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Maryland Outlaws Scholarship Displacement by Public Colleges

OWINGS MILL, Md. — Again and again, college financial aid offices would frustrate Jan Wagner and Michele Waxman Johnson.

As executives of Central Scholarship, a nonprofit in Owings Mills that provides scholarships and interest-free loans to Maryland students, they would award a student money and a university would reduce that student’s financial aid by the same amount.

“It totally undermines our very existence,” said Wagner, Central Scholarship’s president.

The common practice provoked Wagner and Johnson, the organization’s vice president, into a two-year campaign to stop it. Their effort led to a new law that took effect on July 1, making Maryland the first state to ban scholarship displacement by public colleges.

“This is a David and Goliath thing, honestly” said Sara Goldrick-Rab, an education professor at Temple University who has researched scholarship displacement. “I have never seen anything like Central Scholarship, quite frankly. Michele Johnson and her team are so dogged.”

Maryland’s new law now limits the conditions under which institutions may decrease financial aid, allowing reductions when a student’s aid exceeds the cost of college or with permission from a scholarship provider.

Goldrick-Rab and other researchers say the law could prompt other states to adopt similar bans.

The longstanding practice of scholarship displacement has exasperated nonprofits and students across the country. University officials say it’s intended to redistribute limited financial aid to the students who need it most. Scholarship recipients say it essentially punishes them for having the wherewithal to find other sources of financial aid.

Under federal law, a student who wins a private scholarship after receiving a financial aid package from a university must report the scholarship to the university. Some universities then reduce the student’s aid by an amount equal to the scholarship.

The practice jeopardizes a scholarship industry that awards $51 million in Maryland and $1 billion across the country each year, according to Central Scholarship. It discourages donors from giving to scholarship programs, Wagner and Johnson said.

Woudese Befikadu, a junior at the Johns Hopkins University, said her aid was reduced after she received a $700 scholarship from the office of state Del. Eric Ebersole.

“It felt like they were stealing the scholarship that I earned and using the money for themselves,” she wrote to state lawmakers in support of the bill.

Hopkins officials see it differently.

“When a student’s financial position changes, perhaps because of a well-deserved honor like a state legislative scholarship, then the student’s need for our help has also changed,” said Dennis O’Shea, a Hopkins spokesman. “We can put that money to use helping another student who may not have that resource.”

Though the Maryland ban affects only state colleges and universities, lawmakers are considering plans to try and expand it to private institutions such as Hopkins.

At the University of Pittsburgh, administrators have publicly denounced the practice. Randall McCready, the director of financial aid, said he will only displace scholarships when a student’s aid exceeds tuition.

“Promoting access and affordability is a priority at the University of Pittsburgh,” he said in a statement.

The National Scholarship Providers Association published a paper in September 2013 urging nonprofit groups to lobby lawmakers to ban the practice. By then, scholarship displacement had become a thorn in the side of the some of the country’s largest philanthropic organizations, such as the Gates Millennium Scholars Program and United Negro College Fund, Goldrick-Rab said.

But it was the small Central Scholarship, with its staff of nine people, to first bring change. The nonprofit awards more than $1 million a year to students from low-income families in Maryland.

“I was really impressed,” Goldrick-Rab said. “There are much larger foundations that are very unhappy about this problem.”

Researchers don’t know how many colleges and universities routinely displace aid, she said. But it’s an urgent issue for those struggling to afford the increasing costs of college. An average student in Maryland borrows about $28,000 during their time in college, according to Central Scholarship. Nationwide individual student loan debt exceeds $37,000 on average,

“We all view it as a matter of equity,” Wagner said. “For someone who went out and beat the bushes and pounded the pavement and submitted applications to try and get additional grants and make college affordable, the net result of their efforts is zero. That’s unfair. Especially when we’re talking about low-income and middle-income students.”

Some scholarship providers have developed strategies to prevent displacement. The Michael & Susan Dell Foundation, which has awarded more than $76 million to 3,800 students over the last 14 years, allows students to defer scholarship money until they graduate. They then can use the money to pay off their loans.

“The majority of the students that we work with will face some kind of a displacement,” said Oscar Sweeten-Lopez, who led the Dell Scholars Program for more than a decade and now oversees the foundation’s college success products and services.

He said the risk of displacement is “something that we need to counsel our students on every year.”

The National Association of Student Financial Aid Administrators hasn’t taken a position on scholarship displacement. But Karen McCarthy, its director of policy analysis, said she’s heard from universities who say the practice can redistribute aid to low-income students.

The details about the Maryland bill likely will be widely shared in October at a national conference of scholarship providers, said Mark Kantrowitz, a leading researcher of financial aid and publisher of the scholarship website Cappex.

“Most of the other states, I think, are eventually going to follow suit,” he said.

Del. Dana Stein, who represents Owings Mills, co-sponsored the bill after learning of the issue from Central Scholarship.

“It’s grossly unfair to say, ‘Oh, you got some additional outside aid because of your hard work. We’re going to take some of that away from you,'” the Baltimore County delegate said.

Now Stein is among those considering to try to expand the law to private colleges.

“No decisions have been made,” he said, “but I’m certainly thinking about it.”

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