Klink, associate director for special awards and student engagement at the University of Wisconsin-Madison.

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But it’s not the intent of scholarship donors to augment colleges’ financial aid budgets, said Ralph Serpe, who heads the Adams County Community Foundation in Gettysburg, Pennsylvania, and its private scholarship program. They give money to support specific students.

“That’s the side of the equation scholarship donors want to be on,” said Serpe. “They don’t want to be on the side of colleges. That’s not their issue.”

Universities and colleges generally award need-based financial aid by subtracting a family’s ability to pay from the total cost of attendance, including tuition, fees, room, board, books, supplies and other expenses.

Most consider a family’s resources to include any private scholarships received. And those private scholarships add up to a considerable amount of money. Foundations, employers and civic and community organizations such as Rotary International and garden clubs and chambers of commerce award more than $12 billion a year in scholarships to undergraduates, according to College Board. Thirty-seven percent of students get private scholarships, Sallie Mae says; the average award is $2,189.

George Washington University. Zaniya Lewis says the university reduced her institutional financial aid when she received a large outside scholarship, forcing her to take out loans. Credit: UCG/Universal Images Group via Getty Images

Financial aid offices require those students to disclose the outside scholarships they get. Some tell families this is a federal requirement, which it isn’t; the Free Application for Federal Student Aid, or FAFSA, requires that families report only the parts of scholarships that might be taxable — the portions used for living expenses, for example, as opposed to tuition or textbooks. (The federal government calls for scholarship displacement only if all sources of financial aid actually exceed the total cost of attending a college by $300 or more.)

Even if students or parents don’t report their outside scholarships, the schools usually find out about them, since most scholarship organizations write checks directly to the universities or colleges.

Half of universities and colleges reduced institutional financial aid to students who got outside scholarships. Private colleges and colleges that are the most expensive were twice as likely to do this as public and lower-priced institutions.

A few providers have started trying to stymie scholarship displacement by deferring their awards until after recipients have finished their degrees, when they can use the money to pay off student loans.

Emily Liang, who’s entering her senior year at Stanford, asked several of the organizations that gave her private scholarships if she could wait to cash them in until she goes to graduate school. She turned down one award that couldn’t be put off, because of the effect it would have had on her financial aid.

“I was really frustrated to know that even with all of my hard work, it kind of went to waste because I couldn’t use it,” Liang said.

Related: Why are prices rising more for lower-income college students than their higher-income peers?

Donors and recipients shouldn’t have to resort to these kinds of strategies for students to benefit from the scholarships they’ve won, said Lo, at Scholarship America.

“We see scholarship displacement as disrupting the mission of scholarship providers, which is making college more affordable,” he said. “The argument [from colleges] is always that there’s limited funding, but we view that as a separate issue. Scholarship dollars are limited, too. The real issue about scholarship displacement is about fairness and equity.”

Low-income families are the least able to fill the unexpected gap left when universities and colleges reduce their financial aid, said Nadja Jepsen, senior financial programs and scholarships director at College Track, which helps students who are the first in their families to go to college.

“To be told that you immediately need to come up with anywhere from $500 to $1,000 or you could be kicked out of your classes, kicked out of your dorm, can be very distressing if a student is just seeing this on their account,” said Jepsen. “They might not be able to come up with that.” Finding additional outside support, she pointed out, could paradoxically end up reducing their institutional financial aid by even more.

Stanford University. Emily Liang says she had to turn down an outside scholarship out of concern that Stanford would have reduced her institutional financial aid. Credit: Anadolu Agency via Getty Images

Low-income, first-generation and racial and ethnic minority students are already at a disadvantage in the competition for private scholarships, since their wealthier counterparts have parents who know to apply for them and better access to college counselors who can help.

Families earning about $142,000 and higher get more than twice as much money from private scholarships than those with the biggest gap between the cost of college and what they can afford to pay, according to Scholarship America. Only about one in 10 recipients of its own awards go to students the organization calls high need and historically marginalized, it says; the rest are to families with greater resources, who are likely to graduate even without this help.

Scholarship America, which gave more than $300 million last year to 100,000 students, announced last month that by 2027 it will try to change this, and award most of its scholarships to low-income students.

Brett Schraeder, managing director for financial aid optimization at the higher education consulting company EAB, sees the issue from both sides — the students’ and the colleges’, especially schools that are cash strapped. “Except for the most affluent institutions, they’re looking at every line” of their budgets, he said.

But he said financial aid offices should use outside scholarships to reduce the amount of loans that students have to borrow, or work-study hours they’ll have to put in, before cutting into outright grants. And they should make their policies around this more clear.

Related: One college finds a way to get students to degrees more quickly, simply and cheaply

“If you’re not transparent with students, it’s going to become a problem at some point. Maybe in the spring, when they commit to your institution, they think, ‘Hey, I can make this work.’ But when the bill is due, they can’t. You’re better off getting some of those conversations out of the way early.”

One student who was affected by scholarship displacement has created a website to help families avoid it, publicizing laws restricting the practice and disclosing which institutions use it.

“Every day we get emails that [parents and students] didn’t even know that this was an issue until they researched it and saw our website,” that student, Zaniya Lewis, said.

Lewis’s institutional financial aid was reduced by George Washington University when she received a large outside scholarship, she said. She took out loans to cover the difference, but still fell behind; if it wasn’t for a refund she received for room and board when Covid-19 closed the campus, Lewis said, she would have had to drop out.

Zaniya Lewis. Since her university reduced her institutional financial aid when she received a large outside scholarship as an undergraduate, Lewis has advocated for an end to the practice of scholarship displacement. Credit: Image provided by Zaniya Lewis

Colleges and universities “are using this practice to attack the students who need the money the most,” said Lewis, who is now entering her final year in law school with $100,000 in student loan debt. Even in states where scholarship displacement has been banned, she said, some schools are finding “every loophole possible” to continue using it.

Donors, meanwhile, are wondering why they’re giving scholarships that end up not actually benefiting students.

“They’re angry,” said Serpe, in Pennsylvania. “They’re angry because what they hoped to do, what their intent was, was to provide an opportunity to a student.”

Scholarship displacement has “the potential to affect private scholarship providers’ decisions on whether and how” to continue offering these sums, said Jackie Bright, executive director of the NSPA.

Serpe estimated that between 50 and 80 percent of the scholarships awarded by his organization are displaced, and has started asking schools to send the money back if that’s what they intend to do with it. While some ignore the request, a few have returned the uncashed checks. “At least they’re being honest,” Serpe said.

But what’s disillusioning about the problem isn’t only its financial repercussions, Lewis said. After all, she said, outside scholarships often recognize students’ special talents and hard work.

With scholarship displacement, universities and colleges “are penalizing that same student for being extraordinary.”

This story about scholarship displacement was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Additional reporting by Noble Ingram. Sign up for our higher education newsletter.

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