Now You See It, Now You Don't: The Scholarship Displacement Dilemma

As college decision day approaches, students are under more stress than usual. For many students, their college decision will boil down to a key question: will a college education actually be affordable for them? As financial situations shift due to the COVID-19 pandemic, students will be looking to other means to finance their education, such as private scholarships. Many students are encouraged to apply for outside scholarships, but what they might not realize is that their efforts could be in vain. Through a tactic known as scholarship displacement, colleges and universities can “displace” previously offered grants and scholarships with a student’s private scholarship, effectively reducing the amount of institutional grant aid awarded and resulting in a zero net gain for the student. Students compete for private scholarships to reduce their financial burden; policies that allow schools to pocket the scholarship money that students bring to the table are unfair.

No one really knows how widespread this practice is. There are countless stories about students who work hard to secure private scholarships only to have their efforts stymied by institutional policies that allow for scholarship displacement. A 2013 survey of four year institutions found that half of the 61 schools surveyed reduced institutional grant aid if a student has outside scholarship money. Student newspapers at Duke and Stanford have highlighted these disadvantageous policies at their own institutions, featuring student testimonies about how harmful scholarship displacement is. In their defense, numerous financial aid administrators argue that scholarship displacement is a necessary tool that they use to “spread the wealth” and reallocate institutional dollars to the students who need it most.

Students who earn outside scholarships should be able to apply those funds to their costs. Applying for these scholarships takes time--students devote a significant amount of effort to writing personal statements, crafting resumes, and collecting letters of recommendation. All of their work is for naught when the school replaces its institutional aid with the private scholarship, and the student’s cost of attendance hasn’t changed. Students are seeking outside scholarships because their financial aid package alone isn’t enough, or they want to reduce the amount they have to borrow, or they want to lower their out-of-pocket costs. It is not fair to penalize them for trying to make their college education affordable.

Over the past few years, there have been calls from students and advocacy groups to end these scholarship displacement policies, and legislators have begun to take note. Several states have taken it upon themselves to rein in scholarship displacement. In 2016, Central Scholarship, a nonprofit in Maryland that provides scholarships and interest free loans to students, led the charge to pass state legislation regulating scholarship displacement. One year later, Maryland became the first state in the nation to pass legislation to curb these practices at state colleges and universities. The law calls for state colleges and universities to reduce financial aid only if the student’s private scholarship makes their financial aid package above the cost of attendance, or if they get permission from the scholarship distributor.

Other state legislatures, including New Jersey and Washington, have introduced legislation to address scholarship displacement: Washington’s version of the bill (introduced in 2017) mandates that students’ private scholarships can be used to meet up to 100 percent of their unmet need before their federal or state financial aid is reduced. The bill in the New Jersey state legislature was introduced in March of this year, and is identical to the Maryland law. Neither of these bills have passed.

At the federal level, the Understanding the True Cost of College Act of 2019 is a comprehensive bill that aims to make financial aid offers easier to understand for students. Introduced in the U.S. Senate last year by Senators Grassley (R-IA), Smith (D-MN), and Ernst (R-IA), the bill is a bipartisan effort to reduce confusion amid rising college costs. It also includes provisions that require schools to be transparent in their communications about their outside scholarship policies, requiring schools to disclose if any outside scholarships will result in a reduction of the grant aid a student receives.

These policies are possibly more relevant now more than ever given the current state of affairs; the COVID-19 pandemic not only placed additional financial stress on students and their families, but on colleges and universities as well. While students will be looking for every penny they can get, schools will be looking for different ways to stretch their funds. Will scholarship displacement become more prevalent now? As the higher education arena continues to shift and adapt to these new conditions, it’s important to make sure that scholarship displacement doesn’t emerge as a universal practice.

Students and families will be looking to other resources as their original financing plans fall apart, and their efforts shouldn’t be nullified by institutions. No one knows exactly what colleges and universities will look like in the fall, but with many grim forecasts, it’s almost certain that funding and affordability will be even more of a challenge. Schools will be forced to make tough decisions about how to operate, and many students may be left in financial limbo. But institutions shouldn’t resort to scholarship displacement; it’s an unfair policy that will harm students even more now.

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