College Scholarship Penalty

The scholarship penalty is a little known college policy which reduces money available to college students due to scholarship monies they receive.
Scholarships are looked at as a common solution to the college funding problem. Scholarships from organizations such as the DAR, Rotary, Wal-Mart, a local church, the Gates Foundation, or other similar organizations make up only 2% to 3% of the money that is available to help send students to college. But there is a greater problem with external college scholarships.
External college scholarships are those scholarships which a student acquires by applying to an organization other than the college or university the student attends. Internal college scholarships are those funds awarded directly to a student, typically for academic achievement. Internal scholarships are always good and should be pursued at all times. External scholarships have a penalty which is rarely discussed.
The standard policy of colleges and universities across the United States is to reduce the financial award the school would otherwise give you by the amount of money in outside scholarships the student receives.
For example: Sally is awarded a financial award package from Big University of $20,000. Sally is a sharp student and applies for several scholarships in her local hometown and receives $5,000 in external scholarship money. Big University then reduces her financial award by $5,000.
College Policy Examples
The University of Illinois
If a private outside scholarship is not listed on your award letter, you must report the source and amount by completing the Private Outside Scholarship Form as private outside scholarships may reduce any loan or Federal Work-Study awards you receive before they reduce any grant aid.
The University of Northern Iowa .
Federal regulations require that scholarship(s) be included in your financial aid package. Scholarships may reduce or replace a portion of your financial aid award. Loans are the first item to be adjusted on your financial aid award.
The University of Notre Dame .
Many Notre Dame Students receive scholarships from private organizations. The receipt of any scholarship, grant, or loan not listed on the original Award Letter must be reported to the Office of Financial Aid as soon as the student is notified of the award. The receipt of funds not listed on the Award Letter may result in an adjustment to the financial aid award.
Grinnell College .
If you are receiving only merit-based assistance, outside scholarships do not affect your award in most circumstances. If you are receiving need-based assistance, the first $3,000 of outside scholarships reduces self-help. Any amount above $3,000 evenly reduces self-help and gift assistance. If you are receiving Tuition Remission or if you have further questions, please contact the Office of Student Financial Aid.
Northwestern University .
Because outside scholarships are a resource that you will be receiving, your financial aid will have to be adjusted accordingly. Northwestern's policy is to reduce self-help first (subsidized loans and Federal Work-Study), and then University Scholarship assistance. Scholarship funds are generally divided and applied equally over your quarters of enrollment.
Illinois State University .
The financial aid office must take into account all scholarships and grants, regardless of their source, when awarding Federal financial aid. A student’s total aid cannot exceed Cost of Attendance. Sometimes it is necessary for Federal awards to be reduced to prevent a student from being “overawarded.”
Some colleges will make the policy sound as palatable as possible, such as this from Coe College . … Outside scholarships can only help your situation, not hurt it. Coe's institutional policy is that we do not reduce our need-based gift aid when you receive an outside scholarship unless all self-help (work and loan) has already been removed from your package, which rarely occurs. Your merit scholarship will never be reduced due to outside scholarships. Federal regulations do require that we consider outside scholarships when we determine your eligibility for need-based work and loans. Consequently, we may need to reduce need-based student work or loans when you receive outside scholarships.
This policy’s genesis comes from the requirements of the federal government’s loan programs. If a student is going to get scholarship money, the government wants its loan money back first. The colleges and universities typically piggy-back on top of this federal policy. In other words, scholarships most often gain nothing. They lose as much as they gain.

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