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.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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