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Every school has an outside scholarship policy that specifies what happens to your need-based financial aid package when you win a merit scholarship. An outside scholarship is any scholarship not awarded by the government or the school, such as one provided by a private-sector company, philanthropist or foundation.

Outside scholarships are considered resources, meaning they reduce your financial aid package dollar for dollar. The schools often do not have a choice in the matter. Federal rules concerning "overaward situations" require the school to reduce the financial aid package when the sum of financial aid from all sources exceeds the school's cost of education by more than $400.

You’re required to report any outside scholarships to the school's financial aid office. If you fail to do so, you may have to repay the school or the government all or part of your need-based financial aid package.

The school's outside scholarship policy dictates how the outside scholarship is used to reduce the financial aid package. Some schools have favorable policies that reduce loans before touching grants. This lets you replace your loans, which must be repaid, with the outside scholarships. Some schools limit the loan reduction, using only the first $1,000 or $2,000 of outside scholarships to reduce loans, with the remainder reducing the institutional grant.

Even if the school reduces grants before loans, you can still benefit from winning an outside scholarship. If you win more scholarships than you have need-based grants, the school will be forced to reduce your loans. Moreover, most schools will use the outside scholarship to reduce your loans before allowing it to affect federal and state grants. Winning a scholarship is also an honor that can add a line to your resume. Some schools will provide other benefits to scholarship winners, such as giving you priority in selecting a dorm room or working as a research assistant to coveted faculty.

Sometimes, when you’re bringing in a lot of outside scholarship money, you can negotiate with the school to modify the application of their outside scholarship policy. You won't be able to get the school to increase your financial aid package, but you might be able to get them to reduce loans before grants. After all, it is in the school's best interest to encourage you to win outside scholarships. In fact, some schools have outside scholarships designed to provide students with an incentive to win outside scholarships (e.g., increase the student stipend by 10 percent of the outside fellowship amount for graduate students who win prestigious fellowships).

The purpose of this article is to both provide information and facilitate general dialogue about various employment-related topics. No legal advice is being given and no attorney-client relationship created. Please see the disclaimer for further limitations and conditions.