For most students, a summer job is a great way to help pay for college.
But if you're receiving need-based financial aid, it's important to understand how your income could affect future eligibility. In some cases, your paycheck could reduce your award by as much as fifty cents on the dollar. Here are some important tips on how to make the most of your summer earnings.
Income Protection Allowance
In the financial aid calculation, a whopping 50 percent of student income is counted as funds available to pay for college.
However, the Free Application for Federal Student Aid (FAFSA®) disregards student income if it falls below a certain threshold. For example, the income protection allowance for dependent students in the 2017-18 school year is $6,420. Kal Chany, author of "Paying for College Without Going Broke" and founder of Campus Consultants, a financial aid planning firm in New York City, notes that the actual amount you can earn ends up being even higher. The income protection allowance figure is the net amount you can earn without affecting financial aid — after social security, state and local taxes are taken out.
Let's say, for example, you earn $8,000 from your summer job. After all deductions, your net earnings are $7,420. When you report this amount on your FAFSA, only the $1,000 above the income protection allowance will be counted as income, and your Expected Family Contribution (EFC) will increase by $500. As a result, your financial need and your aid package will drop by $500.
While $8,000 may seem like a lot to earn during summer break, it is possible with some higher paying jobs like being a lifeguard or working a corporate internship.
Remember that the FAFSA looks at annual earnings, so you'll also have to include any income you earned during the rest of the school year. Blaine Blontz, founder and lead consultant for Financial Aid Coach, a firm in Philadelphia that helps families maximize financial aid eligibility, says it's non-traditional students who often run the risk of going over the threshold.
"These are students that no longer live with parents and need to sustain themselves with a high percentage of their own income," he said.
What to Report and When
Each time you fill out the FAFSA you'll need to enter tax returns from two years ago. That means if you're applying for need-based aid for the 2017-18 school year, you'll report what you earned in 2015.
Chany says the "prior-prior" reporting rule is both a blessing and a curse when it comes to summer jobs. When you fill out the FAFSA for your senior year of college, you'll report the income you earned during the summer going into your sophomore year. Assuming this is the last time you'll apply for financial aid, you won't have to worry about any future summer job income affecting your eligibility.
"We typically don't even ask students who are sophomores what they make because it doesn't matter," Chany said, "As long as they plan to graduate in four years, they're out of the woods."
But this also means you have to consider financial aid if you work during high school. When you apply for financial aid for your first year of college, you'll have to report income earned during the summer going into your sophomore year of high school.
Income Versus Assets
The way you report student assets on the FAFSA is different. Assets include most money and property you own, such as savings accounts, cash and investment property. Twenty percent of assets will be counted as money you have on-hand to pay for college. But this is the amount of your assets on the day you fill out the FAFSA.
For example, a student's income earned during the summer going into their junior year of college won't be counted because of the prior-prior rule, assuming the student graduates in four years. But, if the money is held in a savings account when they fill out the FASFA, it will be counted as a student asset and 20 percent of the value will be considered available funds to pay for college.
Let's say you have $5,000 in assets on the day you fill out the FASFA. Your financial aid award could be reduced by $5,000 x 0.20 = $1,000. "Unlike income, assets will be assessed based on a snapshot of your situation the day you fill out the FAFSA," said Chany.
If you don't want the money counted as an asset, you should plan to either spend it or deposit it into a Roth IRA before you file the FAFSA. Retirement assets are not included in the financial aid calculation.
Different Rules For Some Colleges
If your school uses the CSS/Financial Aid PROFILE to calculate non-federal aid, you'll have to report prior-prior year income but also estimate your current income.
And unlike the FAFSA, the PROFILE also expects students to put in at least some money for college. Chany said that the amount of summer earnings expectation (also called minimum student contribution) varies by school. It is built into your EFC whether you have a job or not.
When Your Income Won't Affect Financial Aid
Earnings from work-study jobs aren't counted in the federal financial aid calculation, but they generally won't be enough to significantly pay down tuition. However, any income put into a savings account will be counted as an asset. A higher-paying traditional job might be more suitable for someone whose financial aid comes in the form of student loans. Your income will reduce the amount you're eligible to borrow, but you'll be able to pay more out-of-pocket.
If you're trying to decide if a work-study job is a good option for you, Blontz suggests meeting with a financial aid officer from your school to help you weigh the pros and cons.
The calculations to determine federal and need-based aid are complex and results will be different for every student. Understanding how your summer job can affect financial aid will give you a clearer picture of what your actual out-of-pocket college costs will be. And remember that the more money you make from a job, then the less you'll need to borrow, which will save you money in the long run.
FAFSA is a registered service mark of the U.S. Department of Education.