University of Maryland–College Park. (Photo: merari/Flickr)

The state of Maryland passed a law this week banning public schools from "scholarship displacement," a practice in which schools reduce financial aid packages of students who receive scholarships from sources other than the school.

Under the new legislation, which was championed by a small non-profit scholarship provider in the state, public schools in Maryland will not be allowed to reduce the financial aid packages of students who receive scholarships unless the student's total financial aid exceeds the cost of college or the scholarship provider gives permission.

"We all view it as a matter of equity," Jan Wagner, the president of Central Scholarship, the local non-profit scholarship provider that pushed for the legislation, told the Baltimore Sun. "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."

To understand just why this change is such a big deal for low-income students, you need to know a bit about how colleges calculate financial need. Paying the Price, Temple University professor Sara Goldrick-Rab's book on higher education, explains this in great detail, but here's the gist: Every college and university calculates its "cost of attendance"—a number that includes tuition and fees, books and other educational supplies, and living expenses (housing, transportation, food, etc.). That cost of attendance serves as a ceiling on the amount of financial aid a student can receive; a student's financial aid package cannot exceed their cost of attendance. Then, for each individual student, schools look at the "expected family contribution," which is the federal government's calculation of how much money a student's family can contribute to their college education. A student's financial need (and the amount of money that they're eligible to receive in financial aid) is the difference between the cost of attendance and the student's expected family contribution.

"How is it that a college or university is supposed to be able to tell a prospective student what it's going to cost if they don't live on campus? They're basically making something up."

Sounds reasonable enough, right? The problem, according to education experts, is that both the "cost of attendance" and "expected family contribution" calculations are deeply flawed, which means that a student's official "financial need" may dramatically understate their true need.

Consider, for example, the living expenses portion of the "cost of attendance" calculation for students living off-campus. In research on different schools' living allowance calculations, Goldrick-Rab and her colleagues found that at least 20 percent of schools estimated living allowances that were quite a bit lower (at least 20 percent) than that required for a very modest standard of living in the area. What's more, colleges in the same areas calculated widely divergent living allowances. Here's what Goldrick-Rab said about the cost of living calculations in an (unpublished) portion of the Q&A we ran with her last year:

How is it that a college or university is supposed to be able to tell a prospective student what it's going to cost if they don't live on campus? They're basically making something up. And you might think, well, you know what, they probably know all the landlords in the area and they're probably making really good, educated guesses. But what you don't realize is they face an incentive to actually keep the number down, because No. 1, they look less expensive overall. And No. 2, if they're giving out any financial aid of their own, they look like they're more generous, they look like they've met more of your need because they artificially deflated the price. The fact that we've abdicated the responsibility for figuring out what it really costs to go to college and to live to the schools has also caught up to us.

Then there's the expected family contribution, which makes one huge assumption that may be true in upper-middle-class families, but bears little resemblance to the reality of most lower-income families: that money flows strictly in one direction, from parents to their children. The federal government's calculation of a family's expected contribution can't be negative. In other words, it doesn't allow for the opportunity costs to a family of a student's decision to go to college—the wages a student might have earned, or the contributions they may have made to their family's rent, food, or medical expenses.

"[When] they run the calculation, they reach a number that can be both positive or negative—it could actually be a negative number," Goldrick-Rab explained. "And yet they then take the negative number and chop it off and make it a zero, which covers up the fact that, in fact, for the student to actually be OK, you would need to cover what they should have been giving their families and were giving their families when they were in high school, before they went to college."

This is where Maryland's new law comes in. The most enterprising and academically gifted students may seek out scholarships to fill the gap between what a school says their financial need is and what their actual financial need is, only to find that hard-won scholarship simply displaces other pieces of their financial aid packages. Maryland's new law won't fix all of the college funding challenges facing many low- and middle-income families—the law, for example, still allows schools to practice displacement when a student's total financial aid is greater than the (official) cost of attendance. Still, it's an enormous step in the right direction that will help many students.