Hand It Over: Colleges Take Outside Scholarships for Granted

Over the past year, many elite academic institutions such as Harvard, Yale, Stanford, Princeton, among many others, announced that they will be providing record amounts of financial aid.

 

For instance, Harvard declared that it may spend an additional $22 million to assist families earning up to $180,000 a year. Any family earning under $60,000 would attend Harvard at no charge. Under their new financial aid plan, those families with total incomes of up to $180,000 will be asked to kick in a percent of their income toward tuition and other fees so some families will still be paying close $10,000 to $20,000 per year.

 

After this new wave of financial aid “freebies” by the most elite universities, I decided to do some research to observe how much change these new initiatives would bring to their internal financial systems and their students. The focus of this comparative research pertains to the rules of financial aid packages at various schools in reference to outside sources of funding, which a student might receive in the forms of scholarships, state and federal grants, and tuition benefits from a parent's employer.

 

The results were surprising. At some elite universities, outside scholarships are, in effect, credited against the scholarships the university itself provides. Thus the outside scholarship disappears; the student is no better off with it than without it. How could this happen?

 

The older approach that still prevails at most college and universities appropriately treats outside scholarships as funds that can help a student. This policy applies the outside financial sources to reduce “self-help” (student loans and work-study) before touching institutional scholarships and grants. In other words, an outside scholarship is treated as something the student brings to the table and it reduces the amount the student has to borrow. It offsets a student’s loans first, and only if there is money left over does it offset institutional grants.  

 

But some elite universities have adopted a different model. Most notably, Harvard and Yale define “self-help” as solely work-study.  This may seem a slight bureaucratic difference, but it has large implications.

 

Here are some scenarios that illustrate the differences. For the sake of consistency and simplicity, I use Harvard University’s education costs through all of the scenarios. 

 

I. FIGURING OUT FINANCIAL NEED:

TOTAL SCHOOL COSTS AT HARVARD UNIVERSITY WITH MINIMUM PERSONAL EXPENSES:	$50,250
EXPECTED FAMILY (PARENT AND STUDENT) CONTRIBUTION:	$11,500
NEED:	$38,750

 

It is important to remember that scholarship awards are always applied to "need" and do not change the Expected Family Contribution (EFC) amount determined by the FAFSA federal form or the individual institution.

 

II. WHAT COLLEGES DO WITH NEED:

CASE A:	FULL FUNDING	CASE B:	PARTIAL FUNDING
COLLEGE GRANT	$36,250	COLLEGE GRANT	$22,875
STUDENT LOAN	$11,500	STUDENT LOAN	$22,875
WORK STUDY	$2,500	WORK-STUDY	$2,500
TOTAL PACKAGE	$50,250	TOTAL PACKAGE	$48,250
NEED	$50,250	NEED	$50,250
UNMET NEED	$0	UNMET NEED	$2,000

 

Full funding means that UNMET NEED is $0. Partial funding means there is some unmet need left over. Elite academic institutions tend to fall under Case A.

 

III. OUTSIDE AID SOURCES SUCH AS SCHOLARSHIPS:

 

A. By law, the college must include outside aid resources, such as outside scholarships awards, in their calculation. Thus, in Case A, any outside financial aid such as a scholarship will be in excess of the $50,250 of demonstrated need. Therefore, the scholarship award will result in some adjustments of the original $50,250 package.

 

B. In Case B, an outside scholarship award of up to $2,500 may go toward the student's remaining need, meaning that no adjustment will be made in the $48,250 package offered by the college. What happens to any excess scholarship money will depend on the school's policy regarding treatment of outside awards.

 

IV. COLLEGE AWARD ADJUSTMENTS:

 

It is the school's outside financial policy that determines how that outside source of aid is used to reduce the institution’s financial aid package.  Some schools shelter the first $500 or $1,000 or $2,500 of outside scholarships, applying it toward their “self-help”, and then use the remainder to either reduce gift aid and “self help” equally (50%) or reduce gift aid dollar for dollar (100%). (Some schools shelter as much as $6,000, but $500, $1,000 and $2,500 are the most common thresholds. Other percentages applied to outside scholarships to reduce grants include 33% and 40 %.)

 

With all of this in mind, the issue with college aid "adjustments" is not whether they will be made, but from where in the financial aid package they will be made. As an exercise, let' see what would happen to a $2,500 outside scholarship under the different rules of financial aid at four Case A institutions whose costs match Harvard University.

