The Financial Aid Loophole That Cost Me Thousands

I was a poor student on merit scholarships and need-based grants. Then the scholarships cancelled out the grants.

Photo credit: m01229, CC BY 2.0.

For college-bound students, the Free Application for Federal Student Aid (FAFSA) provides an introductory glimpse into the labyrinthine financial reporting nightmares you’ll inevitably face in your adult life. Its mysterious black box calculations can make or break your financial future, cause you to rack up astronomical debt, and may even jeopardize the possibility of your getting a degree at all. For me, it opened up a loophole so wide that my only hope — my hard-earned scholarships — fell right in.

I was a poor college student

For me, “FAFSA” may as well have been Greek for without this, your broke ass has zero chance of going to college. I was seventeen. I had just enrolled in community college — then just $11 per unit. I lived at home with my parents who, for all their merits, wanted me to go on to university about as much as they were able to pay for it, which was not at all.

It seemed pure fantasy that one day I would move away and get a four-year degree. But a couple of professors put the idea in my head, insisting that it was possible—if not through loans, then through scholarships. After a few months of attending class in a vague performance art kind of way — a hapless dance to ward off a future of imagined drudgery — I was desperate to believe them. I spent the remainder of my time at community college working my ass off. I did everything I could to make myself deserving of scholarships and along the way applied to every scholarship I could find.

Some were need-based; some were merit-based. Some were memorial scholarships set aside by the families of former alumni. Some were for Latinas, some were for those who’d be the first in their families to go to college. Many required five-page forms, ten-page essays. I researched and applied for the big, the bad, and the obscure, and spent the better part of a year shoehorning myself into any scholarship I remotely qualified for. I treated it like a job, and it paid off. By the end I had amassed a small treasure: thousands of dollars in scholarships I’d painstakingly won. I started to feel rich enough to believe I could afford a university degree.

Of course, scholarships are really just IOUs that you hope to cash in once school starts. But I felt confident. I’d received the fancy letters, attended the awards ceremonies, and even shook hands with a widower who’d chosen me to attend college in his departed wife’s name. It was incredible to me that real people were forking out real money to help me and my family succeed. I hadn’t even enrolled in classes yet but I already felt reason to be proud of my industriousness. When the time came I filled out the FAFSA forms in full, neatly spelling out each of the scholarships’ names and amounts.

When I finally started university, I lived out of a suitcase; in lieu of a blanket I slept under piles of clothes. I measured my daily budget against how many times I could sneak into the cafeteria. I bootlegged textbooks. I trekked a mile across campus to the public computers every time I had to write a paper. I held my head up high (literally, perhaps metaphorically) while rooting around in trash cans though it was usually (usually!) just to salvage some paper to print on. When I got an on-campus job I worked every hour they let me.

All this is to say that when my financial aid letter — the one that would seal my fate — arrived in the mail, I was ecstatic. Until I read it. Then I cried. I wish I still had the letter but it was eventually sacrificed (printer paper).

I got screwed

At first I was confused: in the cryptic jargon-filled financial “award” letter, none of the line items listed my scholarships. Certainly I was due to receive some of those funds I earned about now, right?

I ditched class to spend the next day in the waiting room at the financial aid office. It was like any classroom, with students nodding off or outright dozing in antique chairs, except when they woke up they were confronted by a bail-bonds-waiting-room level of anxiety. My turn came. I mustered up my fierceness and handed the award letter to the counselor.

“I have outside scholarships; are they in this letter or are they coming later?” I asked officiously, as if my life didn’t depend on the answer.

The counselor looked at my letter and said, “Yeah, they’re in there.”


“Look,” he said, pointing to my need-based grants. “You have less need, so you have less grants.”

I asked him for clarification. He repeated himself. I suppose it’s wise on their part to rely on obfuscation — as representatives of an institution that takes your money, it’s a tactic that probably works to shut most people up.

I stayed until I saw another counselor who was willing to break it down for me. As it turns out, the amounts in grants I was, well, granted, would indeed have been higher were it not for the scholarships. As a low-income student, I qualified for the full amount of available state and federal grants. But I received less grant money than I qualified for because of the scholarships. The way they calculate it, the scholarships lowered my need, so I qualified for less grant money. The scholarships I had worked so hard for ended up canceling out my need-based grants dollar for dollar.

So where would my scholarship money be going? Apparently to some combination of the federal government and the school itself. There would be no payout — not to me at least. Huh?

The scholarships and the need-based grants cancelled each other out dollar-for-dollar.

