Finding a summer job can be hard enough for some students without having to figure out how much they can earn without compromising their financial aid status at school. Here’s some practical help from Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a free web site about planning and paying for college. Dozens of tip sheets about paying for college are available for free download at www.edvisors.com/ask/tips, including a one-page tip sheet about saving for college.
By Mark Kantrowitz
For most college students, a full-time job in the summer and a part-time job during the school year will not affect the student’s eligibility for need-based student financial aid.
Income from Federal Work-Study (FWS) jobs or other need-based student employment doesn’t count and won’t affect the student’s financial aid package.
The Free Application for Federal Student Aid (FAFSA) shelters a portion of other non-need-based student income. The Income Protection Allowance (IPA) is $6,310 in 2014-15 and $6,400 in 2015-16 and is adjusted annually for inflation. In addition, student income is reduced by allowances for federal income tax paid, FICA taxes and state and other taxes, which typically shelter 10 percent to 25 percent of the student’s adjusted gross income (AGI).
Student financial aid will be reduced by half of any income that remains after subtracting these allowances.
For example, suppose a student earns $10,000 per year from a combination of a full-time job in the summer and a part-time job (not FWS) during the academic year. Subtract the $6,400 IPA, $765 in FICA tax allowances and $300 in state and other tax allowances, yielding $2,535. (The earnings are less than the standard deduction and personal exemption, so there is no federal income tax liability.) Student aid will be reduced by half of this amount, or $1,268. The student will net $7,667 after accounting for the tax liability and the reduction in eligibility for need-based student aid.
Given that there are about 13 weeks during the summer and 30 weeks during the academic year, a college student can work a total of about 13 x 40 + 30 x 12 = 880 hours per year. The student should be able to earn at least $6,380 per year at the federal minimum wage of $7.25 per hour. Most college students can earn more. An hourly wage of $11 to $12 should be sufficient to earn $10,000 per year.
Assuming an IPA of $6,400, 7.65 percent in FICA taxes and a typical 3 percent state and other tax allowance, the student can earn up to $7,162 before there’s any reduction in need-based financial aid.
However, in addition to counting the student’s earnings as income, the FAFSA will also count any unspent money as a student asset. Student assets reduce eligibility for need-based financial aid by 20 percent of the net asset value. Thus, the $10,000 in student income could further reduce need-based aid by an additional $2,000.
There are two possible workarounds to address the double-counting of income as an asset.
- One is to spend the money before filing the FAFSA, thereby avoiding any reduction in eligibility for need-based financial aid.
- The other is to contribute the money to the student’s 529 college savings plan. Money in a 529 plan that is owned by a dependent student or the dependent student’s custodial parent is reported as a parent asset on the FAFSA. Parent assets reduce eligibility for need-based financial aid by at most 5.64 percent of the net worth of the assets. Thus, the $10,000 in student income will further reduce need-based aid by at most an additional $564, if the money is reported as a parent asset instead of as a student asset.
Thus, it is financially worthwhile for a student to work a full-time job during the summer and a part-time job during the academic year. This can yield money to help pay for college costs and reduce the need for student loan debt. However, students should avoid working too much during the academic year. Students who work full-time during the academic year are half as likely to graduate as students who work 12 hours a week or less.