College Scholarship Gotchas: How To Avoid Mistakes When You Apply

There are many benefits to receiving one or more private scholarships. It eases the financial burden of getting a college degree and minimizes the need for student loans. And it allows you to focus on your studies while at school. 

But scholarship applicants can face several potential pitfalls along the way. The odds of winning scholarships are often low, and you must be mindful of scholarship scams, displacement, and scholarship taxes. 

By learning how to anticipate and respond to these scholarship gotchas, you can increase your chances of scholarship success. This article guides you through the many considerations you need to make before applying for scholarships, so you can feel more confident throughout the process. 

Scholarship Gotchas: What To Consider Before Applying

Many students have failed to qualify for the scholarships they wanted because they weren't aware of the problems that can arise when applying. Let's take a closer look at some common hurdles, starting with the odds of winning a scholarship in the first place.  

Low Odds Of Winning A Scholarship

For most students, private scholarships are part of their plan for paying for college, but not the entire plan.
More than 1.5 million private scholarships are awarded each year, with a total value of more than $6 billion, according to data from the National Postsecondary Student Aid Study (NPSAS). Most of this money goes to students in Bachelor’s degree programs. Unfortunately, your odds of winning a private scholarship are pretty low.

Among students pursuing a Bachelor’s degree, only about 1 in 8 use private scholarships to pay for college, at an average annual amount of $4,200, or 15% of the average annual cost of attendance at a 4-year college.

Very few students win a “free ride” through private scholarships alone. Consider the following statistics:  

Students with better grades and test scores are more likely to win private scholarships.

However, less than 0.1% of admissions test-takers get a perfect SAT or ACT test score each year.

Tips For Finding Scholarships

Here are some tips to help you increase your odds of winning a private scholarship. 

Note: You will increase your odds of winning by applying to more scholarships.

Scholarship Myths: The Unclaimed Aid Myth

There is an ongoing myth that falsely claims that billions of dollars of scholarships go unclaimed each year. This falsehood is often promoted by paid scholarship matching services to convince students to use their scholarship databases. Free scholarship matching services are better, so there’s no reason to ever pay money to search for scholarships. 

Besides, the reality is that almost all scholarship programs receive many qualified applicants for each scholarship. Sometimes, hundreds of students apply for a single scholarship award. 

A few scholarships do go unclaimed because due to highly restrictive selection criteria. For example, the Zolp scholarship is available at Loyola University of Chicago for students born with a last name of Zolp. The name must appear on both their birth certificate and christening certificate. You can’t change your name to qualify.

There is one form of financial aid that does go unclaimed despite millions of students being eligible, and that’s the Federal Pell Grant. About 2 million students in 2015-16 who did not file the Free Application for Federal Student Aid (FAFSA) would have qualified for a Federal Pell Grant if they had filed the FAFSA. Of them, 1.2 million would have qualified for the maximum Federal Pell Grant. 

Beware Of Potential Scholarship Scams

It's important to be aware of the various scholarship scams that are continually circulating. Here are some rules to follow to avoid getting scammed:

And remember that nobody can guarantee you’ll win a scholarship, even if you pay money. 

What Is Scholarship Displacement? 

Scholarship displacement occurs when winning a private scholarship leads to a reduction in the college’s institutional grants. About half of scholarship recipients experience scholarship displacement.

When you win a private scholarship, it reduces your financial need, so the college may reduce your need-based financial aid package. But, colleges have some flexibility in how they reduce your financial aid package. They can choose to apply the scholarships to unmet need and they can choose to reduce loans before work and work before grants. The average unmet need, or gap, is more than $10,000 a year, leaving a lot of room to absorb the private scholarship.

Look for the college’s “Outside Scholarship Policy” on its website. This specifies how a college reduces financial aid when a student wins a private scholarship.

Even some colleges that claim to not engage in scholarship displacement will reduce their grants in subsequent years when the student receives a renewable scholarship. They take the renewable scholarship for granted. This is called “stealth displacement.”

Workarounds include asking for an adjustment to the college’s cost of attendance (e.g., to cover the actual costs of college textbooks or to cover the cost of a computer and peripherals) and deferring the scholarship to a subsequent year. Keep receipts for books, supplies and equipment and ask the college for an adjustment to the cost of attendance if your total costs exceed the allowance within the student budget.

Ask the scholarship provider for help. Scholarship providers want to know if their scholarships are being displaced. Sometimes they can negotiate with the college on your behalf or provide you with assistance in other ways.

Interestingly, six states have passed laws banning scholarship displacement. 

Tips For Keeping Your Scholarship

Some scholarships are renewable, but you may have to maintain a minimum GPA, participate in community service or send periodic reports to the scholarship provider.

Winning the scholarship was the hardest part. Make sure you know what you need to do to keep your scholarship. Even if your scholarship is not renewable, send the scholarship sponsor a thank you letter that tells them how the scholarship made a difference in your life.

I recall a instance where a student wrote such a heartfelt thank you for her scholarship, that the scholarship provider was moved to turn her non-renewable scholarship into a four-year scholarship. 

How Do Scholarship Taxes Work? 

Scholarships are tax-free if used to pay for tuition and required fees, books, supplies and equipment. Amounts used for living expenses, such as housing, meal plans and transportation, are taxable.
 
The scholarship recipient must be pursuing a degree or certificate. The scholarship must not be a fee for services provided to the college. There are exceptions for tuition waivers, comprehensive student work-learning-service programs operated by work colleges, the National Health Service Corps Scholarship Program, and the Armed Forces Health Professional Scholarships.

Some scholarship providers award scholarships through 529 college savings plans because they have a more favorable tax treatment. Qualified distributions from a 529 plan include not just tuition and textbooks, but also room and board (if the student is enrolled at least half-time), the cost of a computer (including peripherals, software and internet access) and special-needs expenses.

The impact of non-qualified distributions from a 529 plan is minimal if the scholarship provider contributed funds to the 529 plan recently, so there was no time for earnings to accumulate. The taxes on a non-qualified distribution are based on the earnings portion of the distribution. 529 plans may also be effective at bypassing scholarship displacement.

Final Thoughts

As you can see, the world of private college scholarships is complex, which is why you should always do the proper research to not only improve your chances of winning one or more scholarships, but to also avoid the potential pitfalls that can arise.