How Scholarships Work

How Scholarship Money is Used

Compute this: The more scholarship money you earn, the more attractive you are to a college.
Compute this: The more scholarship money you earn, the more attractive you are to a college.

So, it's time to go to college. Your grades are tight, you've applied to your top schools, and you've just been awarded a $1,000 scholarship as a prize in the local poetry contest (it was for your brilliant "Tears of a Clownfish," a solemn aquarium meditation). Things look pretty good. Sure, you weren't lucky enough to get a free ride scholarship that pays for tuition, books and living expenses, but every little bit helps. Even a meager $500 scholarship can mean the difference between eating hot mac and cheese in the cafeteria or rummaging in dumpsters for old bagels, right?

Not quite. When they're calculating how much financial aid to award a student, most colleges count scholarships as part of a student's financial assets and offer aid accordingly, rather than allocating those funds for tuition. Say, for instance, that a semester of college costs $10,000. Five thousand dollars might come from need-based loans, while the other $5,000 is expected to be paid in full. The poetry scholarship got you a cool grand, so your out-of-pocket tuition should come to only $4,000, except that it doesn't. Financial aid is always in short supply, which means that most schools, instead of counting your scholarship toward taking a chunk out of your tuition, consider it part of your previous assets. Instead of subtracting the $1,000 from your own contribution, it gets subtracted from whatever loans or grants you may have been getting from the school according to your individual needs. And while it may mean that you'll have less to pay off in the future, you'll still need to scrape together $5,000 to pay for your tuition. You still might need those bagels after all.

But scholarships do carry some advantages. One perk is that they make students much more attractive to universities. Money that you bring in as a student means less money that your school actually has to allocate to pay for you to study and live there. These days, it's impossible for most financial aid programs to offer support for all students. Schools everywhere in this economy are strapped for cash, slashing budgets and reducing services left and right, so any extra money that comes in from scholarships takes some of the pressure off. For every student who brings in money on a scholarship, the money that would have gone to them (whether through loans or need-based financial aid) can be spent on funding other students' educations.

Next up, we'll hunt down those elusive scholarships.