Will Winning a Scholarship Cause Me to Lose Financial Aid?

High school seniors across the country are making their final college decisions in these next few days before the universal reply date of May 1^st, and, in the wake of those decisions, panic is setting in among many parents. Those large tuition bills—once an abstract concept to be paid sometime in the distant future—are now creeping close and looming very large on the horizon. This frightening reality is sending many parents scrambling for strategies as to how to reduce their bottom line. One tactic that sounds promising is encouraging their college-bound child to hop online and submit some scholarship applications. Parents are often disappointed to find out, however, that winning a private scholarship does not necessarily reduce the balance that the student owes the college. Colleges require their students to report the receipt of outside scholarships to their Financial Aid Offices, and the Financial Aid Offices are, in turn, required by the Department of Education to incorporate outside scholarships into the college’s financial aid award for any student receiving federal need-based aid. If receipt of a private scholarship results in a student being awarded total aid exceeding her calculated need-level, the college must reduce other aid in order to “make room” for this scholarship. When parents learn of this treatment of outside scholarships, reactions range from mild annoyance to all-out fury. “Why did my child go to the significant trouble of applying for all of these scholarships, including writing dozens of essays, only to have other aid cut back as a result?” they understandably wonder. I sympathize with these parents’ frustration, and the only solace I can offer is the knowledge that in the vast majority of circumstances, the student still benefits from winning any outside scholarships. As I see it, four different scenarios could play out when incorporating a private scholarship into an existing financial aid package:

1. The student doesn’t qualify for any need-based aid to begin with. In this situation, there is no need-based aid to reduce, and the amount of the private scholarship directly reduces the student’s bill. Student wins!
2. The student qualifies for need-based aid, but doesn’t have her need fully met. Colleges are not required to meet any student’s need (and only a relative handful of colleges guarantee that they’ll meet every student’s full need), so there’s a good chance that there is a gap between what the student needs and what the college awarded her. In this case, the outside scholarship just goes to help fill that gap, and nothing gets reduced. Student wins!
3. The student qualifies for need-based aid, and has her full need met with an aid package including loans and/or work-study. In this circumstance, the Financial Aid Office is required to reduce their existing aid package to “make room” for the scholarship. While students should refer to their college’s outside scholarship policy specifically, because they can differ, most colleges will reduce loans and work-study (referred to as self-help aid) first, before touching any grant money. If a loan is reduced to make room for a scholarship, while the family may still owe the same amount to the school right now, the student has a smaller loan obligation to pay back in the future. In the long run, the student wins!
4. The student qualifies for need-based aid, and has her full need met entirely with grant/scholarship funding. This is the one situation where the student truly does not benefit from winning the outside scholarship. Grant money from the college is replaced with scholarship money from the outside organization, and the family still owes the same tuition bill. Overall, the student breaks even (and, really, loses, due to the lost time and energy put into the scholarship application which netted them no extra cash).

As you can see, in only one out of four scenarios does the student not come out on top by winning a private scholarship. And that scenario is rare. Of the approximately 4,000 college in the U.S., less than 100 have so-called “no loan” policies, and those policies usually only apply to the lowest income students. So don’t eschew private scholarships due to what you may have heard about them reducing financial aid. Scholarships have become increasingly competitive and hard to win, but, when you do win one, it nearly always reduces your college costs, now or in the future. If it doesn’t, it’s because you’ve been awarded a particularly rare and generous financial aid package to begin with, which, all in all, is a pretty good problem to have.