Summer jobs and financial aid: what you need to know

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% of student income is counted as funds available to pay for college.

However, the FAFSA (Free Application for Federal Student Aid) disregards student income if it falls below a certain threshold. This is called the income protection allowance and it typically changes each year. Any money earned over the protection allowance is counted as income and can increase your Student Aid Index (SAI) (previously EFC), which decreases your financial aid package.

Remember that the FAFSA looks at annual earnings, so you'll also have to include any income you earned during the school year in addition to any summer income, too.

What to report and when

Each time you fill out the FAFSA, you'll need to use tax returns from two years ago, which is known as the prior-prior rule. 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. Similarly, when you apply for financial aid for your senior year of college, you will report 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 four-year college.

Most income items can be found on your tax return and will be retrieved and transferred directly into your FAFSA via a direct data exchange with the IRS. This eliminates the need for you to manually enter most of your income.

Income versus assets

Assets include most money and property you own, such as cash, savings accounts, and investment property. The FAFSA considers 20% of assets 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% 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 $1,000 ($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 Profile^® to calculate non-federal aid, you'll have to report prior-prior year income and also estimate your current income.

And unlike the FAFSA, the CSS 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 aid calculation. While they generally won't be enough to significantly pay down tuition, they can help with expenses related to college like books, a laptop, and rent. 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, the less you'll need to borrow, which will save you money in the long run.

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