The ‘August surprise’: When more outside scholarships lead to less financial aid from colleges

The Hechinger Report recently highlighted the renewed focus on so-called “scholarship displacement”: when higher education institutions reduce their financial aid offers, including grants and scholarships, after students report winning outside scholarships. Around half of all U.S. colleges and universities do so, according to the most comprehensive study on the issue from the National Scholarship Providers Association (NSPA). In another survey, half of all students who had earned private scholarships reported experiencing scholarship displacement; 62% of those students saw their institutional grants shrink, rather than their loans or work-study hours, Forbes reports.

This substitution of outside scholarships for promised institutional aid is also known as the “August surprise,” referring to the shock students and their families experience when their colleges or universities notify them of their reduced financial aid, news that can come without explanation.

“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, according to The Hechinger Report.

The cost of receiving scholarships

Colleges and universities typically award need-based financial aid by subtracting a student’s expected contribution—based on their, or their family’s, resources—from the college’s cost of attendance, which may include tuition, fees, room, course materials, and other expenses. Many schools factor in private scholarships as part of the resources available for a student’s expected contribution, reducing their financial aid package accordingly.

Experts say that such scholarship displacement leaves students who worked to earn outside scholarship awards—a process that often includes additional interviews, letters of recommendations, resumes, and references—with less money for basic needs and remaining college costs. Some students who see their financial aid reduced end up taking out additional student loans.

Universities say that reducing institutional aid for recipients of outside scholarships helps them provide more aid to additional students in need. However, scholarship providers respond that they intend to help students, not supplement colleges’ financial aid budgets. Some providers of private scholarships even defer funds disbursement until after recipients have finished their degrees so they can avoid displacement.

Discouraging displacement, encouraging transparency

As concerns about student loan debt, rising college costs, and inequitable institutional aid increase, lawmakers in California, New Jersey, Maryland, Washington state, and Pennsylvania have passed restrictions on scholarship displacement, mostly at public universities. Similar legislation restricting or discouraging the practice is pending in other states, including Arizona, Wisconsin, and Minnesota. Passing federal legislation on scholarship displacement has been a more difficult task. A 2021 bill compelling higher education institutions to report their use of scholarship displacement stalled in Congress.

Beyond legislation, some experts are calling on financial aid offices to try a different approach, reducing the amount of loans that students have to borrow, or work-study hours they’d have to complete before lowering grant aid. In addition, colleges should be more transparent about their scholarship displacement policies so families aren’t shocked by the actual cost of college just as they start the new academic year.

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