Getting Bent Out of Shape Over Scholarship Displacement

In setting up the Minka Scholarship Program we did our due diligence. Using the Association of Small Foundations (now Exponent Philanthropy) member forum, we contacted a number of small foundations running scholarship programs. We also contacted National Scholarship Providers Association (NSPA). What stopped us in our tracks was a nasty little scholarship secret called scholarship displacement. In this post I’d like to briefly describe scholarship displacement, and our reaction to it. For a detailed look at this topic, I’d recommend a white paper over at the NSPA web site entitled Impact of Award Displacement on Students and their Families: Recommendations for Colleges, Universities, Policymakers and Scholarship Providers.

First, a little background. Our Foundation made an application to the IRS to set up a scholarship program. The application specifically asks about how our Foundation will track how scholarship grants are used by an individual student. One of the reasons we contacted NSPA was to get a sense for how scholarship tracking was commonly done. NSPA told us that it is hard to track scholarship grants because of scholarship displacement. We had never heard of scholarship displacement before. We read NSPA’s white paper on scholarship displacement. Here’s how NSPA defines scholarship displacement:

Award displacement occurs when receipt of one form of financial aid, such as a private scholarship, leads to a reduction in other forms of student financial aid.

Here’s how we’re framing scholarship displacement.

When foundations make scholarship grants, they imagine that they are providing funds directly to a student in a one-to-one fashion. In this way, they imagine that it will be easy to track how the funds will be used. Unfortunately, departments of financial aid (DFA) at colleges and universities do not take this one-to-one view. Instead, they take a “slush fund” view. DFAs seek to take in as many federal dollars as they can, and students are viewed as a conduit to those government dollars. DFAs then go about the business of spreading those federal dollars on to as much of their student body—both perspective and current students—as they possibly can. DFAs take a one-to-many view. As a result of this slush fund view, if a student is industrious enough to find a private scholarship from, say, a private foundation, this student may unintentionally make their overall student aid package worse, not better. How can this be? Well, DFAs figure that if you can bring in your own scholarship dollars then they are now free to take dollars from your financial aid package and spread them elsewhere, say, to entice a perspective student by inflating their student aid package. Suffice it to say that financial aid packages to perspective star athletes are often hugely inflated.

The bottom line is that student aid packages are moving targets that can be updated, modified, or otherwise changed at any time. Friends of mine with kids in college have complained that DFAs will convert student grants (which typically do not have to be paid back) to student loans (which do have to be paid back) willy nilly without warning. Their advice? Monitor student aid packages like you would your credit rating. Typically student aid packages start out covering education costs and then are reduced as the student gets further along in their program. In essence DFAs figure that you have so much invested in their program that you will not transfer. They simply do not have to work as hard to keep you at that school. Yes, student aid packages are used as bait to lure you in. DFAs are fishing for your ability to funnel federal dollars.

So, read the above white paper on scholarship displacement. Our approach to dealing with scholarship displacement is to not make scholarship grants to departments of financial aid but directly to the various educational departments at colleges and universities. In addition, we only make scholarship grants to students who are engaged in graduate work. It’s too bad because we had hoped that we could set up a traditional scholarship program. Until something is done about scholarship displacement, we simply in good conscience cannot engage in a traditional scholarship program. The NSPA white paper has a number of suggestions on how best to address the issue of scholarship displacement. Apparently there’s a small group of colleges that is taking matters into their own hands. Their solution? They do not accept federal funding. As a result, scholarships are merit based and are of the grant variety, that is to say, they do not have to be paid back.

With student debt now at about 1.3 trillion dollars (in 2016)—greater than credit card debt—this is a huge problem. I know the comparison may not be entirely fair but student debt has all of the hallmarks of the subprime mortgage debacle that brought down the housing market in 2008. Is student debt the next big bubble? Time will tell. Undergrad students graduating from college with student debt in the $50,000 to $100,000 range has got to take a toll long term. Students are already postponing such things as moving out of their parent’s house, getting married, buying their first house, etc. Throw in a masters degree (which now has become the de facto degree) and you’re looking at $170,000 in student debt easily. In my humble opinion, this is simply absurd. I’ll leave you with this excerpt from a post I wrote back in October, 2016 over at the BLT blog:

According to an alumni newsletter article written by the Provost a few years back, 40 cents of each dollar of student tuition was paid by the federal government back in 1982 when I was a graduate student at UT Dallas. Today … wait for it … four cents! The article went on to say that this huge reduction in federal spending on public higher education was at the root of the student debt problem. The article finished by asking a provocative question: With so few federal dollars being spent on public colleges and universities, is public education still public education?