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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. 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.

What does that mean for you? Let's say 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.

What to Report and When

Each time you fill out the FAFSA you'll need to enter tax returns from two years ago. This 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. Also, when you apply for financial aid for your senior year of college, you will report on your income from your sophomore year in college.  That will be the last year of income that will affect your financial aid eligibility if you attend a traditional four year college.

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.

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.

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.

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 trademark of the US Department of Education and is not affiliated with Discover Student Loans.


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