College scholarships are not free money

It is National Scholarship Month, which means high school seniors are being exhorted to scoop up free money for college.

What they are often not told is that scholarships won from corporations, nonprofits and other "outside" sources can reduce — dollar for dollar — the grants and cost-reducing financial aid they might get from colleges.

Students with financial need should be aware of this potential disincentive before they spend countless hours pursuing scholarships that may leave them no better off. The same scholarships could, however, benefit affluent families by reducing the amount they have to pay or borrow.

Casey Lu Simon-Plumb, a sophomore at Swarthmore College in Pennsylvania, won more than a dozen scholarships during her senior year of high school, including a $20,000 Coca-Cola Scholars Foundation award.

She thought her winnings would dramatically reduce the $60,000 annual cost of attending the school.

Instead, the outside money replaced other aid Swarthmore had offered her, leaving her family's contribution about the same.

Federal rules require schools to reduce need-based financial aid when students win outside scholarships to ensure that their total financial aid does not exceed their costs by more than $300.

Colleges have some flexibility in how they implement this "award displacement," said financial aid expert Mark Kantrowitz, co-author of the book, "Filing the FAFSA."

If the college does not meet students' full financial need — and most do not — it may opt to let the outside money help fill that gap.

"But most will reduce aid dollar for dollar," Kantrowitz said.

Swarthmore's policy is more generous than many. The small liberal arts college uses outside scholarships first to reduce the earnings students are expected to contribute from summer jobs, said Varo Duffins, the college's financial aid director.

Once those expected earnings are offset, the next category of aid to be reduced is federal work study, in which students contribute to the cost of college through part-time jobs. After that, the college reduces the institutional scholarships it offers students.

Like many elite schools, Swarthmore meets 100 percent of student financial need and does not include loans as part of its need-based financial aid packages, Duffins said.

When colleges do include loans as part of a need-based package, some use outside scholarships to reduce those loans and thus the ultimate cost of going to college. Others do not.

Because colleges' policies vary so much, the only way to know how an outside scholarship might affect financial aid is for families to ask the individual schools. Kantrowitz recommends doing so early enough in the application process that the colleges' scholarship policies can be factored into the decision of where to go to school.

If outside scholarships can reduce the loan portion of an aid package or out-of-pocket costs, personal finance author John Wasik, author of "The Debt-Free Degree," recommends casting a wide net. FinAid (http://finaid.org), Fastweb (http://fastweb.com) and Sallie Mae (http://bit.ly/1ObNYvS) all offer search engines.

Liz Weston is a Reuters columnist.