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Private Scholarships – the billion dollar rip-off exposed

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Towards the end of every school year, most non-profit organizations hold their Awards Banquets where worthy students are honored with various scholarships. Often, the names of recipients appear in the newspapers as an acknowledgment of all their hard work and dedication. Since the awarding organization is primarily giving the money to be used for the student's education, they simply ask the family where the student will be attending, and parents, unaware of the pitfall, tell them. Virtually all such organizations are responsible for the fatal error of making the check payable to the student and the college. So sets the stage for the billion dollar scholarship rip-off.

No, congratulations are not in order. In fact, pity the poor student who dedicated several years of blood, sweat and tears to the Red Cross, YMCA, Kiwanis, Rotary, or other such non-profit organization, only to see all of their well deserved scholarship money evaporate into thin air and wind up in the "scholarship fund" of their college of choice instead of their own financial aid packages.

Most schools send out their financial aid offers between January and April, with a May 1st decision date. As most colleges consider private scholarship awards a resource to help pay for a student's education, they reduce their share of the student's financial aid package dollar for dollar, and this is where the problem lies.

What a kick in the teeth it is for a family to read a revised award letter showing that the school's portion of the financial aid was reduced by the amount of the private scholarship the student earned! The bad news is usually listed on the award letter as private scholarship, outside aid, or very often as other. Here's a typical before and after scenario:

Before Receiving a Private Scholarship

$45,000 - Cost of Attendance (COA = tuition, fees, room & board, books, etc.)
$10,000 - Expected Family Contribution (EFC)*
$35,000 - Financial Need (FN = the maximum amount of aid a family will qualify for)

* EFC = the minimum the federal gov't determines a family will pay at any college

We'll assume the student qualifies for the following aid:

$ 3,500 - Stafford Loan
$ 4,000 - Perkins Loan
$ 2,500 - Federal work-study award
$ 3,000 - State grant
$22,000 - College scholarships, grants, tuition waivers, etc.
$35,000 - Total

The student will qualify for a maximum of $22,000/yr in financial aid from the college.

After Receiving a Private Scholarship:

$45,000 - Cost of Attendance (COA)
$10,000 - Expected Family Contribution (EFC)
$35,000 - Financial Need

The student qualifies for the following aid:

$ 3,500 - Stafford Loan
$ 4,000 - Perkins Loan
$ 2,500 - Federal work-study award
$ 3,000 - State grants, etc.
$10,000 - Private Scholarship
$12,000 - College scholarships, grants, tuition waivers, etc.
$35,000 - Total

While the student still qualifies for a maximum of $22,000/yr in financial aid from the college, the private scholarship has now become a bonus for the school, not the student. All of the student's hard work actually saves the college money, and the benefit to the student is reduced to nothing!

It should be no great surprise to anyone that our greedy institutions of higher learning laid the groundwork for this clever thievery months in advance. Students who apply to any of the 225 elite private and state colleges that require the CSS Financial Aid Profile (FAP) are asked to indicate whether they expect to be scholarship recipients. Section SR, Question SR-150 asks for the dollar amount anticipated from student resources for school year 2007-2008, such as "grants, scholarships and fellowships," and they must be listed individually in Section ES.

The majority of schools that only require the FAFSA (Free Application for Federal Student Aid), simply send out a questionnaire asking about private scholarships. They are less devious, but just as deft.

Who could imagine in their wildest dreams that colleges would stoop so low and play so dirty? Truth be told - and have no doubt about it - it's all about the money. Every year there are billions of dollars awarded in private scholarships, and the beneficiaries of all the hard work that earned them is none other than our poor, starving institutions of higher learning, enriching their billion dollar endowment funds at the expense of their hard working, deserving students.

The best way for a family to avoid the injustice is to personally discuss this sordid state of affairs with the scholarship committee either at the time of application or well in advance of their award announcements. In that way, the check can be made payable to the parents instead of the student! If that fails, parents should ask them to postpone sending the check until after the student has enrolled.

As a last resort, have the parents call the college financial aid administrator, explain the situation, and kindly ask (grovel if you must), that because of all their hard work, the student is really entitled to the money and the college should not penalize them by reducing their aid by the amount of the scholarship. If they take a hard line, try to negotiate some of the money back into the student's pocket, because half a loaf is better than none. Never lose sight of the fact that financial aid is a commodity, and like all commodities, it is negotiable!
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Reecy Aresty has been a financial advisor since 1977. He has authored the critically acclaimed, "How To Pay For College Without Going Broke," an invaluable, parent/student admissions/financial aid manual. Arguably the most revealing book ever (more...)
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