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Top Scholars Should Avoid Schools That ‘Displace’ Scholarships

With college costs ever on the rise, private scholarships give many high-achieving, lower-income students an important supplement to institutional aid packages. But not at Amherst College, Cornell University or Dartmouth College.

The three schools are among those that use a practice called aid “displacement.” Rather than allowing students to combine outside scholarships with institutional aid, the schools use scholarship money to “displace” direct aid, reducing the financial aid packages they offer to students who receive third-party grants. As an example, a student who would ordinarily receive a $30,000 aid package, but who also earned a $10,000 scholarship, might end up getting only $20,000 from the school. That student would then still have only $30,000 in total funding, effectively rendering the outside scholarship meaningless.

One scholarship program, Dell Scholars, found that between 2004 and 2006, about 60 percent of its award recipients had some portion of their institutional aid packages “displaced.” The Gates Millennium Scholar Program, which gave $86 million to 5,000 students this academic year, has also expressed serious concern over the practice.

Colleges argue that aid displacement promotes fairness by allowing them to redirect money to other needy students.

Private scholarships, however, are not intended to give a general subsidy to the schools grantees choose to attend. They are supposed to reward particular students who have successfully competed for them. A draft report from the National Scholarship Providers Association notes, as cited by Bloomberg, that aid displacement “takes away a reward that the student earned through hard work and concentrated effort.”

Also in the supposed interest of fairness, many colleges have established annual “summer contribution” amounts, which cannot be paid with scholarship funds. These contribution amounts can run as high as $2,500 a year, often requiring students with supposedly “full-ride” scholarships to take out loans or forego unpaid internships in favor of paid work. Bernie Pekala, director of student financial strategies at Boston College, explained to Bloomberg that it is important to prevent talented students from using money they have earned through academic dedication, because to do otherwise “would be unfair” to students who did not win awards.

The two practices, aid displacement and mandatory student summer “contributions,” reflect a larger problem with college education financing. The more college costs are subsidized by outside parties, the greater the incentive for colleges to raise their prices - and a reduction in scholarships is really nothing more than an increase in price.

When students get more money from other sources, such as tax credits, federally guaranteed (and now federally issued) student loans, and private scholarships, more of their own family funds are left untapped. Rather than letting families hold onto those savings, schools increase list prices to capture the maximum that students and their families are able to spend. This is why efforts to make college more affordable by providing more outside money never seem to actually reduce the cost of going to college. Like any other business, colleges operate in the ways that allow them to generate maximum revenue.

There is not very much scholarship providers can do to address this larger problem of college affordability, but there are a few concrete steps they can take to ensure that their grant money at least makes education more affordable for their chosen recipients.

One approach that has been tried by some programs, including Dell Scholars, is to withhold money until after students have graduated. While in college, winners of these scholarships take out loans, just like their peers, satisfying the schools’ desire for the appearance of “fairness,” as they define it. The award winners receive their money after graduation, when they can use it to pay off the debt they have accumulated.

This approach succeeds in keeping grant money out of the hands of college finance departments, but it poses other problems for both grant makers and recipients. On the grant makers’ side, there is no way to assure that the money will, in fact, be used to repay college debt or otherwise further the recipients’ educations. This is an inherent risk in placing large sums directly in the hands of 22-year-olds who are trying to find their way in the wider world beyond the campus. On the students’ side, waiting for scholarship money until after graduation may mean not having enough available while in school to travel home to see family or to pay for living expenses as they pursue unpaid internships during school breaks. The money received after graduation also does not count as a tax-free scholarship and will probably be treated as taxable income, at least for students who have enough income overall to be required to pay taxes.

A more effective strategy would be for scholarship programs to combat aid displacement head-on by publicly identifying schools that engage in the practice and refusing to grant scholarships to students at those schools. High-achieving students hoping to secure both private scholarships and financial aid would avoid the schools where they knew they couldn’t do so. Since colleges’ reputations depend heavily on their ability to attract the sort of talented students who tend to win scholarships, my guess is that any “displacement” of high-quality prospective applicants would prompt the schools to change their policies.

For now, students themselves need to do the research to find out, not only what sort of financial aid package they can expect from a school, but also what will happen to that aid if they win any outside awards. Otherwise, students who expect a full ride may end up being taken for a ride instead.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book Looking Ahead: Life, Family, Wealth and Business After 55.

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