- No federal law requires students to report private scholarships to their college. The reporting requirement comes from college policies, not government regulations.
- Colleges often practice scholarship displacement (reducing their own grants when students win external scholarships) which can eliminate the financial benefit of winning a scholarship.
- At least five states (Maryland, New Jersey, Washington, Pennsylvania, and California) have passed laws prohibiting scholarship displacement, and federal legislation has been proposed.
Students who spend hours applying for private scholarships hope that those awards will defray their college costs. But at many schools, winning outside scholarships triggers a process called scholarship displacement, where the college reduces its financial aid by the amount of the scholarship, leaving the student in no better position financially.
Faced with that result, many students and families ask a fair question: Do I really have to tell my college about this scholarship? The answer is more complex than most schools suggest.
What does federal law say about reporting scholarships?
Despite what some financial aid offices claim, it is No Federal laws or regulations that require scholarship recipients to report their individual scholarships to their college. It is worth repeating: The federal government does not mandate reporting of private external scholarships..
The Higher Education Act of 1965 includes scholarships in the definition of estimated financial aid (EFA). Financial need is reduced by EFA when determining eligibility for need-based aid. But the statute’s own language recognizes that colleges may not be aware of every scholarship. This refers to “all scholarships, grants, loans or other assistance” known to the organization The student’s need is determined at that time.” This phrase recognizes that some scholarships may go unreported.
Federal Student Aid HandbookPublished by the U.S. Department of Education, discusses estimated financial aid but does not include a requirement for students to report outside scholarships.
The over-award rules for campus-based aid (34 CFR 673.5(c)) define anticipated financial aid to include “scholarships, including athletic scholarships,” but again place the burden on the college to account for aid that it “can reasonably expect” or “otherwise knows about.” There is no burden placed on the student.
The FAFSA currently includes an optional question about scholarships, but it is limited to taxable grants and scholarships already reported to the IRS as income. Its purpose is to actually help the student – ​​it allows taxable scholarships to be subtracted from total income, thereby increasing eligibility for need-based aid. It does not require reporting of tax-exempt scholarships.
taxes and reporting
There is a legitimate reporting requirement associated with the scholarship, but it goes up to the IRS, not your college. Under 26 USC 117, scholarships used for qualified tuition and related expenses (tuition, fees, books, supplies and equipment) are tax-exempt. Any portion used for other expenses (such as room and board) is taxable income.
IRS Publication 970 explains how to report the taxable portion of the scholarship on your federal tax return. According to IRS statistics collected by The College Investor, $4.43 billion in taxable scholarships were reported by about 808,000 taxpayers in 2022.
So yes, you must report taxable scholarship income to the IRS. But this obligation is separate from reporting scholarships to your college’s financial aid office.
What does your college need (and why)
While it is not required in federal law, many colleges have their own policies that require students to disclose outside scholarships to the financial aid office. Schools may make this a condition of receiving their college financial aid. Some schools also consider this a matter of honor code compliance.
Colleges sometimes tell students that federal law requires the disclosure. That framing increases compliance but is misleading. The need is institutional, not government. Schools implement these policies because of the excessive award rules that require them to account for known financial aid when packaging campus-based aid, direct loans, and TEACH grants. If a college knows of a scholarship, they should include it. But as per the rules the college is not required to force the students to disclose it.
In practice, very few students win enough scholarship money that they would be awarded more under federal rules. The average unmet need is more than $10,000, while only 0.9% of graduate students receive $10,000 or more in external scholarships.
In most cases, cuts to institutional grants are driven by college policy, not federal adjudication constraints. There is no evidence that federal funding has ever been reduced due to excessive restrictions.
How do colleges find out?
Even if a student voluntarily chooses not to report a scholarship, colleges have several ways to find out. Many scholarship providers send checks directly to the school or make them co-paid to the student and the institution.
If a student reports the taxable portion of the scholarship on the FAFSA, the college will look at that income. Last year’s renewable scholarships create hope for continued receipt. Some colleges actively monitor scholarship program websites and newspaper announcements. And some scholarships appear on high school transcripts.
In short, you are less likely to keep a scholarship from your college and attempting to do so could jeopardize your institutional aid if the school considers it a violation of policy or honor code.
State laws are changing
A large number of states have passed laws restricting scholarship displacement. Maryland took the lead in 2017, making it illegal for colleges to displace private scholarships unless the total aid package exceeds the cost of attendance or the scholarship provider allows. New Jersey limits displacement to cases where total assistance exceeds financial need. Washington provided protections requiring colleges to meet 100% of a student’s unmet needs before reducing aid. California banned this practice in the fall of 2022 for low-income students who qualify for Pell grants or state aid under the California Dream Act.
At the federal level, bipartisan Helping Students Plan for the College Act Proposed that colleges would be required to disclose their scholarship displacement policies to both prospective and enrolled students. Although it will not completely ban the practice, it will force greater transparency.
How it could affect your bottom line
The practical effect of scholarship displacement is straightforward: A student works hard to win a $5,000 private scholarship, reports it to the college, and the school cuts its institutional aid by $5,000. Student out-of-pocket costs do not change at all. This discourages students from applying for scholarships and disproportionately affects low- and middle-income families who are most dependent on institutional aid.
Some schools handle displacement more adaptively by reducing student loans and work-study before touching grants. Others reduce grants dollar-for-dollar. Policy varies by institution, and most schools do not prominently disclose their approach. Before applying for external scholarships, families should ask the financial aid office directly: “If my student wins a private scholarship, how will it affect their existing aid package?”
Don’t miss these other stories:
