You probably heard that students should apply for scholarships to help pay for college because they’re “free money” so it has to be a good thing, right?

Unfortunately, it’s not that simple. Determining whether scholarships will be helpful for you or not will depend on your situation and it can actually hurt you in some cases.

To get a better sense, answer the following questions:

• “Do I even need to apply for scholarships?”
• “Does my college practice scholarship displacement?”
• “Do I plan on transferring to another institution?”

1. Your financial aid package covers everything without loans

You should not apply for outside scholarships if your financial aid package already covers 100% of your cost of attendance (CoA) without loans. 

This is because your package would only consist of money you do not need to repay, such as federal grants, institutional scholarships, and work-study so it would be pointless if you applied.

Plus, if you did win an outside scholarship in this situation, it would only hurt you because your college would likely reduce your financial aid by that amount (scholarship displacement).

2. Your college has an unfavorable scholarship displacement policy

Your college’s policy on scholarship displacement will have a significant impact on whether applying for outside scholarships is in your best interest.

Scholarship displacement is the practice of reducing your financial aid amount to offset outside scholarships you have won, which will result in a net gain of zero.

This practice occurs because colleges are barred from offering financial aid that exceeds your cost of attendance (includes tuition, fees, books, supplies, dorm).

There are three scenarios that can happen if you win an outside scholarship:

1. Loans and work-study are reduced first.
2. Grants and institutional scholarships are reduced first.
3. All forms of aid are reduced equally.

For example, Hermione was awarded $25,000 in federal grants/institutional scholarships and $5,000 in federal loans. Let’s assume her college reduces loans and work-study first.

If she wins $10,000 in outside scholarships then her loans would be completely replaced and the remaining $5,000 deduction would then go towards her grants and institutional scholarships.  

In this case, it would be a better strategy to apply for outside scholarships until you win enough to replace your loans and work-study only so it becomes possible for you to graduate debt-free!

However, you should not apply for outside scholarships if your college reduces grants and institutional scholarships first because you would be spending a significant amount of time and effort trying to win money you don’t need.

It also may not be a good idea if your college reduces all forms of aid equally since the composition of your financial aid package would remain the same (you would still have loans if you already have them).

If you don’t know your college’s policy on scholarship displacement, send an email or drop by the financial aid office. Do not apply for outside scholarships until you find out!

3. You will be transferring to another college soon

Whether you’re a student at a community college or a university, you might want to hold off on applying for outside scholarships if you plan on transferring to another institution.

Transferring can be problematic because not all scholarships will transfer with you. Some scholarship programs will only allow you to use it at the institution you indicated on your application.

Here are some things you can do:

Before you apply, determine the scholarship provider’s policy on transferring scholarship funds to different institutions. You can do so by contacting them via email or phone.

You’re likely fine if it’s a one-time payment but it may be difficult if it’s a large sum that is disbursed over multiple payments.

If you already won the scholarship, reach out to your scholarship provider to determine a course of action that allows you to keep most, if not all, of the remaining funds.