The problem with private scholarships

Posted on Posted in Financial Planning, parenting

The burdensome application process combined with the financial aid ‘offset’ policy used by many universities undermines the value of small private scholarships.

A number of small privately offered scholarships go unclaimed each year because of lack of qualified applicants. Students tell me it’s just not worth the effort to apply for them. I used to think that their attitudes showed a lack of motivation that might be triggered by too many other resources (parents willing to pay the bill). Now I understand that, in fact, there is are real economic reasons for students’ disinterest in these small private scholarships.

One scholarship application that I recently considered is offered by a local trade association. Te scholarship might be available to my daughter. The application form requested a surprising amount of information that we did not have immediately available. It seemed that we would need to contact the school for assistance with the documentation required. It is never easy to get anything from her school’s financial aid office and I don’t imagine that they would welcome another request for documents at this busy time of year. I estimated that it might take us a combined 5 hours for parent and student to complete the application and documentation process. The scholarship amount is $1,500.  Just for purposes of this discussion let’s assume that there may be 10 equally qualified applicants competing for one scholarship. That assumption allows us calculate the economic value of each scholarship application at $150 (10% probability of $1,500). Now let’s calculate the cost of completing the application. If we arbitrarily value the parent & student’s time (jointly) at $30/hour then the total cost of completing the application is $150 (5 hours x $30/hour).  So the net economic value of completing the application is ZERO ($150 value minus $150 cost). We can understand why some students don’t get excited by the possibility.

Despite this basic economic frustration, the application process itself might not even be the biggest deterrent to potential scholarship applicants. Applicants must consider the likelihood that their other financial aid award through their school will be reduced dollar-for-dollar by any third-party scholarship received. Financial aid through the college or university is based on a formula that considers the dollars of unmet need as calculated on a standardized basis for all students. In this case there may be absolutely no economic incentive to apply for the scholarship.

For example, my daughter informs me that almost all students at her university who need financial assistance qualify for a $2,500 university grant. But any third-party scholarships she receives must be reported to her school and that amount reduces the basic university grant on a dollar-for-dollar basis. That means that since her basic student grant is $2,500 and if she later wins a $1,500 trade association scholarship then the university grant would be reduced to $1,000 ($2,500 minus $1,500).

It is cleat that between the low economic return for spending time on scholarship applications combined with the likelihood of having other financial aid reduced by the college, it is difficult to make a case for supporting these small third-party scholarships.

Why do scholarship sponsors continue with these methods? It seems likely that there are still a few applicants who might endure the process despite the cost or simply don’t understand the net effect. Perhaps there is some ego benefit to being selected as a private scholarship recipient. But more likely, the sponsors have simply not considered the deterrents that are presented in this discussion.

The solution? Private scholarship promoters should certainly consider investing some time into making the application process easier. There is no logical reason why a $1,500 scholarship application needs to be more than one page long. Sponsors should also consider revising the scholarship program so that the amount is not reduced by other common financial aid programs. Apparently other types of merit awards, honoraria and prizes would not reduce the students’ scholarship.

The college cost crisis facing middle-income families has never been greater. It is time, I think, for private funding sources to update their thinking as to how they can become a more viable part of the solution. The scholarship application process developed for a prior era are simply no longer relevant today.

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