Outside scholarships are those that come from someone other than the federal government or your school. Examples include National Merit Scholarships, scholarships from your or your parents’ employers, or from other civic institutions. Although these scholarships can be very valuable, there is a big difference between them and institutional grants coming from your school: You have to report them on your FAFSA or CSS PROFILE as student income. As a result, they may increase your EFC by 50 cents per dollar received. So your $2,500 National Merit scholarship might increase your EFC by $1,250.
This does not make these scholarships bad! This is simply something to be aware of if you are receiving need-based aid along with an outside scholarship. That’s because you’ll report the scholarship in the correct income year, meaning that a one-time scholarship received freshman year will increase your junior year EFC.