Students who worked hard, got good grades, and applied for a ton of scholarships should not have to worry about losing financial aid for their efforts. All too often, students receive an outside scholarship and later discover that the grant and scholarship money their college awarded them has been reduced.
Students should know that if they put hard work into applying for outside scholarships, they will get to keep those funds without losing other forms of financial aid.
Starting next year, California students from low-income families won’t have to worry about losing financial aid because they gained a scholarship from an outside organization. A new law recently passed by the California legislature will prohibit a practice known as scholarship displacement.
What Is Scholarship Displacement?
Scholarship displacement happens when a student who is already receiving grants or scholarships from their college or university gets an additional scholarship from a scholarship provider. Many schools require that students report any outside scholarships to them. Most scholarship providers send funds directly to the college or university the student attends, so it is almost impossible to avoid scholarship displacement if a school uses the practice.
Schools will often reduce the financial aid they provide to a student by the same amount as the funds they receive from an outside organization. Schools argue they do this to help stretch limited institutional aid dollars. This process is deeply frustrating for students and scholarship providers. It leaves the student no better off than if they had never received an outside scholarship and wastes the student’s precious time.
How Does California’s New Law Help Students?
California’s new law will prohibit scholarship displacement for students eligible for the federal Pell Grant or the CalGrant—California’s primary financial aid grant for low and middle-income students. Colleges and universities will only be allowed to reduce gift aid (money that the student does not need to repay) they have offered a student if the student’s total financial aid package exceeds the school’s cost of attendance.
California is now one of five states that ban scholarship displacement. Maryland was the first state to prohibit the practice in 2017. Pennsylvania, New Jersey, and Washington have also banned the practice.
Scholarship displacement has started to gain national attention. Representatives Kim (D-NJ) and Kelly (R-PA) introduced the Helping Students Plan For College Act earlier this year. The bill stops short of banning scholarship displacement, instead focusing on requiring that schools disclose their policies on how they treat external scholarships.
Providing more information to students is fine, but it puts all the pressure on students to be informed rather than putting pressure on institutions to reform their practices. There is limited research available on how many students are affected by scholarship displacement. One survey found that over 50 percent of students who received outside scholarships had other gift aid reduced as a result.
The Helping Student Plan For College Act directs the U.S. Government accountability office to study scholarship displacement, including the demographics of scholarship recipients. Better data on who is most impacted by scholarship displacement could improve policies governing the practice.
Is Scholarship Displacement Ever A Good Thing?
Some commentators have raised reasonable concerns that banning scholarship displacement could harm students from lower-income backgrounds. Schools often claim that they reduce their financial aid when students receive an outside scholarship to spread limited funds among more students, but that is cold comfort to students who thought they had additional money to cover tuition and other college costs. It is also worth noting that many outside scholarships are based on “merit” rather than financial need.
Wealthier students are more likely to be awarded merit-based scholarships than students from low-income backgrounds. This raises problems if banning scholarship displacement reduces colleges’ flexibility in moving funds from students with little financial need to students who require more financial support.
Students with the fewest financial resources are the most likely to be harmed when they have a scholarship displaced. On the surface, it might seem reasonable to use scholarship displacement as a way to spread limited funds among more students. However, doing so can harm students and prevents scholarship organizations from supporting the students they intended to support. This is a clear example of equal treatment leading to inequitable results.
The California law avoids potential problems of reducing schools’ flexibility to help students by targeting Pell Grant and CalGrant-eligible students. Students eligible for those grant programs are generally not from wealthy families and need all the financial aid help they can get to make college affordable.
There is a growing movement to ban scholarship displacement outright. Still, until more states outlaw the practice, many colleges will continue to reduce their awards when a student gets a scholarship. Students deserve to keep the scholarship they have earned. Hopefully, Congress will consider more robust action than requiring colleges to tell students they might take away funds if they receive a scholarship.