The fine print is everything

If you poke around the web, you’ll find forums where anxious students and parents try to wrap their heads around a simple question: Just how much is school going to cost? It sounds straightforward enough. What other expense of that magnitude is undertaken without a clear understanding of the exact costs? (Oh, wait. Healthcare.)

If you have enough money, the fine print isn’t worth the paper it’s printed on. But the fine print is everything for the millions of families who must budget tightly to make it happen. Yet it’s nearly impossible to pin down accurately.

One such student posted the breakdown of his financial aid package that included a $4,000 third-party scholarship he received. After carefully reviewing the package offered by his Ivy League school, he was stumped as to where the scholarship had gone. His exasperation was apparent in his question to the forum:

So basically, $3,000 of my scholarship went to “nothing”? Because it didn’t affect my family’s out of pocket contribution.

In his situation the scholarship reduced part of his financial aid package, specifically a “term-time job” he would have otherwise had the option to take. Essentially, the school decided that his scholarship funds, which he had already “earned,” would go toward replacing future earnings he would have otherwise had to work for at a campus job during the school year. On the one hand, the school is saying he doesn’t have to get a campus job in order to pay off that amount. But the other hand holds the bottom line: despite earning that scholarship, he didn’t come out financially ahead. As he put it:

But I will not get that $3,000 to use, so what is the point that I got the scholarship or not? I could have just saved up $3,000 from a summer job.

Every university applies outside scholarships their own way. Some have a policy that’s favorable to the student where they create financial aid packages without factoring in outside scholarships. If you attend such a university, you could end up like this student who graduated with $16,000 left over from scholarships, which the university paid out to her after she finished school. It makes for a juicy story, but one you won’t hear too often.

Far more common is that the university will use your outside scholarships to reduce your aid package. If they decide instead to reduce the amount of loans you have to take on, that’s cool, but it’s still not cash in hand.

My school, a public Ivy, was not so cool. Given their policy, the only way my scholarships would have improved my financial situation is if I had won more in scholarships than I would have received in grants, at which point the surplus would have reduced either my personal expected contribution or the amount I would have had to take out in loans. For that to happen, I’d have had to win scholarships totaling more than my billable tuition and fees, i.e. around $5,000 per year. Only then would any additional scholarship funds start to accrue in my favor.

If we’re to be honest, this is a rather underwhelming proposition. The point of chasing after scholarships is to improve your financial situation in college, not to improve your college’s financial situation. Students don’t go out and get scholarships so they can lower government costs. If the school and the Feds have determined that you have financial need, then all the more reason you should be able to keep your scholarships: you earned that money, and you need it.

The point of getting scholarships is to improve your financial situation in college, not to improve your college’s financial situation.

It makes sense if we view it from the perspective of the schools, the state, and the federal government: they’re chipping in to help fund you, so they deserve to recoup their losses and be paid back if you come to the table with third-party funds. But from the student’s perspective, it seems particularly cruel. And, for many students, it gets worse. Depending on your financial situation, scholarships can actually cost you. Middle-class students get hit particularly hard because their aid packages contain fewer grants and are more reliant on loans. If outside scholarships reduce need, middle-class students have to make up the loss with unsubsidized loans or private loans with less favorable terms.

Aside from all this, there’s another figure that families have to navigate: the expected parent contribution. If you’re like most undergrads — under 24 and not considered financially independent — then your financial aid package specifies what you are expected to pay and what your family is expected to pay. I’ve always found this baffling, if not sadistic. Parents should not be expected to pay for children who are legal adults, and young adults should not be legally required to beg their parents for assistance. These absurd financial designations only exist to enrich schools and loan agencies.

In my situation, I would have preferred to keep the aid I originally qualified for and use the scholarships to help pay down some of the parental contribution. After all, I’m the one who wants to go to school, not my parents. Another option would be to take out more in loans, and to use the scholarships as liquid funds to pay for day-to-day costs in the short term. But by reporting my scholarships, as I was legally required to do, these options were closed to me.

I applied for scholarships assuming the funds would benefit me in some clear and obvious way, whether to let me buy necessary college supplies, like textbooks and printer paper, or to help cover my family’s crippling expected contribution.

Knowing what I know now, going after third-party scholarships is a misguided way of earning money for college. If students knew that, they might spare themselves the B.S. extracurriculars; if parents knew that, they could plan ahead. And if grantors of third party scholarships knew how their very real funds were treated once they enter the black box of financial aid, they’d start cutting students direct checks that would actually make a difference. For all the paper I’ll chase in my lifetime, the money I’ve earned should be the least of it. Otherwise it’s not worth the paper it’s printed on. Not even as printer paper.

Melissa Mesku is a web developer, writer, entrepreneur, and the founding editor of New Worker Magazine.