Half Of Scholarship Recipients Experience Scholarship Displacement

According to a recent nationally representative survey conducted by Student Beans, 50% of U.S. college students who receive private scholarships experience scholarship displacement. This prevents them from making full use of the scholarships they have earned.

Student Beans is a popular website and app that provides student discounts for 163 million college students in 52 countries, with more than 2 million students in the U.S.

What Is Scholarship Displacement?

Scholarship displacement occurs when receipt of a private scholarship leads to a reduction in other forms of financial aid, such as college grants.

Private scholarships are awarded by foundations, corporations, philanthropists and other private organizations. This is in contrast with institutional scholarships and grants that are awarded by colleges and universities.

Most colleges require students to report when they earn a private scholarship, enabling scholarship displacement.

Scholarship displacement is unfair to students, because it eliminates the financial benefit of earning a private scholarship. Scholarship displacement is also unfair to scholarship providers, who seek to reduce the debt and work burden of their scholars, improving outcomes by making college more affordable.

A previous scholarship displacement study by the National Scholarship Providers Association (NSPA) found that 20% of colleges reduce institutional grants when a student earns a private scholarship. Some colleges reduce institutional grants even when the student has unmet financial need.

The Student Beans survey is the first survey to evaluate the impact of scholarship displacement on students. The student survey results suggest a much greater impact than the NSPA study of college policies.

Scholarship Displacement Statistics

Almost a third (32%) of the survey respondents reported receiving a private scholarship. Students at private non-profit colleges were more likely to report having received a private scholarship.

Of the students receiving private scholarships, more than three quarters (78%) told their college financial aid office about the private scholarship.

Half (50%) of these students said the college revised their financial aid package, with 62% reducing institutional grants, 55% reducing student loans and 24% reducing student employment. The percentage of colleges revising financial aid awards was similar by type of college, with half of students at public and private colleges experiencing scholarship displacement.

Combining the 50% and 62% figures suggests that almost a third (31%) of scholarship recipients who report their scholarships to the college financial aid office experience a reduction in institutional grants.

Stealth scholarship displacement occurs when a college claims that it doesn’t practice scholarship displacement, but nevertheless takes the receipt of a renewable private scholarship for granted when preparing financial aid packages or awards in subsequent years.

To evaluate the impact of stealth scholarship displacement, college sophomores were asked how the institutional grants in their financial aid package compared with the previous year, ignoring any private scholarships. Of the college sophomores, 18% said that the institutional grants increased, 36% said that the institutional grants decreased, and 46% said that the institutional grants remained about the same.  

Positive and Negative Impact of Private Scholarships

Private scholarships have a positive impact on college planning.

Of the scholarship recipients, 45% received less than $2,500, 35% received $2,500 to $9,999, and 20% received $10,000 or more. Slightly more than half (53%) said that their private scholarships were renewable.

Four-fifths of scholarship recipients (80%) said that receipt of a private scholarship made college more affordable. Slightly less than half (45%) said that winning a private scholarship influenced their choice of college and a quarter (23%) said that it influenced their choice of academic major.

But, private scholarships can also have a negative impact on college planning.

One-sixth (16%) of the survey respondents and 22% of scholarship recipients said that they had encountered a scholarship scam, such as a scholarship that charged an application fee, taxes or another fee. (If a scholarship is taxable, the taxes are paid when the recipient files their federal income tax return. The taxes are never paid to the scholarship provider.)

Only 28% of survey respondents and 42% of scholarship recipients knew that scholarships used to pay for room and board, transportation and other living expenses are taxable.

According to IRS Statistics of Income (SOI) data, more than 806,000 taxpayers reported $3.4 billion in taxable scholarships in 2018.

Scholarships are the only form of generosity that is taxable to the recipient. Many students are surprised to learn later that they owe taxes on their college grants and scholarships.

The House Ways and Means Committee proposed repealing the taxability of the Federal Pell Grant in the Build Back Better Act of 2021 (H.R. 5376), but scholarships would remain taxable.

Federal and State Laws about Scholarship Displacement

Two states have passed laws banning scholarship displacement. Maryland was the first to enact a displacement ban, in 2017, followed by New Jersey in 2021.

Representatives Andy Kim (D-NJ-03) and Mike Kelly (R-PA-16) introduced the Helping Students Plan for College Act of 2021 (H.R. 5380) on September 27, 2021. This bipartisan legislation would require all colleges to disclose their scholarship displacement policies to prospective and enrolled students, letting them know how receipt of private scholarships may affect a student’s eligibility for institutional financial aid and the amount of institutional financial aid awards.

This will help students and families make more informed decisions about paying for college. More transparent disclosures will help students understand whether the scholarships they earn will reduce the amount of student loans they will need to borrow.

“Practices like … scholarship displacement make it harder for students and their families to plan for college,” said Congressman Kim. “Our bipartisan bills will increase transparency and help students and parents make the best financial decisions for their families.”

The legislation also directs the U.S. Government Accountability Office (GAO) to conduct a study on scholarship displacement and the demographics of scholarship recipients. The report will include recommendations for legislative action to ensure that private scholarships supplement and do not supplant institutional financial aid awards.

About the Survey

The Student Beans scholarship displacement survey was conducted in July and August 2021. The survey was not incentivized. There were 564 respondents aged 16-24. The survey results are statistically significant with a confidence interval of +/- 4% at the 95% confidence level.

Of the respondents, 29% were college freshmen, 33% were sophomores, 22% were juniors and 16% were seniors.

The geographic distribution by college location mirrored college enrollment patterns, with 13% of the students enrolled in California colleges, 10% in New York, 8% in Texas, 7% in Florida and 4% in Pennsylvania.

Nearly three-quarters (72%) of the respondents were enrolled in public colleges, 19% in private non-profit colleges, and 9% in private for-profit colleges.

Almost half (44%) of the students had ever received a Federal Pell Grant.