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How Do Private Scholarships Impact My Financial Aid?


College in the United States has become increasingly more expensive over recent decades, leaving many families struggling to prepare financially for this stage in their children’s lives.

In fact, at public 4-year institutions in the United States, the average tuition and fees for the 2020-21 school year were $9,400, up 10% from a decade ago. And this is before including any room and board costs, books, transportation, and other expenses students face throughout the school year.

With this, two main ways students can secure college funding are private scholarships and federal financial aid offered by the US government.

However, each college has its policy for what happens to a student’s financial aid package when they are granted funding from a scholarship external to the school. So, continue reading as we explain how receiving a private scholarship may impact your financial aid and how you can best navigate this situation.

What is Financial Aid?

Let’s begin by explaining what financial aid is and how to qualify for it, which can give us a better idea of how scholarships may impact it. Simply put, financial aid is the money students can receive from the US Department of Education to help pay for college. As we’ll discuss here, financial aid includes:

Grants: funding that doesn’t need to be repaid

Work-study programs: allows students to earn money for school by working part-time for the institution

Loans: money that is borrowed and must be repaid with interest

How to Qualify & Apply for Financial Aid

Students must fill out the Free Application for Federal Student Aid (FAFSA) to apply for federal financial aid. That data will flow into the Federal formula and determine the student’s level of financial need and how much financial aid they can qualify for accordingly.

Various factors are considered during this process, including the cost of attendance at the student’s school, whether the student is still dependent financially on their parents, their level of income, their parent’s income, and more.

Keep in mind there are free forms of financial aid like grants and work-study programs that don’t require the funds to be repaid, though many students will be offered federal student loans up to a certain amount, which will need to be repaid if the student accepts them. So, students should accept free forms of aid before turning to loans.

What are Private Scholarships for College?

On the other hand, private scholarships for college are types of aid external to the US Department of Education or the college itself. In many cases, private scholarships are offered by non-profit organizations, individuals, or even companies.

Again, these are forms of funding that don’t need to be repaid, which is why they are so popular and desired among students.

However, students receiving private scholarships must diligently pay attention to the fine details associated with the funding. This includes any ongoing stipulations they must meet, like maintaining a certain GPA level or completing a certain course. Plus, they’ll also want to make sure they understand the terms of the scholarship and if it renews for each school year or is only for a limited amount of time, like a semester or one year.

How to Qualify & Apply for Private Scholarships

Since private scholarships are not affiliated with the government or educational institution, their qualifications and funding amounts can range widely. Thus, students should shop around to discover all the possible scholarships for college that they could apply for locally or even nationally.

There is a common misconception that private scholarships for college are only based on academics. However, many scholarships have qualifications based on a student’s heritage, interests, or field of study. In addition, students shouldn’t be discouraged by or overlook scholarships of lower amounts because these can add up very quickly when stacked on top of each other.

Why Private Scholarships Impact Financial Aid Packages

College-bound students tend to apply for private scholarships before completing the FAFSA because it’s free money. You don’t have to pay them back. Plus, there are typically no caps on how many private scholarships they can receive.

Unfortunately, you must disclose any private scholarships received, resulting in a reduction in need-based aid. All financial aid awarded cannot exceed the cost of attendance at your college.

Normally, colleges will calculate how much need-based financial aid you can receive by subtracting your Expected Family Contribution from the school’s Cost of Attendance. So, suppose your total financial aid package, which includes private scholarships, is more than $300 over your calculated need. In that case, they will reduce the need-based aid you can receive through grants, work-study programs, or student loans.

 As we discussed, different institutions may have varying rules regarding handling this situation. Still, most colleges will reduce your financial need by the amount of external scholarships you receive from the institution. After that, any leftover amount of funding still required can be covered by the financial aid that the student is eligible to receive.

 Of course, if a student’s private scholarship covers all the costs of attendance and the student requires no additional financial aid, this won’t be an issue. However, students whose private scholarships only cover a partial amount of their educational costs and will still need additional financial aid should continue reading to see what their following steps should be.

What to Do if You Receive a Private Scholarship

Students who receive a private scholarship and still require extra funding help from financial aid awards will first need to inform their school’s financial aid office. The school will then use this information to subtract the scholarship amount from the cost of attendance and financial aid awards granted.

The remaining amount can be covered by the financial aid that students have been approved for, which includes federal grants and student loans.

 If a student doesn’t report their private scholarships, they may owe the “over-award” that they received above what they were entitled to. So, it’s always best practice to update the school’s financial aid office ahead of time on the private scholarships that you will be accepting and using to pay for school.

Why This May Not Be a Problem

In this scenario, it may seem bad that you’ll be eligible for a lesser amount of financial aid awards, but that’s not always true. The school will ultimately decide whether they will cut the grants or the federal loans you’re entitled to.

On one hand, if they cut back the amount of loans you can receive, this is a good thing as it means you’re borrowing less money and will have to make smaller repayments. However, they could reduce the amount of grants you’ll be eligible for, in which case you may borrow the same amount in loans.

In any case, students should consult with the financial aid office at their school to learn about the specifics of their policy and how they deal with these situations.

Final Thoughts: Financially Preparing for Your Child to Attend College

Even though a student’s financial aid package may be reduced by accepting private scholarships, this is ultimately a good problem. If your school tries to lower your need-based grants, try to reach out to the appeal’s team, and ask them to reduce need-based student loans instead of the gift aid.

Again, scholarships are a great source of free aid for your children to attend a school that doesn’t need to be repaid.

Preparing yourself financially for your child to attend college doesn’t have to be stressful and confusing. The good news is that there are financial professionals out there who can help you navigate the college savings process for your children–balancing the right mix of risk management and growth tactics.

Let us help you prepare for this next stage in your child’s life, and join one of our upcoming webinars today.

Tom Martin, WMCP®
Tom Martin, WMCP®
Tom Martin, is a financial advisor at Vaylark Financial Services, based in Hartford, Connecticut. He practices in the area of private wealth management offering comprehensive financial planning, custom investment portfolios, tax reduction strategies, risk management, estate and legacy planning, as well as advises on executive compensation and business owner profitability.


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