Generally subtracted from need-based aid, but not necessarily merit aid.
Need-based aid is --stand by for this-- based on need. When your need is reduced by an outside scholarship, the school can redirect the institutional money that you would have received to another student. That’s a win! In reality, many schools that reduce need-based aid because of the receipt of an outside scholarship will first reduce any loans and/or work-study offered to the scholarship recipient before reducing actual institutional grant money.