 

Original Package			Adjusted Package
College Grant	$36,250		College Grant	$36,250
Student Loan	$11,500	Becomes	Student Loan	$9,000
Work Study	$2,500		Work-Study	$2,500
Total	$50,250		Outside Scholarship	$2,500
			Total	$50,250

Scenario 2: Grant Adjustment

Original Package			Adjusted Package
College Grant	$36,250	Becomes	College Grant	$33,750
Student Loan	$11,500		Student Loan	$11,500
Work Study	$2,500		Work-Study	$2,500
Total	$50,250		Outside Scholarship	$2,500
			Total	$50,250

Scenario 3: Split Adjustment

Original Package			Adjusted Package
College Grant	$36,250	Becomes	College Grant	$35,250
Student Loan	$11,500	Becomes	Student Loan	$10,000
Work Study	$2,500		Work-Study	$2,500
Total	$50,250		Outside Scholarship	$2,500
			Total	$50,250

Scenario 4: Work-Study Adjustment

Original Package			Adjusted Package
College Grant	$36,250		College Grant	$36,250
Student Loan	$11,500		Student Loan	$11,500
Work Study	$2,500	Becomes	Work Study	$0
Total	$50,250		Outside Scholarship	$2,500
			Total	$50,250

 

V. Understanding the System:

 

Scenario 1 will offer the best result for the student award winner. The student will graduate with $ 2,500 less debt.

 

Scenario 2 benefits the college by reducing its commitment of institutional resources to the student. The outside scholarship award will fund the college's financial aid budget, i.e. the institution’s endowment and offers no help to the student.

 

Scenario 3 reflects the policy of many institutions that have outside aid thresholds. In the example, the first $500 in outside aid will result in a loan adjustment. Any outside aid amount in excess of $500 will result in a 50/50 reduction of college grants and loans. At least some of the student’s loans are reduced.

 

Scenario 4 reflects the financial aid policy of elite institutions such as Harvard and Yale as they define “self-help” only as work-study. At Harvard and Yale, outside scholarships, state and federal grants, and tuition benefits from the parent's employer deduct directly from work-study first and if there is excess money, the college grant is reduced dollar for dollar. The only benefit the student gains is the gift of time to focus on studying instead of working, which is a good benefit. That also means no source of outside funding (scholarships, state and federal grants, etc.) can touch the student's loan if a loan is necessary. Instead, that money goes directly to the institution’s endowment, defeating the very purpose and nature of those outside funding sources. In short, elite universities are now taking outside scholarships, taxpayer funds, and parental corporate benefits to directly fuel their endowments.

 

Through further analysis, this system provides another cash windfall for both Harvard and Yale in a completely different manner.

 

If a student at an institution with this type of financial aid policy does not need to work or chooses not to do so, then that student’s work-study becomes $0. Therefore, any outside scholarship or financial assistance that the student receives goes directly into that school’s endowment. If the source of that money is from a state or federal grant, then that is taxpayer money.

 

There is another cash windfall this type of financial aid system creates for these elite universities. That windfall helps these elite universities control operating costs of on-campus student employment. For instance, Student A receives a $5,000 outside scholarship while Student B did not receive any scholarships while both are attending Yale. The work-study grant threshold at Yale is $2,500. Out of Student A’s scholarship, $2,500 of that goes to work-study, leaving $2,500 to go into Yale’s endowment. Because of the scholarship, Student A does not need an on campus job. But someone still has to fill that student’s now vacant position. Because Student B did not get a scholarship, that student would have to take the on campus job. Now this scenario begs an important question: What is the source of money of Student B’s paycheck? Answer: Student A’s outside scholarship. Yale did not spend any money on employment while growing their endowment by a $2,500. Better yet, Yale can also hire another student with no loss to its endowment. For every $5,000 in scholarships Yale students get, Yale gets two “free” student workers, since no money ever leaves the endowment to pay for the student employees.

 

It is true that these elite institutions are giving away more money in terms of financial aid but they are taking more from other outside sources to help reduce their operating costs that will in turn, help make up for the increases of financial aid awards.

 

The sting of giving away more financial aid is reduced in another way. As noted, free attendance is given to "high-need" students, which form a low percentage of the student body. What about the “lower-need” students? Some families will still be paying over $20,000 per year to attend Harvard. By taking away ALL students' outside sources of funding, “lower-need” families become married to the highest possible loan, which cannot be lowered through a corporate tuition benefit program from the parent’s employer. Instead, that money from such corporate programs goes directly into Harvard’s endowment.

 

Welcome to the financial aid shell game developed by these elite universities. 

 

What can be done?

 

Parents have to do research on prospective schools to see how the financial aid policies pertaining to outside sources of funding affect the overall cost of their children’s education.

 

The State and Federal Legislative Branches can write laws to ensure that state and federal grants be used to reduce student loans.

 

For-profit corporations can reassess their tuition benefit programs to truly help their employees.

Scholarship programs can write in award stipulations to colleges and universities, telling these institutions where money has to be allocated. If the college or university does not comply, scholarship programs should not make any award funds towards those institutions. Scholarship programs, if they have the flexibility, can rename their scholarships as “gifts” and donate the money directly to the student winners, thus cutting college and universities completely out of the picture.

Dean Chin is a Board Member of the Massachusetts Association of Scholars

 

 

 

 

 

 

 

 

 

 

 

All sources of information come from the University websites and New England’s Dollars for Scholars®, a program of Scholarship America®.

 

NOTE: Scholarship America® is the nation's largest non-profit, private-sector scholarship and educational support organization.

 

Source: 2007 NACUBO Endowment Study

© 2008 National Association of College and University Business Officers